Retirement planning is an intricate process that changes over time. When planning for retirement, there are several factors you’ll need to consider. You’ll need to think about your retirement goals, analyze your expenses, choose retirement investments, and much more.
All these things may sound overwhelming, but with proper planning, they are achievable. That said, here are five steps you should take when planning for retirement.
Establish Your Time Horizon
Your current age and projected retirement age will influence your retirement strategy. However, whether you’re young or old, the experts at Money Morning recommend exploring income investing for retirement because it’s an excellent way to grow your wealth and retire comfortably.
Generally, if you’re young, you should invest aggressively in riskier investments like stocks. While high-risk investments like stocks are prone to volatility, they offer high returns. On the other hand, if you’re about to retire, you should prioritize the preservation of your capital by investing in safer investments like bonds. While they may not yield high returns, they are less volatile.
However, if you’re risk-averse, don’t steer clear of investments like stocks altogether. Instead, work towards creating a well-balanced portfolio consisting of stocks, bonds, mutual funds, and other securities.
Estimate Your Retirement Expenses
Many people believe that after retirement, their expenses will reduce drastically. Unfortunately, that usually isn’t the case. While some expenses like gasoline may decline, others such as healthcare may rise. Additionally, because you’ll have more free time on your hands after retirement, you may splurge more on things like travel.
Therefore, when creating your retirement plan, have realistic expectations about your spending habits once you retire. As a rule of thumb, to have enough savings for retirement, you should try to replace 80% of your pre-retirement income.
Choose a Suitable Retirement Plan
Picking an ideal retirement plan is pivotal to successful retirement planning. While there is no single best retirement plan, the best plans provide tax advantages.
Thus, if your employer offers a 401(k), it’s an excellent place to start. With a 401(k), you’ll receive a tax break on your contributions.
Reduce Your Debt
As you approach retirement, try to lower your existing debt and avoid taking on new debt so that you can reduce the amount of retirement income that will service debts.
If you have a mortgage, consider fast-tracking the payments to settle the loan before you retire. Additionally, try to avoid incurring credit card debt by paying for major purchases in cash.
Consider Where You’ll Live
Once you retire, you won’t be confined to living close to your place of work. You may opt to move to a town or city with a low cost of living to reduce your expenses. Alternatively, you may decide to relocate to an area with a high cost of living that’s closer to family. When choosing where you’ll reside in retirement, consider how the location you pick may impact your finances.
The best time to start planning for retirement is now. If you haven’t started, the earlier you start, the more the benefits you’ll reap once you retire.