February 23, 2024

Many of us look forward to retirement—the golden years when we are free from work obligations and free to do whatever the heart desires.

But to fund all those grand, after-get off work adventures — or just to cover your day-to-day expenses after you’ve left the job — you’ll need to accumulate savings. Make a financial plan now so you can relax and enjoy retirement later in life.

This retirement guide will show you how to start planning for retirement.

set retirement goals

If you’re not sure how to plan for retirement, start small. Start by thinking about your goals to better determine what steps you need to take to achieve them. The following three tips will help you set unique retirement goals.

Determine your retirement age

When you plan for retirement—and how long you have until then to save, invest, and pay off debt—affects every step of your retirement planning process. So before you do anything else, you should decide at what age you want to retire.

envision the life you want

You work hard now so that you can relax when you retire. But how much you need to park that hard-earned cash — and where you should invest it — depends on what you want your golden years to look like.

Do you want to retire in a specific state or country? The cost of living varies widely from place to place.

Do you want to travel? You are not alone. Many retirees spend more in their first few years of retirement as they travel or remove other items from their bucket list.

How to calculate the medical expenses? Do you have a long-term health condition that requires you to save more money now to cover future expenses?

Think about how your life will change, for the better, or for the worse, once you get the job done. Get these ready now, and you’ll be able to afford the retirement you want.

Estimate your retirement expenses

As a general rule, you need to replace 70% to 90% of your pre-retirement income through savings, investments, and Social Security. So, if you’re making $70,000 a year now, you’ll need about $49,000 to $63,000 a year to cover retirement expenses.

You can use a retirement calculator to get a more personalized estimate of your expenses. But these calculators are not precise. One person might tell you you’re getting ready to retire, while another might say you’re behind.

Finally, you should discuss retirement with a financial advisor, if possible. They can get a complete picture of your financial situation, calculate future expenses and help you meet your retirement goals.

Assess your financial situation

Once you’ve estimated your retirement costs, you can assess your current financial situation. Then, you can create a plan to save what you need.

Review sources of income

First things first: how much money are you making right now? This can include your salary at your main place of work; side income, such as gigs, property rentals, or investment dividends; and any other form of income.

A general rule of thumb is to set aside 10% to 15% of your pre-tax income each year for retirement planning. So, if you make $70,000, you can save $7,000 to $10,500 a year.

Analyze current costs

Just as important as your income is what you spend it on. Looking at your current expenses can help you find costs that you can carry forward to retirement. But you may also find places where you can cut some fat, such as an oversubscription service. Spending less there will allow you to save and invest more.

Create a savings and investment plan

Chances are, you’re not just saving for retirement right now. You might want to buy a house, set up an emergency fund, or pay off credit card debt. If you’re in your 20s or 30s, saving for retirement may not seem like a top priority.

But now is the perfect time to set up a savings and investment plan because you can take advantage of compound interest, as shown in the table below, assuming a hypothetical 10% return on the money you put aside.

investor 1 investor 2 investor 3 investor 4
starting age 25 35 45 55
monthly payment 100 dollars 100 dollars 100 dollars 100 dollars
return rate 10% 10% 10% 10%
total donation $50,400 $38,400 $26,400 $14,400
Total value is 67 $685,078 $256,360 $91,071 $27,345

If you’re making plans in your 40s or 50s, don’t worry! You still have time to reach your retirement goals. You just need to make a higher monthly or annual contribution.

No matter your age, you can implement your retirement plan quickly and efficiently by:

Open a retirement account

401(k) plans: 401(k)s are employer-sponsored retirement accounts, and they’re a great place to start, especially if your employer offers matching contributions. (Essentially, it’s free money your employer contributes to your savings account, although you usually have to be with your employer for a while to keep those contributions.)

Traditional 401(k) plans are tax-deferred, so you don’t owe money until you withdraw money from the account. These taxes will also depend on your retirement income, so you may pay a lower tax rate.

Best of all, you donate in pre-tax dollars. This means that your contributions are deducted from your annual income for tax purposes, which in turn reduces the income tax you owe – another way a 401(k) plan helps you get the most out of your money .

As an employee, you can contribute up to $22,500 per year, or $30,000 if you’re over age 50. You and your employer cannot contribute more than $66,000 in total to your account each year, or $73,500 if you are over age 50.

