How to Prepare for Retirement

 

Preparing for retirement is one of the biggest financial hurdles we’ll tackle in our lives. By creating a retirement plan, you can make achieving retirement success attainable. So how do you create a retirement plan? What items should be on your pre-retirement checklist? What will your insurance needs at retirement be?

The actions you take today to achieve your retirement goals will determine the lifestyle you can enjoy in the future. To help you create the retirement of your dreams, we’ve compiled this comprehensive guide of retirement planning tips and steps.

Set Your Retirement Goals

Have you just started working your first full-time job out of college? Have you been in the workforce for 10 years with nothing saved for retirement? Or is retirement just over the horizon? Whatever your answer, this is when to start planning to retire.

First on the list of retirement planning steps is setting retirement goals. Many employees are not on track for their retirement goals, or they’re unsure what exactly their goals should be.

1. How Much Do You Need to Have Saved to Retire Comfortably?

How to Prepare for Retirement

One of the most important steps in setting your retirement goals is determining how much you’ll need to have saved to retire comfortably. These days, we can’t rely on Social Security benefits to carry us through our golden years. Many of us need substantial personal savings to sustain our lifestyle, cover health care costs and enjoy our later years to the fullest.

The general rule of thumb is that you can withdraw 4% per year from your retirement portfolio. For example, if you want to spend $40,000 a year, you’ll need $1 million in retirement savings. To calculate how much you’ll need to have in retirement assets, multiply what you want to spend each year by 25. If you want to spend $50,000 per year, you’ll need $1.25 million. If you want to spend $100,000 per year, you’ll need $2.5 million.

So how do you calculate what your spending power should be in retirement? Look at your budget to see what you’re currently spending each year. How do you anticipate some of those costs might change in retirement? Health care costs typically increase in our later years, and if you plan on traveling widely, your annual expenses may increase.

Other costs, on the other hand, may decrease, such as commuting, housing and clothing costs. Many empty-nesters downsize their homes in retirement and move to lower cost of living areas, so your housing costs may drop significantly. Create a budget with your projected expenses in retirement to better understand how much you should be saving.

2. Are Your Goals Realistic?

How to Prepare for Retirement

In preparing for retirement, you want to be sure your goals are realistic. If goals aren’t measurable and achievable, we’re more likely to give up on them altogether. We assume that if our goal isn’t something we can accomplish, why bother trying?

So what do you do if your goals aren’t realistic? What if your current savings rate won’t get you to your target for retirement savings?

Your financial health can determine the success of your retirement preparation. Take an honest look at your current finances and how you manage them, and determine if you need to make changes. If you have retirement goals that you can’t attain at your current savings rate, then something needs to change within your finances.

Here are a few tips to follow if you need to improve your financial health to meet your retirement goals:

  • Get educated: The best way to make an informed financial decision is by seeking education in financial literacy and retirement savings options. The more you know about your options, the better you can prepare for your future.
  • Spend less: A great way to save more toward retirement is by spending less on other financial obligations or unnecessary purchases. Create a budget and figure out where you can cut costs. Trim back on your purchases you want but don’t need. If you’ve already trimmed out those extra expenses, consider making bigger changes, like moving to a lower cost of living area.
  • Earn more: If you’re struggling to meet financial goals, one of the best ways to combat this problem is by bringing in more income. If your expenses stay the same, but you start earning more, you can increase your savings rate. You can earn more by working overtime, working an additional job or side hustle, buying a rental property or starting a business.
  • Research tax deductions: You may be able to reduce your taxes by contributing to accounts offered by your employer pre-tax. For example, if you have a high deductible employer-sponsored health plan, you can max out your HSA, as these provide great tax benefits if you need to pay for health-related expenses out of pocket.
  • Eliminate excessive charges and fees: Is your bank charging you fees at every turn? Are you paying an excessive annual fee for a credit card? If so, you may want to consider shopping around for a different bank or credit card. After you make the switch, you can then use the money that would’ve gone to fees to pay off debt, save and invest.
  • Refinance debts: Do you have high-interest debt? If so, you may want to consider refinancing your debt at a lower interest rate. This can lower your monthly payments, allowing you to contribute more money each month to retirement.

While improving the state of your finances won’t happen overnight, it is possible over time with persistence and continuous effort.

How to Create a Retirement Plan

How to Prepare for Retirement

Without having a plan in place, hitting your retirement goals will be much more difficult, if not impossible. How can you reach your destination if you don’t know how to get there? After you set your goals, the next step is to create a retirement plan as soon as possible so you can determine exactly how you’ll achieve those goals.

