How to plan for retirement?

Planning for retirement is a crucial part of managing your finances, which affects everyone. With people living longer, it helps to start preparing financially for retirement from early adulthood through late mid-life. Ideally, this planning begins in your early 20s and adjusts based on various factors like personal goals and changes in the financial markets.

To plan for retirement, start by setting clear goals and determining how much you will need to sustain your desired lifestyle in retirement. Consistently save and invest a portion of your income, taking advantage of retirement accounts like 401(k)s and IRAs. Regularly review and adjust your plan to account for changes in your circumstances and the financial markets.

How much do you need to save for retirement?

Determining how much you need to save for retirement depends on several factors, such as retirement spending needs. Several concepts guide how much to save.

One rule of thumb is to save $1 million, which is a substantial nest egg that can last through your retirement years with a modest lifestyle. However, if you prefer a luxury lifestyle in retirement, you may need more than $1 million.

Some retirement experts recommend saving the equivalent of 12 years of annual income. This approach assumes that you will carry on your pre-retirement lifestyle. The shortcoming of using this approach is the possibility of having increased expenses due to health issues in retirement. 

When determining how much to save for retirement, you should consider several factors. One of these factors is your spending expectations, considering you have free time to take on expensive hobbies and travel plans during retirement. Hence, instead of assuming you will spend 70-80% of your pre-retirement income, consider that you might need closer to 100%.

Secondly, consider the increased life expectancy. When saving for retirement, it is better to save for a longer period than to save for a shorter life than you might have. Thirdly, consider how inflation affects your retirement savings. To maintain retirement purchasing power, you should achieve returns that outpace the inflation rate.

Steps to prepare for retirement

Make sure your portfolio is diversified

A well-diversified portfolio can include bonds, stocks, mutual funds, and other assets. When approaching the golden years, it can be tempting to focus on conservative investments. However, it is important to have some growth-oriented assets to overcome retirement savings troubles such as inflation. 

Take advantage of catch-up contributions

If you save for retirement using a 401(k) or IRA, you should take advantage of catch-up contributions. These retirement plans allow individuals who are age 50 and over to make catch-up contributions, above the regular contributions. For 2024, you can contribute an extra $7,500 in addition to the $23,000 contribution limit, for a total of $30,500.

Determine your expected retirement income

To achieve effective retirement planning, you must figure out how much retirement income you will need. First, income can be estimated from predictable sources such as pensions or social security.

If you do not have any other sources of retirement income, you will likely depend on your investments and savings during retirement. Depending on how much savings and investments you have, you can apply the 4% withdrawal rule or customize your withdrawals depending on your personal needs.

Estimate your retirement expenses

You should consider the desired retirement lifestyle and save up to keep up with it. Projecting your retirement expenses can help you determine how much you need to save, depending on when you start saving. When determining expenses, factor in inflation since it can significantly affect purchasing power. 

Estimate healthcare costs 

With age, health costs tend to increase, making up one of the most significant expenses in retirement. Medicare covers many health expenses from age 65 and can financially relieve seniors with medical bills. However, even with Medicare, seniors need an additional boost to cover healthcare costs that are not covered by Medicare. For example, you need additional medical cover if you experience hearing, eye, and dental issues. 

Decide if you want to move to another state or country

The choice of residence during retirement can significantly affect your financial situation. Seniors may want to relocate for various reasons, including moving to warmer states, close to the coastal city, or to states that exempt retirement incomes from state income taxes. States like Florida are popular among retirees who want to explore the outdoors and enjoy exemption from state income taxes.

Stages of Retirement Planning

There are several life stages for retirement planning, including:

Young Adulthood (Ages 21 to 35)

Young adulthood is the ideal stage to lay a foundation for a solid retirement plan. If you start early, you will benefit from compound interest on your retirement savings. Young adults have the asset of time to compensate for the possible lack of significant disposable income. Savings as little as $100 in your 20s can compound into a sizeable nest egg when you reach your 50s.

Early Midlife (Ages 36 to 50)

While early midlife involves increased financial responsibilities such as mortgages and family expenses, it also has the potential for increased income. At this stage, maxing out retirement account contributions such as 401k can be an excellent strategy to prepare for retirement.

Also, consider diversifying investments and balancing paying off debts and your savings. You can also consider life and disability insurance and explore Roth options in the employer’s plan.

Later Midlife (Ages 50-65)

At the late midlife stage, consider re-assessing the asset allocation and balancing a conservative portfolio with growth-focused investments. Also, focus on maximizing catch-up contributions and consider social security strategies. You can also consider long-term care insurance as a top-up to Medicare.