At the end of a long career, you want to make sure you can enjoy your golden years. Doing so requires having sufficient savings, though.
While it’s become somewhat of a right of passage to enter retirement and enjoy all the perks that offer a happy, healthy, and peaceful retirement requires you to effectively plan so that you have sufficient savings. Given a variety of planning tips and advice, there are a variety of factors to consider regarding the importance of retirement planning and savings.
1. Take stock of how you want your retirement to be.
It’s great to say that you don’t want to work anymore, but it’s much different to consider what you will be doing instead of working. Will you be traveling around the world? Will you be visiting your friends and family for coffee and dinner every weekend? Will you move into a retirement home or stay in place?
Will you be volunteering or working part-time? When you have an idea of what you would like your retirement to be like, you can begin to budget for what you will be able to afford while you are retired.
It’s also worthwhile to note that sound retirement planning should begin many years before you actually retire, which may influence your eventual plans despite your preferences changing as you age.
2. Consider expected expenses.
Once you’ve decided to stop working and what you want to do during your retirement, you can begin budgeting for expected expenses. For example, if you decide to move into a retirement home or a community living arrangement, you can begin to budget for how much that may cost, but you should also consider its proximity to your family, shopping, and entertainment, which may influence other expenses such as owning a car.
You may also consider staying in place, a sound idea if you have friends, family, and reliable community outlets nearby to assist with any living expenses and to maintain community contact. For many people, downsizing entirely while still living independently of an organized retirement community is preferred, especially if it will reduce the responsibility for home expenses.
While figuring out your home and potential recreational expenses is important, it’s also important to take into consideration any expected expenses that may occur independently of your own lifestyle. For example, you may wish to contribute to your children’s or grandchildren’s educational expenses or you may wish to contribute to the purchase of a home or other large investment.
Contributing to an educational 529 plan is not tax-deductible though, so it may influence your willingness to contribute on a fixed budget. Contributing to your children’s home may be more feasible, especially if you do so as a gift under $15,000 which, though not tax-deductible, avoids the gift tax.
3. Budgeting for unexpected expenses
While it’s great to plan for a perfect retirement, you’re probably already aware that life happens. Cars break down, houses spring a leak and you can become sick or injured. One of the greatest expenses to consider is potential medical expenses. If you already have pre-existing conditions, it’s worthwhile to consider what your current medical costs are and budget accordingly.
As employer-based medical coverage is not guaranteed after retirement, with only 29% of employers offering coverage after retirement, you will need to invest in quality healthcare coverage to ensure that any unexpected medical situations can be addressed appropriately.
For most people, Medicare will be available if they are retiring over 65. For those planning on retiring before 65 and not eligible to enroll in a spousal healthcare plan, there are a variety of state plans available as well as private insurers who can help to fill in any coverage gaps or provide select services.
It’s also important that, when considering plans, you take into consideration any prescription medication coverage in addition to nursing home expenses if you have to recuperate from a procedure.
4. Accommodating economic changes.
One of the biggest hurdles to preparing for retirement is anticipating future economic implications as one retires. The first hurdle is accommodating inflation as one age and after retirement.
Although inflation typically overs around 3%, it has increased up to 6% in October 2021, making retirement planning slightly more complicated given that you want the rate of return of investments to outpace inflation (assuming that you’re trying not to return to work). Delaying social security withdrawals until you turn 70 helps to maximize monthly payment benefits, minimizing the influence of inflation.
Further, having a diversified portfolio that provides at least a 5% yearly return not only will help to cushion against any unexpected hikes in the inflation rate but will also help to provide extra insurance in case of unforeseen market deviations, as evidenced by the recessions of 2008 and 2020.
Importance of retirement planning
5. Setting up the right retirement accounts.
It can be somewhat dizzying to try and identify the right type of account you should set up for your retirement. In general, there are three basic principles behind retirement accounts:
⦁ Start early, contribute often, and save for retirement
⦁ Don’t withdraw until the withdrawal period begins
⦁ Diversify your investments and retirement accounts
Retirement accounts, such as 401(k)s, IRAs, and Roth IRAs offer some relief regarding individual financial planning given that these are managed by financial advisors, but you must still choose whether to take advantage of employer-offered 401(k)s, if it is available, or whether you want the tax-deferred traditional IRA or the taxed contribution Roth IRA.
Determining which type of plan you wish to pursue will depend on whether you wish to have taxes deducted from the contributions or the withdrawals, how much income you wish to contribute to your retirement account, and what your future expenses might be.
A good rule of thumb is that you should plan on a budget that is 80% of your last position, which will influence what kind of planning you might need to pursue. It’s also sound to pursue further investment options to diversify your income. If you have sufficient cash available, you can invest in real estate or property management that provides a steady income source.
You can also invest in individual stocks and corporate bonds that provide a higher return on investment compared to some retirement plans, the only caveat being that there is a higher risk for potential losses. Ultimately, diversifying and creating multiple retirement accounts will help to distribute potential risk while providing a maximum return for your contributions.
Planning for retirement doesn’t need to be a life-altering ordeal, but it’s always wise to start as early as possible so that you can be prepared for whatever life brings when you decide to embark on your golden years.
With everything said above, I believe it won’t be difficult to understand the importance of retirement benefits to employees and individual.
FAQ
How to plan your retirement?
Start saving as early as possible and create a detailed plan that takes into account your goals, expenses, and expected income during retirement.
Why is retirement planning important?
Retirement planning is important because it helps you ensure that you will have enough money to support yourself and maintain your lifestyle after you stop working, and to avoid financial hardship during your retirement years.
Why it is important to save and invest for retirement?
Saving and investing for retirement are essential because they allow you to accumulate the funds you need to support yourself after retirement. Here are some key reasons why it is important:
Maintain your standard of living: During retirement, you will no longer have a regular income from work. Without savings and investments, you will have to rely solely on social security or government benefits, which may not be enough to maintain your standard of living.
Inflation: Inflation is the rise in the cost of living over time. As the cost of goods and services increases, the value of your savings decreases. By investing your savings, you can earn returns that will help your savings keep pace with inflation.
Longevity: People are living longer today than ever before; This means that you will need to support yourself for a longer period during retirement. By saving and investing early, you can accumulate a larger nest egg that will last you through your retirement years.
Medical Expenses: As you age, the likelihood of incurring medical expenses increases. Medical costs can be expensive and quickly deplete your savings if you are unprepared. By saving and investing for retirement, you can have a cushion to cover unexpected medical expenses.
Independence: Saving and investing for retirement gives you independence and freedom to live on your terms. You will not have to rely on your children or other family members for financial support.
What is the most important factor in retirement planning?
The most important factor in retirement planning is saving and investing as early as possible; This allows you to take advantage of compounding interest and gives your investments time to grow, making it easier to reach your retirement savings goals.
Other important factors to consider are your expected expenses, income during retirement, risk tolerance, and investment strategy. It is important to create a comprehensive retirement plan that considers all of these factors and regularly review and adjust it as needed to ensure that you stay on track to meet your retirement goals.
