4 Steps To Become Financially Prepared For Retirement

Generally, you work hard to maintain your current lifestyle. Thus, ensuring that your hard work pays off, particularly in your retirement years. Without a good retirement plan, you may end up adjusting your lifestyle to accommodate a lower income during your senior years. 

It’s never too early or too late to start preparing for your retirement. By developing a game plan and setting the right goals, you can build a significant nest egg a live the retirement lifestyle you want. 

So, how do you prepare to be financially stable during your golden years? This article outlines four important steps:

1. Determine Your Retirement Period

According to the United Nations (UN), the estimated global average life expectancy in 2019 is 72.6. This number can be used as a reference in preparing for your retirement fund and calculating how much time is left from your preferred retirement age to your remaining age.

For instance, if you plan to retire at 60, you must have a pension or retirement fund to cover your living expenses for the next 10-15 years. So, if you’re currently 30 years old and will retire at 60 years old, then you have 30 years to prepare for your retirement fund. 

2. Calculate Your Preferred Retirement Income And Expenses

Once you have an idea of how much you have left to save for your retirement fund, the next step is to calculate how much money you’ll need to retire comfortably. 

First, estimate the predictable income from general sources such as employer pensions and Social Security. The rest of your retirement fund will often come from your savings and investment accounts, wages, and other income earned in retirement. 

Then compare it to your estimated retirement expenses. In general, some expenses such as healthcare may be higher later in life. Others such as clothing and commuting costs may decline. The place where you retire could also have a significant impact on your retirement planning. For instance, if you sell your home in an expensive location and move to an apartment in a low-tax state, your retirement expenses could decline. 

If you live alone, then you may want to consider staying in a retirement accommodation like Summerset Auckland retirement villages, which are generally more expensive than properties on the open market. However, they often provide all the necessary services needed during your golden age.

Moving into a retirement village may help you become more independent for a longer period of time and make it much easier for you to connect and have friends with other people who share interests similar to yours. Aside from the amenities that can make your life more convenient and comfortable, a retirement village can offer you the safety you need. On the other hand, to ensure you have healthy finance that will last through your lifetime, it’s important to have a balanced good retirement income-to-expense ratio. You can follow the old rule of thumb–you should be able to spend at least 4% of your portfolio every year in retirement. For instance, if you have USD$2 million in retirement assets, you can afford to spend about USD$80,000 per year when you retire. When added to your Social Security pensions and other saving, is that enough to support the retirement you want? Ask yourself this question to help you determine if you can financially support yourself without any hassle throughout your retirement years. The more you’re aware of your retirement income and expenses, the better you can navigate your retirement.

3. Take Advantage Of Retirement Accounts

It’s best to increase your contributions to the maximum allowed in your retirement accounts like IRAs, 401(k), and other retirement plans, whenever possible. For instance, you can aim to put enough into your 401(k) to qualify for any maximum matching contribution offered by your employer. In addition, if you’re already 50 and older, there are rules for catch-up contributions that you can take advantage of that allow you to set aside more than your typical contribution.

Besides the traditional IRAs, you may also consider setting up a self-directed IRA or SDIRA. It’s a retirement account that allows you to invest in a wide range of alternative investments normally not allowed with regular IRAs. With this individual retirement account, you can invest in real estate, precious metals like gold and silver, private placements, tax lien certificates, limited partnerships, and other alternative investments. Hence, if you want to diversify your investment portfolio in preparation for your retirement, setting up a self-directed IRA may be an excellent solution. To get the most out of investing in SDIRA, you need to keep some things in mind. Make sure you’re familiar with the rules associated with specific assets in your account to avoid unnecessary taxes and penalties. Take advantage of a financial advisor to guide you with your investments. As you near your retirement, you can also consider using account consolidation including combining same-type IRAs into one institution. This can help to simplify your investment management while also providing a clearer picture of total retirement assets.

Ensure to review any 401(k) accounts that you may still have with your former employers. When changing jobs, make sure to learn more about distribution choices and other consolidation options, and always weigh the pros and cons before making a choice. To help you understand your options and decide, you can consult with a tax professional. 

4. Manage Your Current Finances

Managing your finances now may seem challenging, but it’s a lot easier to do it now than when you retire. 

Paying off your debt is the first step towards managing your current finances–your retiring self will thank you later. Begin by paying off high-interest rate debt such as personal loans, auto loans, and credit cards. These debts provide no tax benefits and only deplete your savings. 

After that, pay your mortgage as soon as possible, although it’s common to still have mortgage payments in retirement. Don’t pressure yourself to borrow money, especially on IRA or 401(k), to pay another debt. You’ll incur taxes on the money and may face penalties if you’re under the age of 59. 

The next step in managing your current finances is to start saving more. Finding new ways to cut your unnecessary expenses and saving more today will always make you better prepared for your future. With your savings, you can start investing and create a diversified portfolio for better growth and financial freedom in your golden years. 

Takeaway

Transitioning from busy work life to retirement requires careful financial planning and decision-making. So, allow yourself plenty of time to prepare. Follow the above steps today to get your finances in order and ensure you have enough budget ready for your golden years.