Planning your retirement is not something you should start when you turn 40. The earlier you start retirement planning, the more flexibility you will have as you approach retirement age. A lot of this planning happens in stages, which reflect your current needs, retirement goals, and available financial resources. Breaking down how you should plan for retirement begins early, and continues into retirement.
Early Stage Retirement Planning
Though it may be hard to start saving for retirement when you are fresh out of school or just beginning to start a family, you should make an effort to at least make some basic retirement moves. Usually, one of the best ways of doing this is to max out your 401(k) and/or Roth IRA contributions. Many employers will match up to a certain amount that is invested in your 401(k), and you should be taking advantage of the entire matching contribution. Any money you invest early on, say in your 20s and early 30s, will have the longest time to grow, giving you more value per dollar you put into it.
Mid-Stage Retirement Planning
As you enter your prime working years, you should see an increase in salary, however, this is also the time in your life where you will probably see an increase in expenses. Between 30-50, many people are raising children, putting them through college, paying off a mortgage, and doing many other things which require a decent amount of money. The best way to further your retirement planning goals during this stage is to get out of debt, and try to increase your contributions to retirement accounts and savings. Even at age 50, you can still see 10-15 years of growth from every dollar you put away for retirement.
Late Stage Retirement Planning
Once you are over 50, you will have a better idea of what your current finances look like, and you will have a better understanding about what kind of lifestyle you will want to have in retirement. At this point, you may want to consider making additional catch-up payments to your IRA and 401(k). If you maintain a fairly constant budget and quality of life in your 50s, you should consider contributing a larger part of your income for retirement planning purposes. Longer lifespans and higher medical costs are real issues that need to be considered as you plan for a comfortable retirement.
You will also have to decide when you want to retire. If you have diligently saved, you can probably retire any time you want. If you have very little saved, chances are you will have to continue working for several more years. With a comfortable nest egg though, you have some options. The longer you put off retirement, the better your quality of life will be during retirement. If you choose to retire earlier, you may need to cut back on expenses somewhat to make sure your nest egg lasts your entire life.
Once you are retired, you will either be receiving a fixed income from a pension plan or annuity, or you will have a large amount of money that needs to be budgeted carefully. Either way, taking out enough for monthly expenses is usually the best way to go. With a pension, this is standard, but if you are managing your investments yourself, it can be a delicate balancing act between how much you withdrawal and making your money last—especially with the reality that we are living longer these days.
That is where a professional financial advisor can help, such as fine tuning the investment withdrawal rate and making sure your expenses are in line with what your portfolio can reasonably provide. The greatest threat during this stage of retirement planning is outliving your money, which is why keeping expenses in line with your financial resources at this point should lead to a retirement that is well-funded and lets you live comfortably.
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