Many people dream about not having to work and being able to pursue hobbies during their retirement. After all, not having to work and enjoying one’s later years is what retirement and living your best life is all about. But for a fulfilling lifestyle, planning for retirement is essential.
After many years of working and saving money, retirement awaits you. Retirement is potentially one of the most exciting times of your life. Despite the importance of retirement, only 58 percent of Americans are saving for this special time. With over 40 percent of people not actively preparing for their upcoming retirement, it's no wonder why retirement has a negative connotation for many people.
You may make the mistake of thinking that money makes the world go round when you retire. However, it's not the only thing you should worry about to achieve happiness and satisfaction.
Retirement planning involves many things to consider. However, it isn't rocket science. Since you may not have a hundred million dollars in your bank account, you have to financially plan for the time you no longer work. You also need to consider your health, choice of location, and lifestyle.
What Is Retirement Exactly?
In 10, 20, or 30 years, you will retire. Although you may not know exactly when, this is not a reason to procrastinate. But before you start planning for retirement, you have to know what retirement entails.
When you hear the term “retirement,” what is the picture that comes to mind? Is it an older man playing golf with his friends? Or maybe an older lady crocheting happily on her porch?
Unfortunately, not all people have an optimistic picture of retirement. Some people associate retirement with illness and loneliness. However, a great retirement plan will allow you to avoid being in financial distress and create a positive outlook concerning your future.
Retirement is closing a chapter of your life by leaving the workforce permanently. This time presents an opportunity for new adventures. Retirement is when you have all the time in the world to do things you’ve always wanted to do.
Fifty years ago, the concept of retirement was very clear. You retired when you reach 65 years old, and then you lived off your pension and government benefits. And that was what retirement was. Now, retirement has changed dramatically. Since Social Security benefits are often not enough to afford a comfortable life, treating it as your sole safety net is dangerous.
Since advancements in healthcare have significantly extended the lives of people, especially in developed countries, your goal should be to have enough pension income and savings to support you, and not force you to come out of retirement.
Age Of Retirement
There is no one-age-fits-all for retirement. Choosing an age to leave work and retire varies from person to person.
When planning for retirement, consider what the best age is for you to retire. Analyze the factors that play a role in your retirement decision such as children, debt, mortgage, and savings. Also, factor in a long life ahead of you because many people make the mistake of underestimating how long they will live.
If you retire at 50 years old, you have to be responsible with your finances. And you will probably need to live a low-cost lifestyle. Preparing for costly healthcare is also essential, since you still have not yet reached Medicare age.
The average retirement age in the US is 62. This age is convenient for many, as you may start collecting your Social Security benefits at this time. By 62, you may have saved enough to live a comfortable life. If you want to wait three more years and retire at 65, you can reap the benefits of Social Security and Medicare. You also do not need to pay penalty taxes for withdrawals in your retirement account. However, you may need to worry more about your health, especially cognitive and physical decline.
If you want to work until you reach the age of 70, there will be no extra benefits that await you for your Social Security. But some retirement products improve as you age, such as reverse mortgages and annuities so that you can benefit in these ways.
Types Of Retirement Plans
Before planning for retirement, you have to choose the retirement plan that suits you best. Each type has its strengths and limitations, depending on your income and circumstances. Note that in your career, you may accumulate more than one retirement plan.
One of the most popular retirement plans sponsored by employers, the 401(k) plan allows eligible employees to invest and save for their retirement. This retirement plan is accomplished by contributing funds from their paycheck before being taxed.
Taxes are not taken out until you withdraw the money from your account. Because of this, the amount of tax you pay lowers. For example, if you earned $120,000, you would only be taxed on $110,000 if you contributed $10,000 to your 401(k). Even if you leave the company before retiring, you still control your money.
However, there are also options that allow employees to make contributions after tax is deducted. So this makes these funds tax-free when you withdraw this money. This retirement plan option is limited because its administrative fees can be costly. The IRS also sets limits on the amount per year you can contribute to this retirement plan option.
Individual Retirement Accounts
Also known as an IRA, individual retirement accounts are an excellent alternative if you have maxed out your company retirement plan or if your company does not offer any such options.
This type of retirement plan gives you tax benefits such as tax-free growth, or tax-deferred basis. Many people lean toward this option to save on tax payments. There are many kinds of IRAs. The key to choosing the best one for you is to consider how soon you will access your savings, knowing the contribution you can deduct, and reviewing the taxable income you earn during retirement.
Considered as a tax-deferred retirement saving option, getting a traditional IRA means that you will not pay taxes with what you earn on the account until you withdraw your funds. Because of this, you may benefit more using an IRA compared to other taxable accounts because it enables you to defer taxes. If you meet the specific criteria, your savings may be tax deductible.
