How to Plan for Retirement

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Learning how to plan for retirement is just as important as learning how to save money in general. It’s important to understand why you need to save for retirement, when you should start, and how much you should have set away when the time comes to retire. In order to plan for retirement successfully, you should:

  1. Educate yourself
  2. Start early
  3. Plan ahead
  4. Know what you have now
  5. Know what to do when you don’t have enough

Educate Yourself

Before you dive into retirement, you’ll want to make sure you fully understand the important terms that come with retirement. There’s a 401(k) Plan, Social Security, and Medicare, all important but you might not have a full understanding of them.

401(k) Plan

The 401(k) plan is an option you’re given in your workplace to make salary deferral contributions. Employers that offer the 401(k) plans can make matching or non-elective contributions to the plan and they can also add a profit-sharing feature to the plan.

Since the plan has been enacted into the law, as of 2017, 401(k) plans have accounted for roughly $5.3 trillion of the $27.2 trillion in total retirement plan assets in the US. From 2008 to 2017 alone, the balances of 401(k) plans have increased by 100%.

Social Security

Social Security is part of the Old-Age, Survivors, and Disability Insurance (OASDI) program that benefits retirees, disabled workers, or survivors of deceased workers. It includes, retirement income, disability income, Medicare and Medicaid, and death and survivorship benefits.

Benefits for Social Security may begin anywhere between 62 and 70 years of age. The amount of income you receive will be based on the “average indexed monthly earnings” during the 35 years when you earned the most.

Pension Plan

A pension plan consists of two main types of plans: defined-benefit plan and defined-contribution plan (the most well-known being a 401(k)). These plans require an employer to make contributions into a pool of funds to benefit the employee’s future.

A defined-benefit plan guarantees that the employee receives a definite amount of benefit upon retirement, regardless of the performance of the investment pool. A defined-contribution plan – like the 401(k) – makes a specific plan of contributions for the worker.

Start Planning for Retirement Early

It’s never too late or too early to start planning for retirement. Most of the time, a first job will offer a 401(k) to automatically withdraw from the paycheck. When a company doesn’t have a 401(k), they may have a pension plan that helps put aside money for retirement. As you switch jobs, your 401(k) and/or pension plans may be rolled into the next company.

You are also contributing to your retirement fund through Social Security. When you get your very first job, full- or part-time, the state will take out your taxes as well as your contribution to Social Security. When you retire, your Social Security benefits will be determined by the amount you made the most during a 35-year period.

If by some chance you don’t have any of these plans, then there are many different ways you can start saving for retirement. You’re never too old or young to start. To calculate how much you may need when you retire, follow the guidelines and tips below.

Plan Ahead

In order to calculate what you’ll need, you’ll have to think and plan ahead for when the time comes to retire. To calculate how much money you’ll need for retirement, you’ll need to calculate what you plan to have in the future.

For example, to live the “average” life, most people need 70% of their annual income to live comfortably. If you plan to travel and spend as an elderly, you’ll most likely need 100% of your income.

Also, think about your health and your family’s health history. Are you likely to suffer from different diseases or conditions that might not be covered by Medicare/Medicaid?

After you’ve calculated how much you think you’ll need annually, you can compare that number to the type of retirement fund you’ll need. This will give you an idea if you’ll have to save outside your 401(k), pension plans, and social security.

What Funds You Have Now

Take a look at your savings and consider how much funds you have now, and then look at what you figured out you’ll need. If you have the option for a 401(k) with your company and you have yet to take advantage, it’s highly suggested you enroll. If you have a spouse, see what plans they may have and how you can also benefit from them.

You can also calculate how much you’ll receive from Social Security by checking online based on your expected earnings.

Beyond the 401(k) and Social Security Benefits

If you feel like what you’re estimated to receive for retirement based on your current amount saved or your projected amount saved, there are other ways you can save money to be prepared for life beyond retirement.

  1. Individual Retirement Account (IRA)

An individual retirement account (IRA) allows individuals to direct pretax income towards investments that can grow. You can put money into an IRA to help you save. Put up to $5,500 a year and you can contribute even more money if you are 50 or older.

  1. Stock Market

Investing long-term into the stock market has proven to be a good way to save money. During the 2008 recession, the market still averaged an 11% rate of return. Using online tools to help you navigate the stock market, you could benefit a lot from your investments.

  1. Invest

There are other things you can invest your money into other than the stock market. You can invest into small companies, new inventions, crypto currency, or bit coins. Make sure you do any research on the new up-and-coming technology and consumable products. Consider avoiding anything like cash-value life insurance, individual stocks, gold, silver, precious metals, annuities, or low-interest-yielding investments.

Another investment you could make is on yourself! Start an automatic deduction from your pay every month. Start at a low amount, working your way up as you get used to the deduction or your salary increases. Start yourself with a savings safety net, then work on your retirement savings.

  1. Compound Interest & Savings

As a young adult, starting early could be one of the best decisions one could make for retirement planning. Thanks to compound interest, it gives younger adults the opportunity to become wealthy. By the time they’re 25, if they’ve saved $15,000 and have a return rate of 12%, they could have $1 million by the time they are 65!

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