Retirement is the biggest financial goal for most, which can make it seem overwhelming at first thought.
However, a little bit of planning early on can help you break it down into a simple, manageable plan and create good habits that help you get there. As a result, saving for retirement becomes a lot less challenging.
This article will cover four tips to help you start retirement planning.
1. Evaluate Your Current Financial Situation
Start by evaluating your current circumstances. This helps you determine how far you are from your retirement goals.
Look over your income, spending, and debt to see if you have positive cash flows (more money coming in than going out).
Furthermore, look at your current savings, investments, and overall debts to see where you are in your retirement savings journey.
2. Estimate Your Retirement Needs
Next, estimate how much you will need for retirement. Doing so will require some thinking on your part. A few things to consider include:
- Lifestyle: Do you want to travel extensively? Are there any hobbies you’d like to pursue?
- Income streams: Do you want to continue working? Will you have a business or passive income stream? This may impact how much you need to save.
- Location: Where do you want to live in retirement? Location can impact your living expenses and tax situation.
- Health: What are your plans for covering healthcare costs? Medical expenses tend to increase in retirement. You qualify for Medicare at 65, but that may not cover everything.
- Inflation and the economy: Inflation can reduce the value of your savings. Therefore, you will need to create an investment strategy with the potential to outpace inflation. As you approach retirement, you may need to shift to more conservative assets that keep pace with inflation.
3. Create a Budget
Budgeting helps you live within your means and find areas to cut expenses, freeing up money for retirement savings.
For example, cutting back on unused subscription services or entertainment spending gives you more to invest for retirement.
Budgeting is also a helpful skill in retirement. Following a budget helps you make sure you are drawing down on your retirement assets appropriately and identify ways to cut spending so those assets can last longer.
4. Set Up a Tax-Advantaged Retirement Account
Tax-advantaged retirement accounts help you save more by potentially reducing your tax burden if you contribute.
Here are some account types to consider:
- 401k: These are available at many employers. Contributions are deducted from your paycheck pretax, reducing your taxable income and helping you save more. Retirement withdrawals are taxed as ordinary income. Contribution limits are high. Many employers match contributions up to a certain percentage of your salary.
- Traditional IRA: Available at most financial institutions. Contributions are pretax. Retirement withdrawals are taxed as ordinary income. More investment choices than 401ks.
- Roth IRA: Available at most financial institutions. Contributions are after tax, but qualifying retirement withdrawals are tax-free—more investment choices than 401ks.
- Health Savings Account: These are available with IRS-defined High-Deductible Health Plans (HDHPs). Contributions are tax-free, growth is tax-deferred, and withdrawals for qualifying medical expenses are tax-free. You can withdraw for non-medical expenses at age 65 without penalty, but these may be taxed as ordinary income.
The Bottom Line
Saving for a comfortable retirement is a huge financial goal but worth the hard work and diligence.
Start by evaluating your current financial situation and estimating your retirement needs based on your goals. This helps you map out what you must do to get from here to there.
Then, create a budget to cut expenses and set aside more for retirement. After that, look into tax-advantaged retirement accounts to stretch your savings further.
Consider working with a financial advisor, too. They can help you iron out your situation and goals. They can also assist with making a plan, choosing accounts, and selecting investments.
It’s never too early to start planning for the future. By following these tips, you can take your first steps toward an enjoyable retirement.