In the US, about 26% of non-retired individuals have no retirement savings.
Retirement planning can be tricky, especially if you don’t have a good idea of what it involves. It’s important to plan for your retirement so that, when the time comes, you’ll be financially stable. With proper planning, you can get things in order well before you retire, giving you peace of mind.
For five key things you need to know about retirement planning, keep reading.
1. Your Time Horizon
One of the most important aspects of planning for your retirement is knowing when it’s coming. Determine what age you plan to retire at, and consider that alongside your current age. The more time you have, the more risk you can take on.
If you have 30 years until you retire, for example, you can consider investing in riskier assets such as stocks. They tend to perform well over a long period but can be volatile, so may not be the safest option in the short term.
You also want to ensure that anything you invest in can outpace inflation. While inflation may seem like a small issue, over a long time it can have a significant negative effect on your savings.
As a general rule, when you’re older, you want to focus your portfolio more on income and preserving capital. Assets like bonds may not give the same returns as stocks, but they’re less volatile and therefore safer.
You can make financial management easier by breaking your retirement plan down into various components. This will involve different time horizons and liquidity requirements. As time goes by, you can make changes to your plans as needed.
2. Your Retirement Spending Needs
To be able to properly plan out your retirement finances, you need to know how much you’re going to spend. Many people make their calculations by estimating that they’ll spend about 70%-80% of what they spent before retirement. This can often be inaccurate.
If a mortgage still needs to be paid, it will have an impact. There can also be unforeseen expenses such as medical care. Most people also spend the first year of their retirement traveling or ticking off bucket list goals, which can often cost a lot.
Some experts suggest that people should plan to spend the same amount each year after retiring as they do before retiring. This is especially true as the cost of living goes up every year. It’s also worth noting that you’ll have more free time once you retire, which means more time to spend money.
If you overestimate your expenses, you’ll outlive your portfolio, and if you underestimate them, you may not be able to live the life you plan to. You also need to think about other things you might want to spend money on like helping fund your child’s education or purchasing a home.
Some things you can do to help get an accurate estimate are:
- Specify early retirement activities
- Account for unexpected expenses
- Forecast potential medical costs
This can be a very tricky process, but you should do what you can to get the best idea of what you’ll spend.
3. After-Tax Rate of Investment Returns
Another thing to calculate ahead of retirement is your after-tax rate of return. This will help determine how feasible your portfolio is in producing the income that you need.
You shouldn’t expect a rate of return above 10% before taxes. This return threshold is likely to decrease as you get older due to having a lower-risk portfolio with low-yield assets.
If you’ve calculated your needs to be $50,000 per year, for example, and you have a portfolio of $500,000, you’ll need a return of 10%. With proper planning earlier on, you can grow your portfolio more. With a portfolio of $1 million and the same yearly need, your return will be 5%, which is much more ideal.
Investment returns are usually taxed, so you should calculate this return on an after-tax basis. It’s also important to determine your tax status so that you can make a suitable tax plan.
4. Risk Tolerance vs Investment Goals
When it comes to investing in assets, it’s often the case that taking on more risk presents the potential for greater returns. As such, you need to decide how much risk you’re willing to take in your portfolio.
This can be difficult to work out. How much time you have until retirement will play a part here.
If you have plenty of time, you can accept more risk. If things don’t work out, you’ll have more time to make changes to your portfolio. As you get closer to retirement, you should take on less risk to ensure you don’t end up in a bad position.
By investing in a more volatile asset when you still have 30 years before you retire, short-term fluctuations won’t be an issue. The asset will have years to appreciate in value before you retire. You also have more time to buy assets at points where the market is low, helping to maximize your returns.
5. Estate Planning
For this part of retirement planning, you may need the help of certain professionals such as accountants and lawyers. Proper estate planning will ensure your assets are distributed in the way that you decide.
Life insurance is also crucial. It will prevent your family from experiencing financial difficulties after your death. Both of these will help streamline the probate process.
Estate planning also involves tax planning. There may be tax implications when leaving certain assets to your family, or even if you leave them to charity. It’s ideal to work out the most efficient way to pass things on in terms of taxes so that you can save money and avoid tax penalties.
Successful Retirement Planning
Retirement planning is no small task, but it is essential, and doing it early on will make things easier down the line. At Bennett Financials, we offer a range of financial services and can assist you with your retirement planning to make things easier.
To find out more about our services, click here to contact us today.