Retirement is a major life event. Therefore it’s important that you take retirement planning seriously so you can sustain your lifestyle once the day comes.
Since there is a lot of conflicting advice out there regarding preparing for retirement, we thought we’d help demystify retirement planning with some simple, straightforward advice.
Whether you’re just getting started preparing for retirement or you’re looking for help with retirement planning, the following practical advice will help you along your journey.
What kind of retirement account should I open?
You might be confused about what type of retirement account is right for you. This is normal.
There are many types of retirement accounts available, and the best one for you can depend on many factors such as your lifestyle or your country of residence.
In any case, you should always open a retirement account that is tax deferred.
A tax deferred retirement account will allow you to contribute your earnings tax free so you have more incentive to invest in retirement.
Furthermore, the additional contributions will allow you to maximize what Warren Buffet calls the most powerful factor behind his investing success, compound interest.
Compound interest will help you earn interest on top of interest so you can reach your retirement goals even faster.
How much do I need to sustain my lifestyle?
It’s important to consider how much money you’ll need in retirement to help you figure out how much money you’ll need to save once retirement comes. There are many things to take into consideration when deciding on a number.
To start, ask yourself if you think your lifestyle will change once you retire. Will you need more or less money to live off of than you are currently?
For most people the answer is less.
However, if you want travel more or spoil your grandchildren keep in mind what your new budget will be in retirement so you can invest accordingly.
Will your home be paid off by the time you retire? If yes, you can take that lowered monthly expense into account when setting your budget as well.
What will my retirement age be?
Everyone has a different age that they hope to retire by.
Some people may prefer to retire before their government’s state pension age. If you’re one of those people, you’ll want to maximize contributions to your retirement plan in order to take advantage of the benefits of compounding interest.
If you plan to retire once your pension kicks in then you can contribute less as you’ll have more time to reach your savings goal.
Either way, it’s a good practice to decide on an age that you want to retire at so you can calculate how much you need to put away for retirement each month so that you’ll be prepared when that day comes.
How much do I need to contribute to reach my goal by retirement?
This is the million dollar question.
When deciding how much to contribute to your retirement plan each month you’ll want to take the above points into consideration. How much money do you need in retirement and what will your retirement age be.
Based on those estimates, and an estimate rate of return of 7%, you can then determine how much to contribute to your retirement plan.
As always, if you’re not sure how much to contribute based on your age and lifestyle goals, it’s a good idea to get financial advice from a professional.
There are many things to take into consideration when preparing for retirement and the 4 questions above are just the tip of the iceberg.
So if you haven’t started saving for retirement yet, or you want to reassess your progress so far, ask yourself the above questions and you’ll have a good foundation for a happy (and wealthy) retirement!