Unless you plan to spend your golden years still working for money, you need to know that planning for retirement is a necessity. Having a strong financial plan is essential to living your dream as a senior citizen.
However, making and sticking to these plans requires dedication, strong will, and foresight. It is only when you dream of living a stress-free lifestyle in your old age that having a financial plan becomes a priority to you.
What are your dreams for your retirement years? Do you plan to start a business? Or to spend your time relaxing and having fun in a home in the cool city of the Bahamas? Or do you wish to spend your retirement taking your family on a tour around the world? Maybe taking up a social cause would be ideal?
Whatever your plan is, there’s no better time to start working toward it than now. Due to developments, life expectancy is higher now than it was decades and centuries ago, which means you need to factor in the need for more money into whatever plan you have.
This article will guide you through the process of developing a financial plan for your retirement years. But before we go into that, let’s look at the factors you need to consider when making a financial plan.
Factors to Consider When Planning for Retirement
Whatever your retirement goals are, there are factors that will affect them. Making plans without considering these factors would be a gross mistake.
I’m talking about your family, your residential plans, your personal ambitions, and even the exact retirement savings plan to go for.
If you plan to have a family, do you intend to have children? If yes, how many children do you intend to have? What about your residential plans? Do you intend to live in your current house, or will you get a more befitting apartment? Will you go on vacation to different parts of the world or move to a smaller, less expensive country with a good standard of living? You also need to consider your personal ambitions. Do you intend to start a business or embark on a social cause?
These factors determine how much you need to save and how you should go about making a financial plan for your retirement years. So, how do you go about achieving your retirement goals? Let’s look at the necessary steps you can take.
Steps to Developing a Financial Plan for Retirement
Without a proper financial plan, whatever goals you have for your retirement days are mere wishes.
This step-by-step process will be very important in helping you draft a suitable retirement plan.
Determine Your Retirement Needs/Goals
The first step to making an efficient financial plan for retirement is to determine your retirement goals and needs. This will enable you to know how much to save annually from your income and the percentage that goes into your investment portfolio.
If your retirement goals are capital-intensive ventures like starting a business, taking up a social cause, or embarking on a series of vacations, then you’d definitely need to commit a higher percentage of your income to your plans. Furthermore, your retirement needs, like homes, health, or even the education of your kids, should also be of great concern to you.
Properly estimating your retirement spending needs will help you make proper plans toward actualizing them. However, these plans and your ability to meet them depend heavily on your time horizon. Your time horizon is the amount of time you have to work actively until you retire.
Determine How Much Time You Have Till Retirement
The next step after determining your retirement goals and needs is to determine how long you have to save and invest. The ideal time to start saving for retirement is in your 20s. However, if you’re already past that age group, the next best time to start is now.
Your age determines the kind of investments you’ll channel your retirement savings into. The rule of thumb is to invest in higher-risk investments like stocks when you have at least 20 active working years. Stocks are risky and volatile, but they have a history of performing really well in the long term.
Meanwhile, if you’re older and closer to retirement, you should look towards investing in lower-risk assets. This is necessary as you need to preserve your capital while also looking for good financial returns. Lower-risk assets like government bonds, mutual funds, Treasury bills, etc. are the asset classes that should make up the retirement plan of someone who has less than 20 active years.
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Determine How Much You Need to Save for Retirement
Having determined your retirement goals and needs and how much time you have to work, the next thing is to figure out how much you need to save. The earlier you start saving, the fewer funds you need to put away each year for retirement. This is actually where the real work is: forfeiting a lavish lifestyle now to have a comfortable retirement life.
When it comes to retirement, the most frequently asked question is “how much do I need to save?” While this is not carved in stone, most experts believe you should save 12 times your annual salary. Again, this is just to guide you in setting aside a reasonable sum for your old age, especially when you factor in the increase in the average life expectancy.
You can actually save more or less, depending on your plans and goals for your golden years. So, what happens to the money you’re saving for retirement? Read on to find out.
Choose Investment Plans
The purpose of planning for retirement is to have enough funds to take care of yourself when you’re old and can’t work much. Your savings alone can’t do all that. That’s why you need to compound your savings by investing them in retirement plans that produce high yields.
There are many mouth-watering investment plans available to you, ranging from employer-sponsored plans to plans for solo entrepreneurs and small business owners.
All investment plans offer tax breaks to their customers. However, the plan you choose determines when your tax will be deducted. There are plans you can fund with pre-tax and after-tax dollars. Pre-tax dollars funded accounts give you tax breaks when you contribute but charge you when you withdraw. But the after-tax plans are taxed upon contribution, and withdrawals are tax-free.
The best investment plans you can consider are 401(k), individual retirement accounts (IRAs), solo 401(k), traditional pensions, and guaranteed income annuities (GIAs). These plans offer you investment options in mutual funds, bonds, ETFs, and individual stocks. Most plans with diverse investment options make it easy for you to diversify your portfolio according to your risk tolerance level.
Track and Review Your Plan
For optimum results, you have to track and review your plan regularly. This is to ensure you’re on course to meet your set retirement goals in due time. Tracking and reviewing your plans becomes more important if you want to grow your business on a shoestring budget. If there are any changes in income, goals, expenses, etc., this is the perfect time to incorporate them into your original plan. It’s advisable to review your plan twice a year.
Conclusion on Developing the Best Retirement Financial Plan
Having a solid financial plan for retirement is a useful hedge against whatever old age brings your way. It can be overwhelming to think about your “golden years” when you’re still in your youth. However, given that it’s an unavoidable part of our lives, having a strong retirement plan is a necessity.
Hopefully, this article has given you a detailed guide on the necessary steps you can take to have a less complicated golden age. Here’s another article you may need to read on how to retire rich using seven investment ideas.
