There are many things to consider when planning for retirement. You may want to travel the world, buy a vacation home or continue to pursue your passions such as marathon running or novel writing.
One of the best ways to make sure that you have enough money to live comfortably during retirement is to save early and often. Contact Pacific Crest Wealth Management for specialized services.
Whether written down on paper, using a retirement savings tracking app or working with a financial professional, it’s important to identify your goals for retirement as early as possible. These goals serve as a roadmap for your financial future and are a source of motivation when making sacrifices to save and invest. They also provide a baseline for measuring progress against your desired financial future.
One of the most challenging aspects of retirement planning is determining how much to save. Many people struggle to find the extra money to allocate toward retirement savings, especially early on when their expenses may still be high.
To help determine how much you need to save, start by calculating your current income and expenses. Then subtract your expenses from your take-home pay to calculate how much you can dedicate to savings each month. Depending on your situation, you might need to increase this amount or look for ways to decrease costs.
Once you’ve determined how much to save, consider your anticipated spending during retirement. It’s often suggested that you should aim to replace about 80 percent of your pre-retirement income. This includes a wide range of expenses, such as food, clothing, healthcare and transportation costs. It’s also important to factor in inflation. Everyday expenses typically rise over time, so it’s necessary to save more than you might think you will need to combat this phenomenon.
Finally, you should account for any potential unexpected costs that might arise during your retirement. These could include large medical bills, estate taxes or the cost of living in a different state or country. In these cases, it may be beneficial to seek the advice of a certified financial planner who can help you prepare for various scenarios and identify any additional risks.
It’s important to keep in mind that retirement is a journey, and it takes time to build up your assets and establish healthy habits. As such, it’s important to be patient and work with a trusted advisor who can help you navigate the process. As you near the final stages of your career, it’s also a good idea to review your goals periodically to ensure that they are on track to meet your desired retirement lifestyle.
Creating a Budget
Creating a budget for retirement is the first step in achieving your goals and enjoying a comfortable life. This can seem daunting, but a few simple steps can help you get started. Start by identifying all of your income sources and comparing them to your estimated expenses.
You should also take the opportunity to review expenses that may go up in retirement, such as health care costs. Then, you can balance these increases with the costs that will likely decrease, such as eliminating a mortgage payment or car payments.
The best way to find out how much you spend now is by reviewing your credit card and bank statements over the past few months, or even longer if possible. This will provide a snapshot of your average monthly spending.
Breakdown your expense categories into essential and discretionary items. Essential expenses include those that you must have, such as housing, food and clothing. Discretionary expenses include entertainment, dining out, travel and hobbies. You should also include a miscellaneous category for expenses like gym memberships and charitable donations. It’s also important to consider future healthcare costs, especially after age 65 when Medicare coverage begins.
Finally, you should calculate your estimated income streams, including Social Security benefits and the money from tax-advantaged retirement accounts, such as 401(k)s and IRAs. You should also include expected bequests and income from any part-time work you might do in retirement.
Once you know how much you are currently spending and how much you anticipate spending in retirement, you can create a zero-based budget. This is a method of budgeting that assumes your assets will generate enough income to meet your expenses in every month of the year.
This method can be difficult, but it’s important to try your hardest to remain as close to zero as possible. Trying to live beyond your means in retirement can quickly derail your plans and cause financial stress. Once you’ve established a livable budget, track your expenses monthly and make adjustments as necessary. This will ensure that you don’t run out of money before you can reach your retirement goals.
Investing
Investing is a key component of retirement planning. It’s important to save as much as possible, especially in tax-advantaged accounts like 401(k)s and individual retirement accounts (IRAs). In addition to making regular contributions, it’s beneficial to make purchases at regular intervals rather than trying to time the market. This strategy, known as dollar-cost averaging, reduces your average cost per share by spreading out investments over a longer period of time.
The type of investments you choose will depend on your personal situation and goals. For example, some people invest in real estate to generate rental income or capital gains. Others may choose to diversify their portfolios by investing in stocks of companies that pay dividends. It’s also important to consider the potential impact of inflation on your investments.
Once you have determined your goals and tolerance for risk, you should establish an asset allocation plan. This will determine how much of your portfolio is allocated to each investment type. It’s important to include all of your savings and investment accounts, not just those that you plan on using in retirement.
Many people make the mistake of keeping too much money in cash, which can lower their overall return and increase the likelihood of running out of money in retirement. A good rule of thumb is to use the 4% rule in retirement, which suggests that retirees should withdraw no more than 4% of their savings each year.
It’s also important to remember that you’ll need to continue saving for future expenses, even after retiring. If you don’t plan on working in retirement, it’s a good idea to continue to set aside funds for things like medical bills and travel.
One of the biggest mistakes people make is starting to save for retirement too late. Getting into the habit of saving early will give compound interest a chance to work in your favor. Even if you’re not able to save a lot, even putting 1% more in a tax-advantaged account can make a big difference.
Delaying Retirement
Depending on your personal situation, delaying retirement may be a smart financial move. It can allow your investments to grow and potentially increase your Social Security benefits. But it’s important to be aware of the risks involved in retirement deferral and make sure that your savings are enough to last through your expected lifetime.
The last few years of working life are typically your highest earning years. In addition, your children are likely grown and your mortgage is paid off, giving you more ability to sock away money. By delaying retirement just a few years, you can significantly boost your savings.
It can also help to delay taking required minimum distributions from your retirement accounts until you are 70, if possible. This can save on taxes and keep your money invested longer, if you’re not yet ready to take the leap into retirement.
If you’re not yet ready to retire, you can still continue to work and contribute to a traditional 401(k) or individual retirement account (IRA). However, you must be careful to not exceed contribution limits. If you do, you may be subject to a tax penalty.
Another reason to consider working longer is that inflation tends to be higher during the early part of retirement, which can put a real dent in your spending power. By continuing to work, you can take advantage of lower inflation rates and ensure that your savings last through the rest of your life.
Finally, if you do decide to retire, it’s a good idea to first pay off any outstanding debt. Debt, especially high interest rate debt such as credit cards and auto loans, can eat into your retirement savings over time. Moreover, failing to pay off student loan debt can result in your retirement income being garnished.