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TEMPO.CO, Jakarta - As you get older, you will gradually lose some of your ability to work optimally, primarily due to declining health. Besides, you may not want to work for the rest of your life. Therefore, it is important to start planning for retirement.
There are several things you should consider in advance while planning for your retirement. For example, you need to calculate how much your daily expenses are during life after work.
This article will guide you on how to plan for retirement, from the steps to the pre- and post-retirement checklists. Read on to prepare for your financially stable future.
Why is a Retirement Plan Important?
Retirement is a time to relax and enjoy life. But, to do so, you need to achieve financial stability first. This is why you may want to make a retirement plan.
According to Investopedia, a retirement plan refers to a strategy for long-term saving, investing, and finally withdrawing money you accumulate to achieve a financially comfortable retirement.
Planning for retirement is essential since it helps ensure you have enough money to live comfortably when you stop working, and you can’t heavily depend on Social Security benefits. A retirement plan serves as your roadmap to a more financially stable life after work.
Steps on How to Prepare a Retirement Plan
There are several key considerations in retirement planning. Money Smart highlights the importance of timing, that is, when to start retiring, as well as evaluating income and living expenses after you stop working.
For more details, here are some of the important steps on how to prepare a retirement plan, according to NerdWallet and the U.S. Department of Labor.
1. Start Saving Early
The first thing you can do for your retirement plan is to start saving. The earlier you start saving, the more time your money has to grow. In case you haven’t started yet, it’s never too late to begin saving now.
2. Prioritize Your Financial Goals
Some people have multiple financial objectives, such as paying down credit card debt and establishing an emergency fund. In this case, you can prioritize which one needs to be fulfilled first.
However, it would be better if you could save your money for retirement while simultaneously building an emergency fund.
3. Calculate How Much to Save
Once you have a clear idea of your retirement goals, calculate how much you need to save. Experts revealed that you will need around 70 to 90 percent of your preretirement income to maintain your life after work.
4. Contribute to Retirement Accounts
You can sign up for tax-advantaged retirement accounts like a 401(k) or an IRA. These accounts not only help you save but also offer other benefits, including lower taxes to pay.
5. Diversify Your Investments
It’s important to have a diversified investment portfolio to minimize risk and maximize returns. You can get access to an array of investments from retirement accounts you’ve signed up for.
6. Pay Off Debt
Carrying debt into retirement can create financial strain. Focus on paying off mortgages or high-interest debt before you retire.
7. Maximize Social Security Benefits
Lastly, you may want to start estimating the benefits you’ll receive from Social Security. According to the U.S. Department of Labor, the amount of wages from Social Security may vary depending on your income and the age you start receiving benefits.
Pre- and Post-Retirement Checklists
The official website of the State of Michigan has shared the following checklists that you can use as a guide while planning for your retirement. You can download the PDF version of these retirement checklists here.
a. Pre-Retirement Checklist
1). Identify or plan your retirement date.
2). Reduce your debt. Excessive debt will have a negative impact on your net retirement income.
3). Estimate your Social Security benefits and other sources of guaranteed income, such as Social Security and pension.
4). Identify your essential monthly expenses during retirement (mortgage or rent payment, car loans or lease payments, property and car insurance, utilities, health insurance, etc.).
5. Develop a budget for discretionary spending that takes into account your estimated essential monthly expenses and estimated total monthly income from all sources.
6). Evaluate how your retirement money is allocated and calculate its growth and income potential during retirement. Be careful and conservative with your assumptions.
7). Utilize ‘catch up’ provisions on IRA and 401k contributions if a gap exists between your estimated retirement income and your estimated overall expenses during retirement.
8). Evaluate your 401(k) rollover options. Take into consideration your other pools of retirement money, such as your spouse’s 401(k) and your IRA accounts. The option you choose should complement your other retirement pools of money.
9). Evaluate healthcare benefits and provider options.
10). Consider long-term care and disability insurance.
b. Post-Retirement Checklist
1). Develop a budget with an emphasis on managing your debt. Identify your essential expenses (mortgage or rent payment, car loans or lease payments, property and car insurance, utilities, health insurance, etc.). Excessive debt will have a negative impact on your net retirement income.
2). Evaluate and control your discretionary spending. Discretionary spending is too often rationalized as necessary, "must-have,” or “must-do” spending. Overspending on discretionary items increases your risk of running out of money.
3). Manage risk or volatility in your investment accounts, especially downside volatility.
4). Know what you own in your investment account and why you own it.
5). Know how your investment portfolio has performed. Measure its performance at least semi-annually. Compare its performance against an appropriate benchmark (index) or blend of benchmarks.
6). Know the percentage amount you are withdrawing on an annualized basis from your investments. Evaluate the “safeness” and sustainability of your withdrawal rate.
7). Know what factors may adversely affect your withdrawal rate and develop a plan to adjust the amount or source of your withdrawal.
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