Retirement is a word that depicts both good and bad. Good in the sense that you feel at last now you are free from daily routine responsibility and will now spend some quality time rest of your life with friends and family or will fulfill some hobby or interest that was lost due to stress of job work.
And bad in the sense, many people feel low when thinking of retirement. For these people life is now an end and they seem that they are now too old to take up another job or to show that they do not have the ability to take responsibility again.
Your retirement may be years ahead from now or you might be planning to take voluntarily retirement due to certain reasons of your own. But it all determines how smoothly plan ahead for your post-retirement life. It is often seen that most of us have no road map or plan sheet for preparing in advance for retirement.
There are few questions for individuals to prepare. What does your retirement plan look like? What kind of lifestyle do you wish to lead when you retire? Will you continue working during retirement? Will there be medical expenses based on your current health and that of your family?
What are your family commitments? Is your spouse and children dependent on you? Will you still be paying rent or a home loan, or do you want to own a house? Do you have travel plans? And how long will you want to travel and where? Do you want to pursue a hobby that costs money? This will help you know what you want to do, how much you need to save and how you will achieve your goals.
A great way to map your retirement plan is to visualize what your retired years will look like, to give you a sense of how you can be prepared.
- You should know how much you need at the time of retirement Start early enough. Suppose Mr. John and Mr. Rex followed a disciplined investment process. Both of them invested $ 10,000 every year. However, Mr. Rex started investing at the age of 25 and stopped at the age of 35, whereas Mr. John started investing at the age of 35 and continued all the way until he was 65. By the time both of them retire at 65, Mr. Rex would have acquired as much as 2.5 times the amount Mr. John has, even though he invested only for 10 years, compared to Mr. John who invested for 30 years. That’s the power of compounding. The effect of compounding is only realized if you give time for your money to grow. The earlier you start to save, the earlier you can retire.
- Always include contingencies such as health care expenses in your retirement plan: In your retired days, medical expenses is the most common contingency that you need to prepare for. Just one medical bill can exhaust your savings, leaving you vulnerable. You must ensure emergency funds are allocated to cater to your health care in your old age. Make sure you factor in the costs of medical insurance and health care expenses post retirement when you plan for your retirement corpus.
- Make smart investment decisions: Invest in assets like company shares or equity mutual funds that give you inflation beating returns (14-16% after tax) in the long term. This will help you speed up the retirement corpus accumulation and also get started with lower monthly investments. When planning for retirement, it’s important to realize where you want to be, in order to know what you need to do to get there.
- Park your money in the right accounts:The U.S. tax code offers several advantages for retirement investors. Go to the max. The government sets annual contribution limits on retirement accounts. Do your best to max them out: 401(k) accounts and other workplace retirement plans have a $16,500 annual contribution limit ($22,000 for those 50 or older). IRAs and Roth IRAs both have $5,000 limits ($6,000 for those 50 or older).
- Save even more:Any extra savings for retirement should go into a taxable brokerage, certificate of deposit or bank account. A common goal is to save at least 20% of your income each year, more if you’re way behind.
- Pay attention to “asset location:For people who have both tax-favored retirement accounts like 401(k)s and IRAs, as well as brokerage accounts, it can be a challenge to figure out in which accounts to put which investments. Put a higher percentage of stocks into your taxable accounts, while taxable bonds are better off in your tax-favored retirement accounts like your IRA. Focus on asset allocation. One key study shows that 91% of a portfolio’s performance is determined by allocation of assets, not individual investments or market timing.
- Age rules: Some financial advisers recommend stock market or equity exposure equal to about 120 minus your age. If you’re 55, at least 65% of your portfolio should be in stocks, regardless of which types of accounts you are using to invest for retirement.
- Fixed income matters: The remainder of your portfolio should in so-called fixed-income investments like bonds, bond funds or CDs, which generate annual interest income.
- Pick the right investments: Misguided investment choices can cost you tens of thousands of dollars over a lifetime.
- Fees add up: Investment fees come in many forms, including expense ratios on mutual funds, commissions for stock or ETF trades, and account fees from advisers. Fees should be no more than 1% of your total portfolio.
- Diversify: For the stock portion of your portfolio, consider index funds and mutual funds and get exposure to domestic and international markets, as well as small, medium and large cap stocks; for the fixed income portion of your portfolio consider bonds, bond funds, CDs or possibly real estate or commodities.
- Ask for help: A financial adviser can help you pick low-cost investments to help you meet your retirement goals. Be mindful, however, of how that adviser gets paid.
- Don’t try to time the markets: A study found that people who try to time the markets end up with significantly lower returns than those who buy and hold.
- Don’t tinker too much: Don’t change your investments on a whim; instead, once a year, make review your portfolio, either on your own or with an adviser.
- Lost time cannot be retrieved: Many people delay maxing out their retirement account contributions, assuming they can make up for lost time later on. So it is not that easy but determination and proper plan will help the situation.