While many workers look forward to retirement, it can also be an intimidating prospect.
Once you are retired, you live on a fixed income. Finding work after you retire can be difficult, and in some cases, you may lose some of your benefits if you return to work.
There are many different strategies for finding out how much you need to save before you are ready to retire. While these may serve as good guides, they may not necessarily be suited for your financial situation or retirement plans.
A good way to prepare for your retirement is to plan ahead. Even if you do not plan to retire for many years, it is a good idea to start planning early.
The earlier you start planning, the easier it often is to start investing in your retirement. While you may not be able to plan for everything that will happen by the time you are ready to retire, there are several tips to get a general estimate of how much you need to comfortably retire.
Deciding When to Retire
Before you start calculating how much you need, you should focus on when you want to retire.
Today, the average retirement age is 67. While you may be tempted to retire as early as possible, it is not always practical.
More employees are choosing to delay retirement, waiting until they are 70 to increase their retirement benefits and ensure they have enough saved away to stop working.
67 is the most popular age to retire because it is when you get your full Social Security benefits. While this is one method to earn money after your retirement, it is not the only one.
It is possible to retire early, with some employees able to retire by the time they are 50. However, this typically requires much more work.
The earlier you retire, the longer you must prepare to live on a fixed income. It also leaves less time for you to build up your savings.
Once you know when you want to retire, it can be easier to plan your actual financial needs.
Planning Retirement Expenses
How much you need to retire largely depends on your lifestyle choices.
The first thing to figure out is where you plan to live after you retire. Many seniors choose to move out of their home after retiring, both to cut down on costs and to find a more comfortable location.
The older you become, the harder it might be to take care of your home. If you are planning your retirement early, consider that your household may shrink as your children grow up and move out.
Selling your home and downsizing to a new location can be a great way to cut down on your costs while also boosting your income after selling your home.
Depending on your plans, your housing needs may completely change. Many seniors like to use their retirement as a way to travel around the world. If you are interested in traveling, you must decide whether you will travel throughout the year, or only during select months then stay at home.
If you are worried about health issues and living alone, you may choose to live in a retirement community, or even move in with a family member.
Where you live can be a big financial decision, but it is not the only consideration. How you want to spend your time has a big impact on your finances.
Some retirees use their retirement as a chance to pursue new hobbies. While some hobbies are relatively inexpensive, others are costlier, such as buying and restoring your dream car.
Estimating Your Retirement Income
A common recommendation is that your annual retirement income must be around 70 to 80 percent of your current income. While this is a good rule of thumb, it is not always applicable depending on how early you are planning your retirement.
If you start early, there is a good chance your future income could greatly increase as you get promoted at work.
Remember, your retirement plan is not set in stone. Every few years, go back and check how much you have in your savings.
As you become more financially comfortable, consider investing more in your savings account so you are better prepared for your retirement.
There are many retirement calculators available online. These calculators use many factors, such as your current income and general retirement goals to calculate how much you need to save.
These calculators can only provide a rough estimate. To get a more accurate idea of how much you need, you may want to speak with a financial planner.
A financial planner can guide you through the retirement process and bring up all the factors you must prepare for. He or she can also help you map out your retirement plan.
Retirement Income Sources
There are many ways you can prepare for your retirement. Many Americans receive Social Security payments when they retire.
How much you receive in benefits depends on the age you retire and your total lifetime earnings. The later you wait to retire, up to the age of 70, the more you can usually receive.
Social Security payments are helpful, but it is not your only retirement savings option.
The two most popular retirement savings accounts are defined contribution plans and IRAs. With a defined contribution plan, you set aside a portion of your paycheck each month that goes into a retirement account.
The maximum amount you can put into your account each year varies based on your age. Depending on your job, your employer may match your contributions. The most common example of a defined contribution plan is a 401k.
An IRA is similar to a 401k. There is a set amount you can contribute based on your age, but instead of automatically deducting from your paycheck, you choose when to invest in your account.
Both defined contribution plans and IRAs have several variants. These variants typically change whether your income is taxed when you invest it, or when you withdraw.
If your income is taxed as you contribute, you pay a little more in taxes each year, but you do not have to pay any taxes when you retire. If your income is not taxed on contribution, you must list it as earned income when you withdraw it.
Depending on your job, you may also have other options available. For example, some professions still offer pension plans.
With a pension, you receive a set amount of income each month based on your previous job, age and how long you worked. Each income source has different advantages and disadvantages to consider based on your retirement goals.