If you withdraw your funds before retiring, you pay an additional 10 percent tax. However, this rule may not apply depending on your circumstances. This type of retirement plan applies to mutual funds, CDs, stocks, bonds, and other types of investments.
This type of IRA is an account in which you can use post-tax income. It is quite similar to the traditional IRA, with a few key differences in how it is taxed.
While its traditional counterpart is formed using pretax money, Roth IRAs differ. So your contributions will not be tax deductible. People who are younger than 70.5 years old can avail this option. There is also no required minimum distribution with this type of IRA.
Roth IRA contributions involve cash, including checks. However, there are also options which include mutual funds, bonds, ETFs, stocks, and other investment types.
Savings Incentive Match For Employees IRA
The SIMPLE IRA is a tax-deferred retirement account which is established by self-employed individuals and employers. For employers to qualify, they must have fewer than 100 employees.
This type of IRA features lower initial expenses and administrative costs compared to other IRAs. They allow tax deductions for all contributions. The SIMPLE IRA also requires employers to contribute to the account. However, this plan has lower contribution limits compared to employer-sponsored plans such as the 401(k).
Simplified employee pensions focus on small business owners and self-employed individuals. It involves tax-deductible contributions that are held under the employee’s name, although the one who makes the contributions is the employer. The money in this IRA is not taxable until the period of withdrawal.
This type of IRA has a higher contribution limit than other IRAs. Since it does not involve high operating costs, it is an excellent option for business owners. It also allows employers to avoid having to contribute when the business is not doing well.
How Much Money Will You Need?
There are two common methods used in determining how much you should save when planning for retirement. If you do not want to use a retirement calculator, here are some principles to guide you.
Multiply By 25
The first rule is to multiply how much you earn by 25. For example, if you earn $30,000 per year, you would need $750,000 to retire to live comfortably. This guideline does not include other retirement fund sources such as social security, pensions, and passive income.
The 4 Percent Rule
You may also use the 4 Percent Rule to guide you when you are planning for retirement. Under this rule, you should withdraw only 4 percent of your retirement portfolio each year.
For example, if you have $750,000 in your portfolio, you should only withdraw $30,000 in the first year. The next year, you withdraw the same amount and adjust for the level of inflation. For example, if the inflation rate is 3 percent, you should withdraw $30,900.
Planning For Retirement Tips
If you want to establish a secure future, you have to start planning for retirement right now. With a lot of things on your retirement checklist, it can be daunting to start. Here’s a definitive guide so you can enter your golden years prepared.
Decide What Lifestyle You Want
Your finances are not the only thing you should prioritize in preparing for retirement. Before retiring, figure out what kind of lifestyle you want in order to calculate how much money you need before stepping away from the workforce.
Planning for retirement is stressful if you don't have a clear picture of your future. Everyone has different retirement goals. While some may be happy with a simple life, others prefer a more luxurious lifestyle.
You can opt for a simple retirement in which you are living debt-free, enjoy most of your dinners at home, and partake in inexpensive or free hobbies such as playing with your grandchildren or gardening.
Or you may also opt for a grander retirement in which you enjoy activities such as sailing or overseas travel. You can even choose to live in a beach house in a faraway land if that is your preference.
Another popular option when planning for retirement is to establish a passive income stream, such as building rental houses while you are still young. This income allows you to live comfortably. You just need someone to manage your properties and income sources.
You can even choose to work for fun during your retirement. While you may have left your primary occupation for good, you may still work for organizations or engage in writing to live a life of purpose. This work does not need to be a primary source of income. It's just something you do for enjoyment. And the additional funds can be used for daily expenses or something special.
Managing your retirement investment portfolio is one of the most important aspects of planning for retirement. To start, increase your financial literacy. For a quick crash course, you can check out "The Total Money Makeover: A Proven Plan for Financial Fitness" by Dave Ramsey.
It is essential to invest in a wide range of instruments such as index funds or stocks. A diverse portfolio will save you from market declines in a specific area. Try to allocate your investments in many sectors to prevent shocks. This way, a decline in a specific sector will not affect you much since other unaffected investments can counterbalance any adverse effects.
Try to avoid risky investments. Volatile stocks can wildly fluctuate and may not be great for your retirement portfolio. Choose stocks that feature a trend of stable growth. Watching out for capital preservation is critical. So be sure to hold stocks with minimal or no volatility.
When planning for retirement, consider healthcare insurance. Covering your medical costs is essential whether you plan on retiring early or not. Many seniors are forced to stay in the workforce to keep their healthcare insurance. Consider whether your employer provides healthcare if you retire early. You could also try out private insurance for you and your family.
Relying on Medicare alone is not enough, since you would still end up footing part of the medical bill even though you’ve reached retirement age. Although Medicare covers hospital stays, health services, hospice, and even nursing care, it will not pay for your custodial care.
