Planning for Retirement
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Planning for Retirement |
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Planning for your retirement can be scary and intimidating. Many people are now
thinking will I be able to retire, instead of the older thought of when will I
be able to retire. Our 9 keys to preparing for retirement can get you started on
the right path.
To live well in retirement, you no longer can rely solely on a company pension plan or Social Security. Instead, you will have to depend on how skillfully you plan and invest, and whether you make good use of tax-advantaged savings plans such as 401(k)s and IRAs. First, estimate how much you will need. One rule of thumb is that you'll need 70% of your annual pre-retirement income to live comfortably. That might be enough if you've paid off your mortgage and are in excellent health when you kiss the office goodbye. But if you plan to build your dream house, trot around the globe, or get that Ph.D. in philosophy you've always wanted, you may need 100% of your income or more.Remember, too, that your health care expenses are likely to go up in retirement, if only because you'll be paying more for insurance, especially if you retired prior to being eligible for Medicare, says Gordon Homes, senior financial planner at MetLife. Some employees who retire before 62 don't realize how much their employers contribute to health care, Homes says, which has led some to consider retiring after 65. 1. Save as much as you can as early as you can. Though it's never too late to start, the sooner you begin saving, the more time your money has to grow. Gains each year build on the prior year's -- that's the power of compounding, and the best way to accumulate wealth. 2. Set realistic goals. Project your retirement expenses based on your needs, not rules of thumb. Be honest about how you want to live in retirement and how much it will cost. Then calculate how much you must save to supplement Social Security and other sources of retirement income. 3. A 401(k) is one of the easiest and best ways to save for retirement. Contributing money to a 401(k) gives you an immediate tax deduction, tax-deferred growth on your savings, and -- usually -- a matching contribution from your company. 4. An IRA also can give your savings a tax-advantaged boost. Like a 401(k), IRAs offer huge tax breaks. There are two types: a traditional IRA offers tax-deferred growth, meaning you pay taxes on your investment gains only when you make withdrawals, and, if you qualify, your contributions may be deductible; a Roth IRA, by contrast, doesn't allow for deductible contributions but offers tax-free growth, meaning you owe no tax when you make withdrawals. 5. Focus on your asset allocation more than on individual picks. How you divide your portfolio between stocks and bonds will have a big impact on your long-term returns. 6. Stocks are best for long-term growth. Stocks have the best chance of achieving high returns over long periods. A healthy dose will help ensure that your savings grows faster than inflation, increasing the purchasing power of your nest egg. 7. Don't move too heavily into bonds, even in retirement. Many retirees stash most of their portfolio in bonds for the income. Unfortunately, over 10 to 15 years, inflation easily can erode the purchasing power of bonds' interest payments. 8. Making tax-efficient withdrawals can stretch the life of your nest egg. Once you're retired, your assets can last several more years if you draw on money from taxable accounts first and let tax-advantaged accounts compound for as long as possible. 9. Working part-time in retirement can help in more ways than one. Working keeps you socially engaged and reduces the amount of your nest egg you must withdraw annually once you retire. |
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