5 key steps to retirement planning
Retirement can be seen as a sort of a reward after working hard most of your life. However, retirement is also something that you need to plan for as soon as possible. The reason for this is that planning your retirement is a process that has multiple steps, and it evolves over time as well. You may be looking into tax debt relief options at the moment, but you should also be thinking of how your current and future situation influences your retirement. With this in mind, we have prepared five key steps to retirement planning to help you out. We will also cover the importance of retirement planning and provide you with a few tips and tricks on how you can make it a bit easier.
Why is retirement planning so important?
Many people wonder what is it, exactly, that makes retirement planning so important. While there are many reasons, the simplest and the most “effective” reason is that retirement can last a rather long time. Let’s say that you retire at the age of 65. According to the CDC, the average life expectancy in the U.S. is 77 years. That means that, on average, you will retire for at least 12 years. But that same statistic can be extrapolated to show that you have around a 50% chance of living to 88 (men) or 90 (women). In this case, you will be able to take advantage of the retirement for 25 years or even more!
As you might imagine, planning your retirement will provide you with a much better quality of life. But that is not the only benefit that you get from it. Let’s take a look at some of the other reasons why you might want to consider retirement planning.
Lower stress means better health
Money is the most common stressor. By going through the key steps to retirement planning you will be able to ensure that money is never as big of an issue as it otherwise might be. Not having enough money in your later years can lead to all sorts of problems, such as depression, anxiety, headaches, poor sleep, etc. The best thing you can do is to plan your retirement carefully, boost your tax refund amount, and ensure that you can live comfortably. By having enough money for your retirement needs, you will be able to reduce your stress levels, improving your overall health in the process.
Not planning your retirement usually means that you need to pay more taxes than you might be comfortable with. There are many different types of taxes in the USA, some of which can be a real hindrance if you don’t plan for them. With proper retirement planning, you might be able to avoid paying too much. There are numerous ways in which you can accomplish this but here’s a simple tip: You want to have three categories of income sources.
The categories are:
Tax-Deferred sources usually include your 401(k), pre-tax IRA, social security, or pension plan. Tax-Free sources include your HSA (Health Savings Account), municipal bonds, as well as Roth IRAs. Lastly, Tax-Managed income sources include any accounts that have tax-efficient investments such as index funds.
Easier to be self-sufficient
Most people do not want to be a burden to their children upon retirement. While this is not always possible, retirement planning can provide you with a means to that end. With good planning, you will be able to save enough for any medical and long-term care costs. You do need to be somewhat careful, though, as there are many pitfalls when planning your retirement. For example, you will want to protect yourself from common IRS tax scams. Most of these scams prey on the very feeling of not wanting to be a burden. They promise huge returns on investments only to scam you out of your hard-earned money.
These were just a few of the many reasons why you need to plan your retirement very carefully. Some of the others include having the resources to be a “cool” grandparent or to continue with your charitable donations. And with proper planning, even a forced early retirement might not seem so bad. With that in mind, let’s take a look at how to plan for a successful retirement!
Five key steps to retirement planning
- Consider your retirement goals
- Assess the time that you have
- Calculate your retirement spending
- Create a portfolio that can cover your needs
- Make plans for the unexpected
Before we get into explaining these steps, it is important to note again that your plans will change over time. For example, you may be following our property tax relief guide one year only to get the numbers to change in the next and have to rethink your strategy. The key to retirement planning is to be flexible. Don’t be afraid to change your retirement strategy if the circumstances necessitate it.
Step 1: Retirement goals
The very first thing you need to do is figure out what you want from retirement. Every person is unique, after all, and your personal goals might be completely different from what is considered to be “normal”. Do you want to travel the world once you retire? Are you satisfied with living in a small home in the suburbs? Do you want to be able to support your children and grandchildren?
By knowing what your goals are, ahead of time, you will know exactly what you need to accomplish prior to retirement. If you find out that you need extra income, you may want to read up on business tax tips for entrepreneurs, for example. Or you might realize that you don’t really need all that money for when you retire and might decide to “take it easy” before retirement. Either way, your goals will provide you with the necessary direction.
Step 2: Assessing the time you have before retirement
Time is your most valuable asset when it comes to retirement planning. Analyzing how much time you have before retirement will allow you to lay down the groundwork for your retirement strategy. There is a world of difference in risk management between having 30+ years before retirement and only having 10 years. In other words, the more time you have, the more risks (and potential rewards) you can take.
For example, investing in stocks is usually a good idea if you have 30 or more years before you retire. But if you only have ten years before retirement, you may want to consider less risky ventures, such as bonds. Of course, the more risk the greater the reward.
Depending on how much time you have, you may also want to consider purchasing a rental property. In this case, you would search for the best states for property taxes and make your purchases there. Time is money, as they say, and you will want to make the most of what time you have.
Step 3: Calculating your retirement living costs
Next up, the third of the key steps to retirement planning is determining your retirement spending. This can be quite tricky to do, as you will never be 100% certain of your needs in the future. Most people believe that, once they retire, they will be spending a lot less than what they used to. This assumption is almost never correct.
The easiest way to think about your retirement spending is that it is going to remain much the same as it currently is. While you may not be spending money on traveling to work, you will have a lot more free time. And, most of the time, you will want to spend that free time in the best possible way. Which usually means spending at least some money.
That being said, you will want to try and estimate retirement activities (especially early in retirement) and account for additional costs such as sending grandchildren to college, for example.
Step 4: Creating a portfolio
All of the previous steps were actually taken to prepare yourself for this step. Creating a portfolio that creates a proper balance between risk and return is absolutely critical. While this is a complex process, you can think of it simply as “risk vs reward”. You need to be comfortable with the risks you’re taking, no matter how large or small they are. Additionally, you do not want to overly obsess with the “market noise”, and overmanage your portfolio. Sometimes, the best course of action is to simply wait for the market to correct itself.
Depending on the time that you have, you will either create your portfolio on your own or hire a professional to help you with it. But, at the end of the day, it is all about risk and reward.
Step 5: Always plan for the unexpected
The last step involves preparing for the unexpected. It is always good to have a contingency fund in place to cover any unexpected situations. As far as key steps to retirement planning go, this may be the most important step. You can be certain that unexpected things will happen. And that your retirement funds will need to cover them.
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