Retirement is one of the most important things in life, but it’s often overlooked by people who are too busy worrying about day-to-day survival. However, putting your worries aside for just a moment might help you realize that retirement is something to be prepared for. Today, we’re going to discuss 6 things that make a good retirement plan.
1. Predetermined Retirement Age
What is the best age for you to retire? Many experts say that if you can afford it, retiring early pays off because it gives you more time to enjoy your earnings and save even more money while interest rates are relatively high compounding over 40+ years instead of 30+. The younger you are when you retire, the less you need to rely on your investments to sustain a comfortable lifestyle for the rest of your life. With so many life insurance policies to choose from, there’s no reason to put off retirement – just look into how much life insurance you need before calling it quits. Investing in life insurance early in life will help you meet your goals faster and leave a positive impact on those around you.
2. Calculated Life Expectancy
Many people will spend a third of their life in retirement, and it’s important to keep this fact in mind before making any decisions about savings or investments. When you design your retirement plan, think about how long you can expect to live.
Many factors will determine this number. Genetics plays a role in longevity, as do fitness levels and any health problems you might have starting now. The most important thing is for you to be aware of what your life expectancy might be so that you can plan accordingly with your investments. It’s also wise to plan on living longer than the average life expectancy because many people underestimate their life expectancy or overestimate it due to having false information at hand.
Overplanning for one’s family members is better than under planning for them! The best way to truly know what you need is by using an online financial calculator, written specifically for retirement needs, which will give you a clearer picture of what will happen with your money. Adding this number to the 20-30 years (or more) that you plan on working will get you a more realistic idea of how much money you need for retirement.
3. Managed Inflation
Inflation is a measure of how much the cost of living increases over time. If you have $10,000 in savings today and put it into an account that earns 4% interest per year, then by 2075, with a 2% inflation rate your money would only be worth about $5,510 if you didn’t invest any more cash for the rest of your life. Saving money today can make a huge difference later on because it’s equivalent to locking in higher prices for many essentials such as food, gas, and other household staples. That means that even if someone invests their entire lifetime earnings ($343k), there still wouldn’t be anything left behind – not to mention the opportunity costs of all the other things they could have done with that money.
Essentially, inflation can be managed when you have a diversified portfolio invested over a long period of time. The best way to avoid inflation in your retirement plan would be to invest in real estate or other investments that can increase value and cash flow.
4. Accounted Time Horizon
The amount of time you have to save for retirement has a big impact on how much you need to put away every month in order to meet your goals. If someone retires at age 65 but lives until they are 100, then they need as much as three times more money than someone who lives to be 85. In short, someone who is 40 years old and wants to retire at 60 will need 15% of their income ($3k out of $25k per year). If that same person were to wait until age 70 and still wanted to retire with an equal standard of living, they would need to put away 25% ($7.5k out of $25k per year). Someone who is trying to plan for retirement must take their time horizon into account, as it will make a big difference in how much money is needed and when savings should begin.
5. Forecasted Investment Horizon
How long do you want your investments to last? Do you plan on spending all of your savings in the first year (like most pensioners), or would you like to generate some income for as long as possible? Unless you’re never going to touch this money again, consider hedging against inflation and diversifying your portfolio with different types of assets such as stocks, bonds, and real estate. Always keep an eye on how much is left (when looking at a portfolio) and try not to spend more than is necessary, but make sure that you have enough left for your needs.
6. Accounted Tax Rates
One thing that people forget to take into account is how much tax they’ll have to pay when they withdraw their savings or reinvest their profits. If someone gets money from an IRA or 401(k) then the government will tax it as ordinary income, which means you’ll have to shell out 20-30% in taxes (depending on where you live). The more that money grows while it’s invested, the higher your tax rate will be – which means that if someone has a long investment horizon, then they want to choose investments with relatively low growth rates. This is why bonds have become so popular over the years – because their dividends are taxed at a much lower rate.
There are several integral considerations when planning for retirement. If you want yourself and your family members to continue enjoying their standard of living in retirement, then plan things thoroughly. Avoid subtle mistakes like saving too little, investing too late, or taking on too much risk. A well-excuted retirement plan can determine whether you will have an enjoyable or regrettable retirement.