Retirement planning can be an overwhelming and sometimes frustrating task.
Where do you start?
How much money do you need to retire?
Should you invest in stocks, mutual funds, bond, 401k, or another financial product?
First, you need to make sure that you have a good grasp on your personal finances, you can find more information on that HERE.
When you have a good grasp on your personal finance basics you can start understanding how to best save for retirement.
Retirement Planning Basics
Preparing for retirement essentially means maximizing your assets and and eliminating liabilities. If you try to retire with a mortgage, car payments, or other debts, retirement will likely be far less enjoyable. Retirement is meant to be enjoyed, so it is important to make sure you start taking the necessary steps now to avoid any outstanding debts during retirement. Retirement planning is not just about saving money, it’s about eliminating debt so you can increase your net worth.
Step 1: Save 1 Months Expenses
Get a little bit ahead on your expenses before you move forward to step 2. By doing this you allow yourself a little extra cushion in case any emergencies happen along the way. The last thing you want to do is start paying off debt, just to end up right back in it again.
Step 2: Eliminate Debt
Debt is risky. Some people believe that it is necessary to go into debt when going to college, buying a car, or purchasing their first home. However, that is a myth that seems to be passed down from generation to generation in the United States. Debt is rarely necessary and is most often the result of poor financial planning or acceptance of thats just the way it is.
But why bother?
Cash flow. There are enough expenses in life without introducing more monthly payments. When you take out a loan you are increasing the amount of monthly cash flow that you are dedicating to debts and you are in turn reducing your monthly cash flow. Less money dedicated to debt means more money you can dedicate to your retirement.
Mortgages are the exception to the rule, but eliminate all other debt!
Step 3: Plan for the Worst
Hope for the best, plan for the worst. We all hope that our financial future will be easy and free of bumps along the way. However, most of us know that we quite possibly more likely to win the lottery. Retirement planning is not only about building wealth, but also about mitigating risk. The best thing that we can do is plan for the bad times so that they aren’t quite as bad. That means…..
An emergency fund!
Saving 3–6 months of expenses will allow you to care far less about the bumps in the road on your way to retirement. For example you could run into one of the following scenarios:
- Loss of employment
- SURPRISE BABY
- Car transmission goes out
- HVAC unit need repairs
Remember, an emergency fund is for emergencies only, which leads us into step 3!
Step 4: Start Saving for Retirement
Now it’s time to start saving for retirement, which leaves a TON of questions. So where to start?
- If your employer matches your 401k contributions, this is the perfect place to start. It’s like investing with a guaranteed interest rate of 100%. The only negative is you usually have limited selection for your investments. Because of this, it’s usually best to just contribute what you need to get the full match from your employer.
- Next, start putting money in a roth IRA. A roth IRA will allow you to pay taxes on your contributions NOW which means you don’t have to pay taxes on the growth! A roth IRA is essentially a tag that can be put on different financial products, it gives a list of rules to be followed when the tag is present on the product. For purposes of retirement you want to use Mutual Funds for your roth IRA. You can contribute up to $5,500 ($11,000 if married) to your roth IRA every year.
- Invest directly in mutual funds that are not part of a roth IRA.
You want to contribute ~15% of your income into the above investments, depending on your age. If you are getting close to retirement and have not been saving, you definitely want to be more aggressive. Also, if you are age 50 or older, you can contribute $6,500 per year to a roth IRA.
Step 5: Pay Off Your House!
It’s time to get serious about paying off your mortgage. The last thing you want to do is retire with a large mortgage payment. Also, the sooner you pay off your house, the more opportunity you have to move up in house before retirement. Lets be honest, most of us do not want to retire in the house we currently live in. So, the faster you can pay off your house, the better.
When to Retire
Retirement is often thought to be an age because people think of when “social security kicks in”, but in reality it is a financial figure. Anyone of any age can hit such a number and either become retired or semi-retired. That being said, many financial products have advantages for retirement savings that kick in at 59.5 years old or greater.
Calculating How Much Money You Need
There are a lot of figures that go into calculating how much money you will need in order to retire. You have to think about inflation, cost of living, health, and what kind of life you want to live. You can find a pretty decent retirement nest egg calculator HERE.
Retirement age is going to be different for everyone, it is up to you to determine when the time is right. Honestly, a lot of people never truly retire, but instead only semi-retire. Who really wants to sit around and wither away?!
Originally published at thinkhub.co on June 3, 2018.