Time and health are two precious assets that we don't recognize and appreciate until they have been depleted.
To solve this, invest in long-term care. This option provides assistance with activities of daily living, which includes toileting, eating, grooming, and dressing. Insurance companies offer these policies. However, you may not qualify if you have a pre-existing medical condition.
The cost of healthcare is high. To prevent spending your retirement savings in this area, focus on physical fitness. Taking care of your health also includes watching what you eat and exploring healthy food options. To help you, check out healthy cookbooks such as "The Health Meal Prep Cookbook: Easy and Wholesome Means to Cook, Prep, Grab, and Go" by Toby Amidor.
Talk To Your Partner
When it comes to planning for retirement, you should not be alone. Having a conversation with your spouse is essential because around 31 percent of couples say that money is a leading cause of conflict.
Plan your retirement with your wife or husband carefully. Make sure that he or she is not stressed. You can even talk over a nice dinner or on vacation. When planning for retirement with your spouse, don't make any demands. Ask open-ended questions. Instead of saying, “Let’s get a motor home for retirement,” say, “What do you think about buying an RV when we retire?”
It is also important to know what their retirement vision is. Does your partner want to live in the same house? Do they want to relocate to a smaller town? Or even live by the mountains with a great view? Once you have a clear vision of their expectations, you can compromise on critical points on which you don't agree.
Seek Help From A Professional
If you want to make your retirement last, get help from a financial adviser. The job of a financial advisor is to help you best achieve your retirement goals and manage your funds in the best way possible. People who work with advisors have $80,000 on average more than those who don’t when they retire.
But don’t worry. You don't need to be a millionaire to start planning for retirement with a financial adviser. There are advisers you can pay a monthly or hourly low-cost rate, depending on your needs.
Whatever your financial standing, a financial adviser can give you practical and affordable advice. This information is particularly important if you don't know where to start or if you don't have time to manage your finances on your own.
Finish Paying Your Mortgage
A mortgage-free retirement is something you should aim to achieve. Getting rid of your mortgage means you will be eliminating one of your biggest expenses. So these savings are available for healthcare or vacations.
You may think that having a mortgage means having tax deductions. But you pay more in annual interest on the loan than any tax savings you may experience. In time, your mortgage will drain your funds and leave you in a weaker financial position. By paying off your mortgage early, you will be saving significant amounts of money in interest.
However, emptying your savings to pay your mortgage is not a smart move. The last thing you want is to have a great house with no money.
If you're planning to sell your home and transfer to a new one to downsize during retirement, you also need to factor in your mortgage payments.
How long you remain in the workforce is entirely up to you. Some circumstances might not allow you to leave your work, such as weak economic conditions, government cutbacks of programs, or personal issues.
When it comes to planning for retirement, you may fall short. However, you can always try working for a more extended period. Working additional years allows you to increase your retirement contributions and have added income. Delaying your Social Security benefits will also enable you to maximize your payout.
Remaining in the workforce for a more extended period is like a contingency plan. However, this is not enough to cover your shortfall if you did not save enough.
Challenges You Need To Prepare For
The landscape of dealing with retirement risk management has changed dramatically in recent years. Here are some challenges you may face.
Spending More Money
Since you’re not spending on gas, clothing allowance, drinks, and eating out as much as you did when you were working, you may be tempted to think that retirement is cheap. When planning for retirement, you need to know that spending less is often a misconception.
Around 40 percent of retirees spend more in retirement compared to when they were still working. A common reason is that they finally have the time to spend their money. Also, when nobody expects you to show up to work, you can finally do things that give you a sense of purpose. And these things usually cost money. Another reason is you may find it hard to tweak your spending habits even though you don't have a large and stable stream of income.
To prevent these problems, establish a structure in your life when planning for retirement. This system allows you to adjust your spending in line with your savings.
Feeling anxiety during the planning for retirement when retiring is normal. However, remember that having free time without any schedule and no one telling you to finish your job is supposed to be liberating.
Instead of spending your day worrying, stop thinking about whether you don’t have enough money, or if you need medical treatments right away. You also don't need to stress yourself about the performance of the stock market.
Although all the things above are valid concerns, excessive worrying can decrease the amount of joy you experience. There is no way to predict events in the future, so you might as well live in the present.
Many people still think that leaving a legacy to their family, friends, and even the workplace is a significant concern.
More than half of Americans plan to give their children an inheritance. However, you can also leave other legacies aside from financial types. Your legacy can be your memories and stories that will remind others of you as a person. This reason can be an excellent rationale to enjoy retirement by spending more time with loved ones.
