One of life’s main goals, as far as personal finance is concerned, is to adequately prepare for retirement. There are several variables to consider when calculating the amount of money needed to spend a comfortable life beyond 60, and the task appears difficult and daunting from the get go. Sure, it would be easy to retire on a pension but not every job offers that facility. Most of us have to start saving up decades ahead of time to fatten up the bank account, and so the biggest question is, where should I start?
Today’s article shares a few quick retirement planning tips you can follow to catch up on the important task. Be sure to consult your financial advisor before following any one of these.
1. Determine how much you need to retire
A general guess as to how much money you need to save for your retirement will not ease your financial anxiety. There are rules of thumb that may give you a ballpark figure, such as, “five or ten times your yearly expenses” but it’s wise to get a proper estimate using financial calculators available online.
There are plenty of free retirement calculators on the web and it’s a good idea to have a fixed goal in mind to accelerate your saving plan. These retirement calculators will consider a lot of factors, such as your age, annual household income, expected return on your retirement savings and investments, annual withdrawals and expected increase in annual income, so the figure may be more reliable than a sum determined using vague estimates.
2. Enroll in an employer sponsored retirement plan – 401(k) Plan
If your company offers a retirement plan, be sure to enroll in it. If you live in the United States, the employee sponsored retirement plan is titled the 401(k) plan and let’s you save a portion of your monthly salary for your retirement, with a promise that your employer will also add to it. The company may offer a 401(k) matching feature up to a certain amount, and that is like free money for your retirement years, which is a bonus one should definitely avail.
3. Open an Individual Retirement Account (IRA)
Most banks and brokerage firms allow you to open up a traditional IRA or a Roth IRA, which are retirement-specific savings accounts. Two things to consider here are:
- Traditional IRAs and Roth IRAs have different tax implications,
Maximum saving limits for the 401(k) and IRA ar drastically different, which brings us to our next point.
4. Contribute the maximum amount possible to your retirement account
It makes financial sense to add as much money as possible to your savings account to ensure a stable, debt-free retirement. While there are no limits to how much you can save in a conventional savings account at your bank, if you have enrolled in a 401(k) plan, you are bound by the legal cap of $18,000 per annum. This means you cannot contribute more than $18,000 per year to your 401(k) account. By contrast, the annual limit for IRA contributions is only $5,500.
There is an exception to these rules for people who are 50 or older. For 401(k) plans, such individuals can save an additional $6,000 per year as catch-up contributions, while IRAs can accept an additional $1,000 per year.
According to Time Magazine, not many people make use of this catch-up feature to save extra for their retirement, even though it can make a big difference over the years.
5. Explore all investment options to grow your retirement funds
There are numerous investment opportunities for people who are interested in retirement planning these days. Innovative financial tools are constantly hitting the market to cater to different risk appetites, involvement levels and target wealth figures.
Research the pros and cons of investing in index funds, pension funds and mutual funds, and any other legitimate programs, in the context of retirement planning. You can choose which investments to make (stocks and bonds) via your 401(k) plan and IRA or even as standalone investments.
One interesting new financial tool is the target date mutual fund. According to CNBC, this type of mutual fund is suitable for people who want to “put their investment portfolios on autopilot”. At younger ages, investors may be willing to take on more risk by preferring stocks over bonds, and as these investors approach retirement, their risk appetite may fall, preferring bonds over stocks. Target date mutual funds automatically make changes to the asset mix as the target retirement date approaches, making it a low maintenance investment option.
These are 5 basic starting points for your retirement planning efforts, which you should begin as early as possible. The only regret people have is that they did not start planning for their retirement soon enough. Be sure to consult with professional financial advisors before adopting any of these and good luck to you!