Retiring comfortably is one of the biggest goals for all of us. The same as with everything else in life, the earlier you start planning, the better – and more fun – your retirement will be. To be able to retire comfortably without worrying about financials, you need to have a solid plan in place before you reach your retirement age.
Planning starts as soon as you begin brainstorming and thinking about how you will retire. After you have gathered your thoughts about your financial goals, expenses, and timetable, the next step is to take a look at the different types of retirement accounts that aid in your retirement plan by raising money to fund it. And while you save that money, you must invest it to grow your fund even more.
A popular misconception is that to start planning for retirement, you must be old, which is not true. Retirement planning could be done at any age. Let’s start by getting into six main steps to take to start planning for a comfortable retirement.
1- Realize your timetable
To start working on a retirement plan, your current age and goal retirement age are the building blocks of your plan. The earlier you start investing and building your portfolio, the more you should invest your money in riskier investments with higher returns. But this only applies if you have more than 10 years till your expected retirement age.
Another thing to keep in mind is inflation. Definitely, you need to keep in mind the inflation rate when realizing the return on the investments you make in order to regulate your purchasing power. A common mistake people make when they plan their retirement is solely focusing on the compound growth without taking inflation into consideration; hence, they find themselves with less purchasing power than they have planned for.
Counter wise, if you’re near the age of retirement, there’s no need to focus on risky investments because you want to secure yourself as soon as possible. Also, since inflation won’t be much of a concern in this case, your sole focus should be on a portfolio that’s not risky.
1- Consider reverse mortgage
A reverse mortgage is the complete opposite of paying off mortgage payments – meaning that you receive income in exchange for equity in your property. This type of mortgage plan is recommended for those near the age of retirement since it gives them extra income to live on.
2- Set realistic spending needs on retirement
One important consideration to keep in mind is your spending habits after retirement. Well, the majority of people have unrealistic expectations regarding this concern since they assume that they’ll spend less. This might be true, but in the majority of cases it’s not because you might have to face unexpected medical expenses, unpaid debts, or want to do the things that you didn’t have the time to do while you were working such as traveling, sightseeing, shopping, and spending time and money on yourself.
So, stay on the safe side, assume that your spending habits post-retirement are almost the same as pre-retirement, if not more if you’re planning on ticking some things off your bucket list.
3- Take After-Tax rate into consideration
Now that you have established an investment portfolio, you need to calculate the after-tax rate of the return on investments in order to have an accurate measurement of the amount of income you’re going to receive. The older you are in age, the less the return on investment you’ll have which leads to less feasible income after tax payments – that’s because portfolios with less risk are composed of more low-earning securities that are safe, rather than risky high-paying securities.
4- Consider your tolerance for risk
No matter who is in charge of establishing an investment portfolio for you, considering your tolerance for risk and financial goals is a crucial step in retirement planning. You want a portfolio that balances out your aversion for risk and your financial goals. That’s especially true if you’re near the age of retirement – if you’re comfortable with not touching the amount invested for 20+ years, then you can choose more volatile investments, otherwise, play it safe.
5- Consider life insurance
One of the objectives of life insurance is that it ensures that your assets are distributed to your loved ones as you wish. This is an important aspect to plan beforehand because it relieves your loved ones from a lot of stress by the time you leave. A pre-planned life insurance ensures that the financial matters pass as smoothly as possible without your family having to pay a fortune for the probate process.
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