1. Write Down Your Goals

After you’ve determined what exactly your goals are for retirement, write them down so you can track your progress over time. Take a look at your current investments and assets and calculate what you’ll need to save each year to meet that retirement goal.

Your written plan doesn’t need to be long or overly complicated. All you need is a plan that clearly states what your goals are and how you will achieve them.

  • At what age do you want to retire?
  • How much money will you need to sustain yourself for the number of years you’ll be in retirement?
  • What do you need to save every month to meet your goal?

When you have clear goals, you can begin to map out how to reach them.

2. Implement the Plan

Perhaps the most important step in preparing for retirement is actually getting started. Many delay saving for retirement and excuse their procrastination with excuses.

  • “When I’m making more money, I’ll start saving for retirement.”
  • “When I’m out of debt, I’ll start saving for retirement.”
  • “When I’m 30, I’ll start saving for retirement.”
  • “Next year I’ll start saving for retirement.”

Any of these sound familiar? When it comes to saving for retirement, you don’t need to be making a lot of money or investing a large amount every month to make progress. The earlier you start, the better.

If you look at your current savings rate and discover that you’re not saving enough to meet your retirement goal, you can start taking action now. You can identify ways to save more, reduce your expenses and pay off debt so you can get back on track. The sooner you can implement a solid retirement plan, the more likely you are to achieve your goals.

Remember that it’s never too late to start or to get back on track to reaching your retirement goals.

3. Track Your Progress

How to Prepare for Retirement

You can use an online retirement calculator to track your progress every year. Though you’ll see highs and lows from month to month if you’re investing, you should see an upward trajectory over the long term. Understand that major life events, such as having a child, losing a job and getting married or divorced, can have an impact on your plan.

It’s okay if you want to change your plan as your situation changes. Maybe you want to increase your retirement goal if you get married or have a child or if you want a more luxurious retirement.

Communicating about your retirement plan with your partner, family, friends or financial planner is another great way to stay on track. Having someone who can hold you accountable or who is also depending on you staying on track for your retirement goal can be excellent motivation to continue working toward your goals.

Remember that if you’re investing in the stock market as part of your retirement savings portfolio, the market can be volatile. It has its ups and downs, and the rate of return can vary dramatically from year to year, but historically, the market is actually quite stable over the long run. Keep your end goal in mind while investing and try not to let your emotions get involved.

Having the Proper Life Insurance Entering Retirement

Another important step for preparing for retirement is ensuring you have the proper life insurance for retirement. Sometimes we can focus all of our attention on investing and saving for retirement and neglect ensuring we’re protected against possible risks. One of the ways you can reduce or eliminate financial risk is by having the proper life insurance.

1. Do I Need Life Insurance After I Retire?

How to Prepare for Retirement

Do you have a spouse or dependents? Do you have loved ones who rely on your income? If so, ensuring you have the proper life insurance is key to a successful retirement. You want to make sure your loved ones are taken care of, and life insurance will protect them financially.

You’ll likely want life insurance if:

  • Your spouse depends on your income: Imagine if you both plan to retire at 67, the current full retirement age, but you die at 60. This leaves your spouse without those planned seven years of savings from your income to put toward retirement. This is where life insurance comes in, helping your spouse close that financial gap.
  • You want to cover the funeral costs: Funerals can be prohibitively expensive, costing your loved ones thousands of dollars. Without life insurance to cover these costs, your family could be left struggling to pay for your funeral expenses. With life insurance, you’ll ensure your loved ones can cover your funeral expenses and maintain their quality of life after you’re gone.
  • You have an elderly dependent: Are you caring for an elderly parent or relative? If you were to die, and they would require professional care, life insurance could ensure the costs of their care will be taken care of and they continue to enjoy the same quality of life.
  • You have debts: If you die with significant debt, the burden could become your spouse’s or heirs’ to bear. With life insurance, your beneficiary can use the death benefit to pay off the loans and free them of that financial burden.
  • You’re an employer or business partner: If you have a business partner or employees who depend on you and your business to make their living, then having life insurance can protect them.
  • You don’t have sufficient savings: If you’ve reached retirement and don’t have sufficient savings that could take care of your dependents after your death, you may want to obtain life insurance.

Take an unbiased approach to determine your coverage needs before you think about what policies can fill any coverage gaps. You should review your policies every year, as major life events can alter your coverage needs. As you enter your 60s, you may want to consider new options for life insurance.

