Retirement Planning

Understanding the Basics of Retirement Planning

Having a solid retirement plan is essential to reaching your goals in life. While it is possible to retire without savings and rely solely on Social Security benefits, that is only ideal for some people.

A common rule of thumb is to aim for enough retirement income to replace 70% of your pre-retirement income. However, there are several other factors to consider.

Develop a Budget

While many people think of budgeting as a negative term, when it comes to retirement planning Wyckoff NJ, it’s essential. The process allows you to estimate your expenses in retirement and compare them with the income you’ll receive from your savings, investments and other sources of revenue.

Once you’ve developed a budget, consider making changes to help your money last longer. For example, you can downsize your home with only one vehicle instead of two. You can also reduce your entertainment costs or eliminate subscription services you no longer use.

Remember that prices will likely rise in retirement, so factoring that into your budget is important. As you receive extra income, such as a raise or inheritance, allocate some of it to your retirement account. Also, resist the temptation to splurge on unnecessary items. Instead, use the extra funds to increase your retirement contributions.

Contribute to Your Retirement Accounts

Savings can be made through a retirement plan sponsored by your employer, such as a 401 (k) or individual retirement account. Many employers match contributions. This is free money.

Experts recommend saving between 10% and 20 % of your income. Employers may let employees choose between a Roth IRA and a traditional IRA based on their tax situation and preference.

Another consideration is the cost of living in retirement. Prices are expected to rise over time, and it’s important to consider this when planning your budget.

It’s also wise to have a separate emergency fund in addition to your retirement savings. Life doesn’t move in a straight line, and unexpected expenses may arise at any point. These can be costly and strain your finances, but having a cushion will help prevent you from depleting your retirement savings prematurely. It would help if you also considered investing in disability and life insurance.

Diversify Your Investments

You can use a robo advisor or target-date funds if you are uncomfortable managing your investments. These funds let you choose a date for when you plan to retire and will automatically switch the funds from stocks or mutual funds to safer assets, such as bonds, as you near retirement.

As a rule of thumb, people in their 20s should focus more on saving (up to IRS limits) than on which investments to make. Investing as early as possible is important so your money can grow.

The older you are, the more your portfolio should be invested in stocks to capture growth potential, but with a higher allocation in bonds to provide income and reduce risk. That’s why investing through dollar-cost averaging is a good idea, which allows you to purchase more when prices are low and less when they’re high.

Work with a Financial Professional

Your financial professional can help you create a comprehensive retirement plan, ensuring the components work together to achieve your goals. This may include planning for inflation, helping you develop a spending plan, and addressing health care costs and Social Security issues.

Many employees save for retirement through employer-sponsored plans, such as 401(k) plans. These allow you to contribute pre-tax funds, lowering your tax burden now and saving you thousands of dollars in taxes upon retirement.

A qualified financial planner can discuss how to turn the money you have saved into a recurring income stream you can rely on during retirement. Fixed annuities can guarantee a lifetime income stream, while income annuities can be paid as a lump sum or regularly. You can also get advice on other ways you can prepare for retirement. These include estate planning and life assurance.