No matter how much you love your job, creating a financial retirement plan must always be on your mind, this is because a day will come when you’ll have to move out of active service years and start your retirement. So it is always a good idea to have solid retirement plans ahead of that day.
How to create a financial retirement plan
The main aim of your savings during your work years should be toward having enough in your retirement fund to support financial retirement goals and lifestyle without a steady salary. Having enough money in the account is just a start.
You’ll also have to save for taxes, decide what type of investment is perfect for you to grow your money, determine the best ways to make your money work for you and generate more interest, account for other retirement income sources, and also plan for retirement expenses.
5 Tips to create a perfect financial retirement plan
- Enough money, as much as you can afford, should be saved.
- Save your money in tax-advantaged retirement accounts
- Invest your money and adjust your assets as you are growing older.
- Take note of your retirement expenses and income needs.
- Your savings and other sources of income can then be used to meet those expenses and needs.
Financial retirement plan
The number one thing on your priority list should be how to save enough money. Although many financial experts suggest you should always save 10% of your earnings every year, many other ‘gurus’ say you should try to push it to 20% if you can endure it so as to save enough quickly. But it is really not how much you save, it all depends on where the money is saved.
A few years ago, Congress has really tried to encourage savings by enabling the creation of unique tax-advantaged retirement account. One of the most popular retirement plans is the 401k, most employers offer this plan and it allows pre-tax dollars to be contributed towards your retirement with every paycheck.
A certain percentage of your contributions is also matched by many employers, which results in free money.
You can also open other retirement accounts independent of your employer. Individual retirement account (IRAs) is the most popular in this category. The “basic” type of these accounts resemble the 401k, because pre-tax money can be contributed, donate some dollars to an IRA, and this money can be deducted from your taxes.
Another type of Ira is the Roth IRA, in which contributed money is post-tax, this means a tax deduction can not be taken on it, but allowed to grow in the account and can only be withdrawn tax-free in retirement.
Investing your savings
Investment is the perfect way to grow and multiply your money, so saving it in a tax-advantaged account may not be enough. Enough money should be kept in both savings and checking accounts for emergencies and expenses. But more than this shouldn’t be kept in a savings account so as not to shrink in value. This is because enough interest is not offered by savings account to keep pace with inflation.
“The time value of money concepts states that a dollar earned today is worth more than one earned in the future—if that dollar is invested and can earn interest.” If more than enough is available to cover emergencies and expenses, the rest should be invested.
Allocation of portfolio
How do you decide what to invest in? The information available for this are many, but an accepted rule of thumb is that your portfolio should consist of 100 minus your age in stocks, and the rest should be in bonds and mutual funds. More money should be transferred to bonds and mutual funds as you are getting older.
Some modern investors have stated that the rule of 2100 minus your age is outdated and should be 110 minus your age, or if you have a higher risk tolerance, then you should consider higher numbers.
Note: the higher the numbers, the higher the risk. But this really depends on how much you dislike risks, your investment strategy, and your investment goals.
Some long-term performing investments may work perfectly for some investors. It is normal for the market to always dip and then rise again at some point, so a long-term-performing investment shouldn’t be discounted. As a matter of fact, they can be a perfect choice for retirement purposes.
It is best to use a mostly-stock portfolio when you are still young, putting percentages aside. His will allow you to regain any losses incurred in the market. Then more of your savings should be allocated to safer investments as you are growing older, such as metals and bonds, so losing a bunch of money won’t be risked in the market before your retirement.
Instead of playing the stock market directly with your retirement savings, it is always best to put most of the money in index funds, mutual funds, or an exchange-traded fund. Although fund managers who are trying to “beat the market” are actively managing some of these funds, there are others that are more passive in their approach.
No matter which one you choose, investments can be selected through your 401k provider or maybe the brokerage in which your IRA is set up.
Retirement income and expenditures
The amassed money in your retirement savings accounts will naturally form your retirement income base. And you can start withdrawing money from those accounts as income once you reach the retirement age.
However, IRAs and 401k are not the only sources of retirement income. Many people, majorly the public sector workers, will have pensions rather than 401k, giving them a stream of income, that is guaranteed, and determined by their years of employment and previous income.
But nowadays, pensions are becoming very rare. Social security is the only thing that isn’t rare for now, and it provides a constant check from the government; the longer you wait before claiming it, the larger will be your check. And although it comes from the government, always put in mind that it is still subject to taxation.
You shouldn’t be counting on your social security as part of your retirement plan because this is too risky. If the program runs out of funds, this can keep you in an income shortage. It should rather be considered as an unexpected source of income if it is still much around when you retire.
Another way to set up yourself for retirement income is through an annuity, which is a life insurance product type that offers a guaranteed income over a given period of time.
Many sources of income will be accounted for by a good financial plan. Think of how your income needs are met by them before you actually decide. Because your expenses during your working years will likely look different than what they will look like when you retire, it is best to understand both.
Your home mortgage may be already paid off by the time you reach retirement, which will significantly lower your housing expenses. But as you get older, it is possible your medical bills will go up. The switch you will have in your retirement should be anticipated by your retirement plan, and ensure they will be covered by your many sources of income.