Planning for your retirement is something you'll do throughout most of your life (ideally!) A retirement plan is more than figuring out how you will live out your golden years once you've stopped working – it's also a great way to figure out your current finances and improve your overall money management.
Getting Started Planning For Retirement
If you already have some investments or a retirement account, take a look at how much you've obtained so far. Consider how much you are likely to need when you retire, by estimating the age you plan to be when you retire and the number of years you will probably live – then determining how much you will need per year to live on to cover your expenses. You'll want to consider how much you might receive from Social Security, personal investments, pensions and employment earnings if you plan to take a different job when you “retire”. Finally, think about your tolerance to risk. Do you have 20 or more years left before you retire or are you quickly approaching retirement? The sooner you plan to retire, the less risk you will probably want to allow, but keep in mind that long-term performance investments may help compensate for investments with short-term risk potential.
Employer-Sponsored Retirement Plans
If you are lucky enough to work in a place that offers employer-sponsored retirement plans, you should contribute as much as they allow – or at least as much as your employer will match in the case of employer matching retirement plans. Investing in these retirement plans, as well as IRAs help your money work harder because they are tax-advantage accounts. The longer your money remains in these accounts, the more it can grow through compounding interest.
You don't want to put “all your eggs into one basket” as everyone says. You'll want to divide your money and retirement savings among a variety of investments, from employer-sponsored retirement plans and IRAs, to certificate of deposits and money market accounts, mutual funds, stocks and bonds, and cash. This will give you a complete and diversified portfolio. The percentage of money you contribute into each type of investment is based on your risk tolerance and how much time you have before you retire.
Annual Withdrawal Rate
You don't want to outlive your money when you are retired! Determining an annual withdrawal rate will help you make sure your investments will last you throughout your retirement years. You determine the annual withdrawal rate by knowing the amount of your total assets available when you retire, the assumed rate of inflation, and how many years you plan to live during retirement (a good estimate since no one knows this for sure!)
You may want to withdraw money from different investments at different times during your retirement, depending on the tax benefits of doing so. Some accounts allow you to start receiving the benefits at the age of 59 and a half; while some tax-deferred retirement accounts require that you are making annual withdrawals once you reach the age of 70 and a half.
Part of your retirement planning involves the creation of your will. This will ensure that your final wishes are legally documented and that you are doing all you can to minimize the tax burden you might leave to your heirs. As your life changes, you'll want to review and update the will to make sure it is still what you want it to be. Planning for retirement is something most people do throughout the course of a lifetime, and plans can be modified and adjusted as your lifestyle and financial situation changes.