Retirement planning is the process of ensuring you have a steady flow of income to cover your expenses when you stop working. Most people do not want to spend the rest of their lives at a job. At the same time, the expenses do not magically disappear when you reach the retirement age. As a result, you need to start retirement planning early enough.
First, it is important to set your retirement goals based on your current lifestyle, income level, expenses, and age. You need to evaluate your current financial position to establish whether it can sustain your lifestyle and expenses when you choose to retire. You also need to identify various retirement income sources available and evaluate risks, such as inflation, that might affect the retirement income.The good news is that you do not have to navigate this complex process alone. Having an experienced financial advisor on your side makes all the difference.
You can retire when the income level derived from personal savings and investments is enough to cover your monthly expenses such as mortgage, car payments, groceries, and utility bills. It is also safe to retire when your passive investment income exceeds your expenses.
There are various options to derive retirement income from:
Personal Savings and Investments
These comprise Roth IRA or the traditional IRA accounts, nest eggs with savings or taxable brokerage accounts. Other people invest in stocks and bonds, real estate or precious metals. The advantage of these investments is tied with the power of compounding and the time value of money to earn greater returns.
If you are a W2 employee, you can benefit from Social Security after retirement. However, it's not advisable to rely on Social Security solely as it's not enough to entirely cater to your expenses. Furthermore, based on the current rates, the Social Security Trust Fund is likely to run out around 2035, making it an unreliable source of retirement income.
These vary from company to company and are becoming less common. It is typically a percentage of your highest-earning year paid in perpetuity until you pass away.
An emergency fund is a rainy-day fund which is simply a liquid account that resides in an online savings account or a savings account at your bank. It comprises three to six months of all your monthly expenses. If the monthly costs go up over time, you need to adjust accordingly and remember to replenish any money taken out in an emergency.
An employer match such as the 401(k) is an employer-based retirement plan that allows you to make money and put it away for retirement based on your chosen rate. Along with this plan, you also get a nice write-off on your tax returns.
With a Roth individual Retirement Account, you can contribute post-tax income, which grows over time. The advantage of these accounts is that you can pull out your contributions at any time tax-free. They are also flexible in choosing where to invest the money, either in stocks, bonds, real estate, or precious metals.
It is advisable to start saving as soon as possible, especially when you are younger as your expenses are lower. You can choose to maximize Roth IRA contributions or hold on to as much money as possible and invest it where it grows in value. Investing is important because the main factor in how much money you have in retirement is not based on how much you invest but on how much you allow the money to grow. It is also important to note that it's never too late to start saving for retirement.
According to the Bureau of Labor Statistics data, the average retired person spends roughly $3,800 a month.
Ultimately, a good retirement advisor will help you set your financial goals and priorities and recommend specific steps that put you well on your way toward a secure retirement. It is worthwhile to sit down with a knowledgeable financial planner who will help you tackle issues with asset mix, asset allocation and help you understand the tax implications for each plan. Contact Haro Financial Services today to get started!