Planning for retirement is a significant responsibility. While your golden years can be fun, having enough money to live comfortably is essential. How can you ensure your financial stability? Consider your retirement planning as early as possible. Starting this preparation at a young age can go a long way when you’re ready to retire. Here’s what you need to know about planning for retirement.
What influences your retirement planning?
Many people spend time planning their retirement, but the path to get there will vary. Your age, employment status and other factors affect your finances once you reach retirement age. Here are six factors to consider when preparing for your golden years.
1. Target date
What is your target age for retirement? The year you select affects how long you can save and how much money you’ll have. Gallup says the average retirement age among Americans is 61 — a four-year increase from the 1990s. Retiring earlier than 60 is an option if you feel comfortable with your financial outlook. However, waiting into your 60s may allow you to accrue wealth and feel secure in retirement.
2. Social Security
Another critical decision you’ll make is when to withdraw Social Security. The Social Security Administration says you’re eligible to receive benefits at 62, but you can get full benefits once you reach the full retirement age.
This mark depends on when you were born, so determine which date you can receive the most benefits. If you were born in 1960 or later, the U.S. government says you’ll get full benefits at 67 years old. Delaying retirement until 70 means your Social Security income will be higher.
3. Savings
How much you have saved will directly affect your retirement plans. Your funds depend on how old you are and your past contributions. Contributing in your 20s is optimal because you allow time for growth. Compound interest can lead to lucrative savings if you regularly deposit money. If you don’t have an account, set one up as soon as you have money to put away.
Research shows younger generations have started planning for retirement earlier to avoid financial insecurity. For instance, Transamerica Institute research reveals that 25 is the median age for millennials to save for retirement. Their baby boomer cohorts didn’t begin planning until they were 35.
Retirement savings vary by person, so use the average amount for your age group to gauge your status. For example, government data show 35 to 44-year-olds in the U.S. have about $141,000 saved on average. That number climbs to $313,000 if you’re between 45 and 54.
4. Account type
Your retirement planning will center around your income sources. While Social Security benefits help, much of your savings will come from your retirement account. Your employment status influences which type of account you have, so knowing how to navigate your choice will affect your financial outlook.
For example, a full-time job with retirement benefits likely provides a 401(k). This retirement account is the most common in the U.S., with 34.6% of working adults using this option for their planning. Self-employed individuals may choose an individual retirement account (IRA). Each has different rules concerning withdrawals and contribution limits, so consider these regulations when picking the most suitable one.
5. Location
Where you want to live in your golden years is another crucial retirement planning question. Your monthly income should let you feel comfortable based on the cost of living in your area. Living in a less-expensive state may allow you to retire early, whereas an expensive one could mean a later retirement. For instance, a retiree in Georgia needs about $64,000 annually to live comfortably. Conversely, they’ll need about $131,000 in Hawaii.
6. Lifestyle
What are you planning to do in retirement? Some older adults enjoy traveling the world, whereas others want to stay home with their families. Regardless, consider the lifestyle you want in retirement. This financial preparation should include money for necessities like food and housing while accounting for fun. Additionally, it’s important to allocate funds if you need to get assisted living services. Your retirement fund should be sustainable for the rest of your life.
Consider how much you’ll receive from retirement accounts, social security and pensions. Experts say you should follow the five percent rule, meaning you’ll withdraw this amount from your retirement fund annually. For example, suppose you’ll need $80,000 per year for a comfortable retirement. This financial principle says you should have about $1.6 million in assets.
How can you better prepare for retirement?
While retirement planning may seem complicated, your preparation is essential for financial security. Use these tips to feel more confident in your preparedness.
Speak with a financial advisor
Retirement preparation often includes complex financial jargon that can be difficult to comprehend. If you don’t understand the terminology, consult an experienced advisor to design your retirement roadmap. These professionals will evaluate your retirement path and help you reach your goals.
Use employer matching
Most companies with 401(k) plans match your payroll contributions up to a certain percentage, thus boosting your retirement savings. Employer match is a priority for workers as they plan for retirement. Research shows 62% of American employees identify it as important for their retirement goals.
Choose wise investments
Your retirement account relies on investments, so your choices determine your financial success. Employers will likely give you investment options for your 401(k), whereas an IRA gives you autonomy over your retirement planning.
Stocks, bonds and mutual funds are standard investing options, so decide how much risk you want to take. Individual stocks are the most volatile because their value can change rapidly. Bonds carry the least risk, but experts say they only bring 4% or 5% returns over time.
Mutual funds may provide a happy medium because they invest in low-risk securities while bringing higher returns than bonds. Experts say balanced mutual funds bring 10% annual returns on average.
Understanding retirement planning for financial stability
Investing for retirement is critical for financial stability when you stop working. Knowing what affects your retirement helps you plan better, whether the type of investment account or how much to contribute annually. Consider when and where you want to retire to reach your golden years with more financial security.