Traditional Individual Retirement Accounts (IRAs): Like a 401(k), you contribute to a traditional IRA with pre-tax funds. (Again, this is money you earn, but it’s deducted from the income you report to the government, saving you income tax.)

Like a 401(k), you’ll be taxed when you withdraw your retirement contributions.

Advantages of a Traditional IRA include that anyone can open one — and unlike a 401(k), you don’t need a full-time employer to do so. Unlike a Roth IRA (see below), you can open one regardless of your income.

Roth IRA: Unlike a 401(k) or traditional IRA, you contribute to a Roth IRA using after-tax dollars — that is, the money you invest still counts when reporting your annual income (and is therefore subject to income tax).

That said, an IRA can still allow you to save for retirement in a tax-advantaged way. Once the money is in your account, it can grow tax-free, and you won’t owe taxes when you withdraw it in retirement. (This assumes you withdraw after you turn 59-1/2 and the account has been open for at least five years – if you withdraw before those milestones, you will pay a 10% penalty and income tax. )

You can open a Roth IRA as long as your annual income does not exceed $228,000 as a married couple or $153,000 as a single filer.

You can contribute up to $6,500 a year ($7,500 if you’re 50 or older) into any type of IRA. With a Traditional IRA, you must start withdrawing at age 73.

There are some very specific exceptions and complications that you can find by consulting a financial advisor or reading IRS Guide to IRAs online.

simplified Employee Pension (SEP) IRA

Another set of acronyms: If you’re a freelancer or a business owner with one or more employees, you can open a SEP IRA. Any contributions you make to these plans are tax-deferred and you can deduct them during tax time.

The contribution limit for employers and the self-employed is $66,000 per year, or 25 percent of the employee’s compensation, whichever is less. As a business owner, you can also contribute to an employee’s account, but the employee cannot contribute to their own SEP.

Diversify your investment strategy

Like they say: don’t put all your eggs in one basket. This is especially true for IRAs due to contribution limits. You may need to open multiple accounts, such as a 401(k) and a Roth IRA, to maximize your contributions and achieve your retirement goals.

Retirement planning allows you to invest in a range of investments, including stocks, mutual funds, exchange-traded funds, and bonds. When you’re in your 20s and 30s, experts tend to suggest that you can be more aggressive with your investments. This is because you have a longer period to ride out any volatility in the stock market, potentially earning higher returns over time. Once you’re nearing retirement, experts often recommend prioritizing safer investments, such as bonds, to protect your nest egg.

With many managed plans, such as those from Fidelity or Vanguard, you provide your target retirement date, your general risk tolerance, and are matched to a fund where the investment type changes over time to match your overall target without you lifting a finger (or clicking the mouse).

Dealing with High Interest Debt

Not all debt is created equal. High-interest debt, like credit cards, can cost you a lot of money in the long run, especially if you keep a balance.

You can lose more money paying interest than you could gain by investing the same amount. According to Investopedia.com, the historical average annual return for the S&P 500 is 10%. But the average annual interest rate on new credit cards is nearly 24%. (Even with good credit, the best rate you can get on a low-interest credit card is about 13.7%.)

In other words, the cost of borrowing money exceeds the return on investment, at least when it comes to credit cards and other high-interest loans. Therefore, you’d better pay off these debts before investing in the market.

priority debt repayment

You should pay off high-interest debt as soon as possible to minimize the money you lose due to compound interest. You can then use the savings to plan for retirement and achieve other financial goals.

Paying the minimum monthly fee will prolong your payment process. So pick a debt and start paying more than the minimum each month until you eliminate it. Then, move on to your next high-interest debt, and so on until you’ve paid it all off.

Avoid new high-interest debt

You don’t want to eliminate high-interest debt in order to take on more debt. Therefore, one of your financial goals should be to build an emergency fund. You can use the money you save to pay for unexpected expenses instead of taking them to a credit.

Review and adjust your financial plan

Life inevitably changes, and your retirement plan should change with it. You may experience times that don’t save you the way you originally planned. Or, you might find a better-paying job at a company that matches your 401(k) contributions, allowing you to save more.

So try to review your financial plan annually. You can assess whether your retirement savings are on track, and if not, adjust your investment and savings rates.

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