‘The early bird catches the worm’ they say, and this also seems to be the golden rule for retirement planning. Which of us doesn’t dream of the day when we don’t have to set the morning alarm, rush off to work, slog through the day and crawl to the weekend for a slight recharge before we do it all over again? For me, retirement cannot come fast enough. But the thought also scares me. Have I done enough to ensure that I have a good safety net for the sunset years of my life? Well, those in the know say that there are a few key steps to follow if we want to be certain of a comfortable retirement.
Plan, plan, plan!
This is really a given; if you want to be able to enjoy anything in life you have to plan. Experts say the planning must start as early as possible. Doing this entails first ascertaining your income sources, listing out your expenses and then calculating how much of your income can be saved. This may seem quite easy, but more often than not, we tend to spend lavishly in the early years of our lives on necessities and then luxuries like travel and holidays, thus dipping into our savings with the idea that these can always be replenished over the years. Of course, holidays and luxuries should certainly be enjoyed, however, we must also know what our final retirement fund goal is and work towards that. So how do we know how much should be saved each year? Take the whole required sum and then divide it by the number of years you have before retiring to ensure you’re saving enough each year.
How much do I need in my retirement fund?
This is a tricky question, because this will depend ultimately on the lifestyle you envision for yourself after retirement. However, the general rule of thumb is that you need enough finances to live on 80% of your income when you retire. Investopedia, which dispenses advice on saving for the golden years explains it like this: So, if you made $100,000 per year, then you would need savings that could produce $80,000 per year for roughly 20 years, or a total of $1.6 million, including the income generated by your retirement assets. One can also factor in pension funds and other investments such as stocks and property income that will generate a certain sum annually, as well.
Forbes Advisor suggests that you look at how much will be needed annually for retirement, and then multiply that by 25 to arrive at the total amount you will need for retirement. They say that at retirement, you need to exercise the 4% rule where you will only withdraw 4% of your retirement fund for expenditure each year you are retired. This is calculated for an estimated 30 years of retirement.
In the US, those who do not get a contribution from their employer towards their retirement plans, will probably need an IRA (Individual Retirement Account). It is always prudent to speak to a financial institution that provides IRAs and know their fees structure at the outset. While there are certain benefits to saving with IRAs such as tax reductions on your savings, there are also some downsides like caps being placed on how much you can deposit in your account annually.
The habit of saving each month will be tough to cultivate, but it can be done if you set up a standing order for a set amount of money from your salary to be transferred to a different account each month. The objective is to make sure that the money in that account remains untouched and gathers interest. This should be an account that is separate to your ‘Emergency Fund.’ The latter will help you to deal with unforeseen expenses and still prevent you from withdrawing from your retirement fund.
Make the right investments
Placing all your money in banks and financial institutions may not always be the best bet. Try to diversify your retirement savings in real estate and stocks. These assets will allow you greater freedom in that you will have a backup plan to your savings which can be affected by interest rates. Experts recommend that you scout out the best location when buying a property or real estate, which can bring in greater returns in the long-run as the property will be more in demand than one obtained for less at a relatively cheaper location. However, always obtain advice on taxation, liabilities, recurring expenses, etc. John Graves, managing principal of an independent RIA says that the goal should be to earn at least 8% on capital invested in rental.
Stocks are also a good option for retirement investing as they produce long-term gains. In addition, they can overcome the effects of inflation, although once again, proper advice must be gained on what stocks to invest in. In addition, information must be obtained about taxation on stocks, etc. Stocks will also be more or less attractive based on the various sectors they belong to, as well as the industries. Some sectors tend to do better than others (technology, healthcare, consumer staples, etc.), so this should also be taken into account when selecting stocks as a retirement investment.
Be vigilant
Stay abreast of what is happening with your retirement investments. Do not be afraid to make adjustments when necessary, according to your lifestyle changes. You’ll likely be able to save more when you’re younger, single, and without family responsibilities. But as you grow older, your salary and perks will be better too, and this will also allow you to diversify your investments. Keep your eye on the prize; a well-deserved comfortable retirement at the end of it all.
(Anouk De Silva)