Inflation refers to the increasing rate of prices every year. The increased cost of necessities can significantly affect the purchasing power of retirees. For example, if the value of a house is $100,000, its price could jump to $200,000 in a few years. When planning for retirement, it\s essential to factor in inflation, since you will be living on a fixed income.
What You Can Do After You Retire
People deal with various circumstances that dictate when they can retire. When you’ve worked for 30 to 40 years, retiring can be daunting, since you have no set schedule to follow. You are finally in charge of how you’ll spend your time and can fill your day with meaningful events. To make retirement more comfortable, try out these activities.
Retirement is an excellent time to explore the world at your own pace. Even if you previously traveled for work, you might not have had the luxury of time to go sight-seeing, embark on a food trip, or visit famous cultural landmarks. Retirement is the best time to fulfill your travel goals.
If you traveled when you were young, revisiting these places during your retirement will give you a fantastic perspective on how the world has changed.
A change in scenery is often a good move. If you want to save money, you can move to a smaller house or relocate somewhere cheaper. Spending all your adult years in the city can be stressful and tiring. Retirement is the ideal time to move away to a quieter community. Just make sure there are options for restaurants, shopping, social life, and culture.
To know whether to move away is all up to you. Ask yourself key questions, which include what you want to do and what makes you happy.
Remodel Your House
If moving to a new home during retirement is not for you, you might want to consider remodeling your current residence. Remodeling your home gives it a new life without decreasing its sentimental value.
You should also consider age-proofing your home. You only need to switch out doorknobs for lever handles and install raised toilet seats and bathroom grab bars. These improvements will improve your home’s functionality as you grow older.
Since you have developed familiarity and comfort in your home, leaving it can be challenging. Moving to a new house might also be expensive, since you will not only cover the cost of the home, but also new appliances and furniture you need. There will also be added expenses with travel, furniture storage, or hiring movers.
Without the demands of work, it can be confusing to know what to do with your time. To give more meaning to your life, you can volunteer. This activity will do wonders to make you feel that you are living life with a purpose.
Volunteering will have a good effect on your well-being, and not just to the organization or people you are serving. It also improves your quality of life and keeps you active.
For example, if you volunteer in a hiking area, you can lead group adventures. This activity is also one of the best ways to take care of your health. It has even been proven to decrease your risk of developing heart disease.
Aside from helping you physically, volunteering is also good for your emotional health. Retirees who reported the lack of companionship before volunteering forged meaningful connections after partaking in a volunteer role. Because of this, they experienced low rates of depression.
Retirement's the most wonderful thing. I get to enjoy all the things I never stopped to notice on the way up. After an extraordinary life, it's time to enjoy my retirement.
When choosing a volunteering gig, select the organization wisely. Know how and where you want to spend your time. For example, if you are a veteran, you might want to spend your retirement volunteering at a veteran’s hospital. If you used to be an artist, you could teach an art class for kids.
Be realistic. No organization is perfect. So knowing that you will face shortcomings will help you manage your expectations more.
Do A Fun Hobby
Retirement is the perfect time to find a new hobby. If you’ve always wanted to try doing something before such as knitting, sculpting, or swimming, now is the time to do it. If you want to try out photography, the Sony Alpha a6000 Mirrorless Camera is a fantastic option to pick up.
Recall the things you wanted to do as a child. Maybe you wished to be a pianist, but couldn’t afford to take piano lessons. Or you wanted to be a chef but were too busy to practice cooking. Retirement is the time to pursue your passions. If you don't know what hobby you want to try, don’t be afraid to explore.
Physical activity becomes more important as you get older. To maximize your retirement years, making time for exercise is a must. Before exercising, check with your doctor and ask for restrictions and recommendations. Find the right activity for you and stick to it. The best activity for you may be swimming, yoga, dancing, or cycling.
Exercising will reduce your risk of developing illnesses and bone issues. If you have a problem with mobility, you might want to get help from a therapist or podiatrist. To continue enjoying your retirement and spending time with your loved ones, you have to keep up and stay active. Not being sedentary will also improve your energy and mood.
Spend Time With Family
Spending time with your family when you retire is a must. You can even move closer to them. When your children are working, you can volunteer to babysit your grandchildren. Spending time with family will allow you to pass on your skills, such as a foreign language or even swimming.
You can even go on vacations with your family if you have saved enough money. Enjoying holidays together is a fantastic way to create lasting memories.
Don’t Forget To Enjoy Planning For Retirement
Planning for retirement is like getting ready for a year-long trip. Although all your expected outcomes may not happen, it is no excuse not to enjoy it. The key to enjoying retirement to the fullest is not a vast sum of money, but a positive outlook.
If you follow the tips and tricks listed above, you can experience an amazing life in your golden years. All it takes is some planning for retirement to make sure you live the life you want.
Do you have your own experience with planning for retirement? We would love to read about it in the comments below!