How to Plan for Retirement

How to Plan for Retirement

Retirement should be one of the happiest times of your life. It's a time in which your life's not governed by the alarm clock. For most people, it's a relaxing time to enjoy family and friends while exploring hobbies there wasn't time for while they worked. If you don't plan your retirement, it can be difficult because you might find yourself trying to make your money work for you. You'll have time without any money to make the most of your time. Retirement needs to be planned. It needs to be organized or you might not enjoy it as much as you'd hoped.

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When you consider that the average American spends 20 years in retirement, but fewer than half have calculated how much they'll need during their twilight years, you'll conclude that those without plans will run out of cash long before they reach the end. Some will enjoy the start of their retirement, but they won't have enough to enjoy the later years. Your retirement starts while you're at work. Make saving goals and try to stick to them no matter what life throws at you.

How Much?

According to the US Department of Labor, you'll need 70 percent of your pre-retirement wage to maintain the standard of living you enjoyed while you worked. The best way to make sure you have enough for retirement is to put into your employer's retirement savings plan, such as a 401(k) plan. Contribute all you can, and over time with compound interest, your small monthly contributions will slowly mount up. Speak to your employer to assess your options.

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Basic Investment Principles

How you save is as important as how much you save. The type of investments you make and inflation play major roles in determining how much money you'll have when it comes time to leave work for good. Find out how the pension plan is being invested. Work with pension advisors to maximize your savings. You have to take charge of this process. You can't expect your employer or the pension company to make decisions for you, and you shouldn't just leave the pension pot to accumulate. The harder you work on this, the harder your money will be working for you.

Don't Touch Your Retirement Fund

Don't take money out of the fund. That's key to making the most money. Interest is paid on the savings along with the interest you've already accumulated. The more that's in the pot, the greater the interest amount will be. There are also tax implications to taking money out of the pot early. When you change jobs you can leave your savings invested in your current retirement plan or roll them over to an IRA or put them into your new employer's plan.

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You can save up to $5,500 a year in an Individual Retirement Account (IRA). You can contribute a little more if you're over 50. There are tax advantages to having one of these open. You can opt for a traditional IRA or a Roth IRA. A traditional IRA takes tax when the money's withdrawn. This means that you pay tax on the contribution and all the earnings you've made. With a Roth IRA, you're taxed when the money is contributed. For most, having the tax taken when they're working makes more sense, so you should consider a Roth IRA.

Too Much?

If figuring out where to put your money and how much to save feels a little bewildering, you're in the majority. For most people, trying to make their money work for them is difficult when there are so many ways you can save for retirement. Do you put your money into an IRA or contribute more to your company's 401(k) plan? Do you put money into housing or other assets that are sold to release capital for retirement? These decisions can make a massive difference to the quality of life you enjoy during your retirement. If all this seems a bit too much to bear, there are professional retirement planners out there who can wade through this and help you avoid the pitfalls.

To Consider Before Your Purchase

Should you plan for retirement on your own or hire a retirement planner to guide you through?

Our Notes

  • The current retirement age is 66 years and 2 months but that will creep up to 67 for those born in 1960 and later.
  • The average Social Security benefit is $1,461 per month.

What Do They Say on Other Sites

“I'm currently with Wealthfront and really like it, but I've recently noticed that Vanguard's target date funds are cheaper, soooooo I'm a bit confused as to which option I should go with for a 30-40 year set it and forget it approach.” (Matt discussing Roth IRAs on Nerdwallet)

“I want to choose my mutual funds , such as S&P. But want to be a buy and hold trader, meaning let it sit and ride it out.” (Terri Findlay discussing pension investments on Nerdwallet)

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