Do you see your retirement on the horizon after years of toiling and building a future for you and your family?
Retirement planning is a process that requires time and effort. At some point, it may look like a tough nut to crack. However, with the right tips and strategies, you can achieve the kind of lifestyle you envision during your retirement.
To help you prepare for your retirement, regardless of your age, here are 5 fundamental steps that you must take:
1Take Care of Your Debt
Debt can be a stumbling block between you, your goals, and the lifestyle you desire to live. This is why you should downsize your debt as you prepare for your retirement.
If you’re still servicing your mortgage payment, look for a way to fast-track the process so that you’ll be done by the time you retire. The same applies to any credit card debts, as well as personal and business loans.
Also, you should consider different ways to avoid further accumulation of your debts. Instead of using credit cards for significant spending, try using cash. If you’re looking for capital to fund business for your retirement, try alternative financing options, such as crowd funding.
Paying off your debts and limiting the accumulation of new debts helps you restrict the amount of retirement income that’s spent on paying interest.
When preparing for your retirement, estate planning is crucial. This also involves consulting the right professionals, such as lawyers and accountants.
A good estate plan includes life insurance. With a good estate plan and proper life insurance coverage, your properties and assets are distributed as you wish. This way your family doesn’t financially suffer in case of your demise.
The major benefit of estate planning is avoiding the long and expensive probate process.
When planning your estate, also take into consideration tax planning. This helps you compare the tax implications of different outcomes for your estate. For example, if you leave a part of your estate to charity, the tax ramifications may be different from passing down the property to your family members.
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3Build An Emergency Fund
Even though an emergency fund is a vital tool for everyone, the majority of people still don’t have one. It should be a compulsory account regardless of what stage of life you’re in, whether straight out of college or five years away from your retirement. In your retirement, an emergency fund helps you not interfere with your regular cash flow or accumulate debt to cater to unprecedented costs.
Also, imagine if something went wrong with your investment and you suffered a major setback. What will you use to pay for your essential daily bills? Your emergency fund will play an instrumental role in preventing you from draining your pension.
The amount you need in your emergency fund depends on your monthly expenses. It’s also based on how cautious you are when planning for emergencies.
If you’re not yet retired, you can approximate how much you’d need by looking at your monthly budget. Your monthly budget can include the following bills:
- Transport and travel
- Housing costs
- Costs associated with running your business
This is to help you determine how large your emergency fund should be. Most financial advisors and experts recommend having between three and six months’ worth of savings in your emergency account during your working years. In your retirement, however, you should increase that to at least 12 months.
For example, if your monthly expenses amount to $4,000, your emergency fund should have $48,000 at any given time. This would be enough to give you a safety cushion regardless of what life throws at you.
Also, accessibility is a huge factor when determining where to keep your retirement emergency account. You can use a high-yield savings account because they tend to have higher interest rates compared to traditional savings accounts. For convenience, you can link this account with your checking account.
4Determine Your Timeline
To plan your retirement effectively, you need to determine how many more years you have left for your retirement. The longer time you have between your current age and retirement, the higher the level of risk you can take.
For example, when you’re younger, with about 30 years to your retirement, you can invest in riskier ventures, such as stocks. While they’re volatile, stocks have a history of doing better over a long time, at least a decade, in comparison to other options, such as bonds.
As you grow older and get closer to your retirement, your investment should focus more on income and preserving your capital. This means that a large part of your investment goes to securities such as bonds. While bonds may not have much higher returns, the risk is low. If you’re a short while away from retirement, you need not have the same worries as a 30-year old professional.
5Estimate Your Retirement Expenses
You need to have realistic expectations about your after-retirement expenses and needs. You don’t want to save only to be overwhelmed by your needs after retirement. This will help you establish the size of savings and retirement portfolios you’ll need.
Many people estimate they’ll only need 70% to 80% of their previous expenses. However, this can be unrealistic. You need to factor in any unpaid debts such as mortgage and obligations, like medical insurance for unprecedented medical emergencies. If you’re going to spend the first years of retirement on vacations and entertainment activities, also add that to your budget.
Realistic expectations for your retirement should be close to 100% of your current spending. Remember that the cost of living is also going up each year. You need to save and invest appropriately because your income needs to last for a long time.
Retirement planning requires time and precision. You want to achieve your retirement goals and lead the kind of life you wish. To do this, take care of your finances and settle your debts. Also, create an emergency savings account for your unexpected expenditure. Also, to come up with a proper estate plan, involve a lawyer and an accountant.