2. What Life Insurance Should I Have?

How to Prepare for Retirement

The two major types of life insurance are permanent life insurance and term life insurance.

  • Permanent life insurance: This is a type of life insurance that lasts for a person’s entire life and combines a death benefit with a savings or investment account.

Whether your premiums are fixed or not depends on your policy, and the premium itself is based on your current health and medical history. In a whole life insurance policy, your premium consists of two components — the cost of insurance and savings. The premium remains consistent year to year, and the portion of your premium that goes toward savings goes to your cash value, which grows tax-deferred.

  • Term life insurance: This is a type of life insurance that lasts a certain number of years before expiring.

Many people are attracted to term life insurance because of its simplicity and lower premiums. Term lengths range from one to 30 years, or they can last to a certain age, which is generally 65. Among the most popular life insurance policies is the 20-year term policy. Term life insurance doesn’t offer any extra features, so there also aren’t any additional fees or costs associated with this type of life insurance. You can also opt to cancel your policy while it’s active without taking a loss.

After your term policy expires, you can choose to renew your policy, obtain a new term policy, convert to a permanent policy or continue uninsured.

Selecting the right life insurance policy for you depends on your life circumstances and what you’re looking for in your coverage. When preparing for your future, keep in mind the importance of life insurance at retirement.

Evaluate Savings and Investments and Adjust According to Your Retirement Goals

How to Prepare for Retirement

Do you already have some savings and investments? Are you just getting started on your retirement savings? The following are a few savings and investment options you can use to prepare for your dream retirement.

1. 401k

One of the best investments may be an employer-sponsored 401k. This is for a few reasons:

  • Free money: Many employers that offer a 401k also offer an employer match, meaning they’ll match your contribution to your 401k up to a certain percentage. With an employer match, you’ll be investing more and you can get a better return on your money. If your employer match is 3%, for example, then you should contribute at least up to that amount.
  • Pre-tax contributions: The contributions you make are pre-tax. This means your taxable income will be reduced, so you’ll pay less in taxes while still saving for retirement. Your contributions will also grow tax-deferred, meaning you don’t have to pay taxes on the gains from your investments until you begin withdrawing.
  • Portability: If a 401k is employer-sponsored, they also tend to be quite portable, so you can transfer these plans into an IRA or a new employer’s plan without tax consequences.

If your employer offers a 401k with a match, this may be a great investment avenue for you to pursue. This is a benefit you get for being an employee with this company, so take advantage of it.

2. IRA

An employer-sponsored retirement plan isn’t your only option for saving for retirement. An IRA can be another excellent way to invest for your retirement. To contribute to a Roth IRA or deduct the contribution, there are some income limits and restrictions, so do your research to select the best IRA option for you.

Most will choose from either a traditional IRA or a Roth IRA. For the self-employed, you also have the option of contributing to a SEP IRA. If you’re unsure whether a traditional or Roth IRA would be better for you, you can contribute to both.

3. Pensions

How to Prepare for Retirement

An employer may also offer a pension to employees. An employer will make contributions to a set of funds that the worker will receive in the future. The earnings on the investments in this pool of funds are given to the worker when they retire. You may also be able to contribute part of your wages into a pension plan. A pension can offer you a steady monthly income in retirement, so if your employer offers a pension plan, this can be quite beneficial for you in retirement.

4. All Other Assets

Having a diversified portfolio can help you reduce your risk. If your portfolio isn’t diversified, you’re risking your entire retirement on one type of asset and the consequences could be severe. To reduce your risk, choose the investment allocation that makes the most sense for your age, financial goals, time horizon and risk tolerance, along with considering assets such as your home and real estate properties.

You can also generate additional income through a side-hustle or self-employment in retirement. You can work a freelance job part-time if your Social Security benefits and current assets aren’t enough to sustain your lifestyle. You can also earn money through investments, including property, which doesn’t affect your Social Security benefits. This means renting out a spare room or another property could bring in supplemental income to boost your retirement.

Remember that your most important asset is you because of your ability to make money, so you need to make sure you are protected.

Contact David Pope for Your Insurance Needs

How to Prepare for Retirement

 

When you obtain a life insurance policy from David Pope Insurance Services, LLC, you’ll know your family is protected if something happens to you. We want to give you the peace of mind you need so you can relax and enjoy your retirement.

For affordable, quality life insurance in Missouri, contact us at David Pope Insurance Services today.

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