If you have not yet started planning for retirement, don’t panic. While it may bring some stress, you are far from alone.
According to the 2024 Allianz Life Retirement Survey, 56% of Americans have not established a concrete retirement financial plan. This survey conducted in February and March this year also found that nearly half (48%) of individuals aged 25 and older worry about living too frugally and not being able to fully enjoy retirement.
Additionally, 45% of respondents stated that they do not know how to best allocate their retirement savings.
So why do so many people lack a retirement plan? There is no single answer to this question. Some may be concerned about the future or have other financial priorities. Others may find the process of creating a retirement plan daunting.
Although the lack of a retirement plan can be daunting, it is never too late to start. Here is a step-by-step guide to help you get back on track.
As you age, retirement planning helps maintain financial independence. Planning and saving early can reduce reliance on social security or other limited sources of income. Additionally, by creating a clear retirement plan, you can enjoy your ideal retirement lifestyle without worrying about financial issues.
Without a financial plan, retirement may limit your choices and may burden your family. However, even if you start late, as long as you follow solid strategies, you can still achieve financial security.
To create a retirement plan, you must first assess your financial situation. Make sure to gather the following information:
– Income: including all sources of income such as wages, side jobs, and investments.
– Expenses: track your monthly expenses, separating essentials (like housing, utilities, groceries) from non-essentials (like entertainment, travel).
– Savings: review all savings accounts, including emergency funds, regular savings, and retirement accounts.
– Debt: debts include mortgage loans, credit card balances, and student loans.
This assessment can provide you with an overview of your financial health. Additionally, you may find ways to save more, adjust expenses, and repay debts more quickly.
Estimate how much money you need to live a comfortable retirement life. According to financial experts, you should aim to achieve 70%-80% of your pre-retirement income to maintain your current lifestyle. However, this depends on your specific circumstances.
– Retirement Age: When do you plan to retire? Early retirement requires a larger savings account. Conversely, delaying retirement may reduce the total amount needed.
– Life Expectancy: Estimating your life expectancy helps ensure you do not deplete your savings. Many advisors recommend planning for 20-30 years of retirement.
– Medical Expenses: Long-term care and supplemental insurance needs should be considered when planning for retirement.
– Lifestyle Goals: Are you planning to travel? Want to try new hobbies? Your retirement income should support the lifestyle you envision.
Even if you start late, saving every dollar brings you closer to financial independence. To quickly accumulate retirement savings, follow these steps:
– Maximize Retirement Accounts: If your employer offers a 401(k) or 403(b), take full advantage of these opportunities. Self-employed individuals can consider SEP IRA or Solo 401(k), which have higher contribution limits.
– Open Individual Retirement Accounts (IRA): IRAs offer tax advantages, helping your savings grow faster. Depending on your tax situation, a financial advisor can help you choose between a traditional IRA or Roth IRA.
– Set Up Automatic Savings: Automatically deposit a portion of your income into retirement and other savings accounts every month. This “set it and forget it” method allows you to accumulate savings without continual decision-making.
– Reduce Expenses and Increase Income: Cut unnecessary expenses. Additionally, consider increasing income through side jobs, freelance work, or part-time jobs to contribute to retirement savings.
Investing can increase retirement savings faster than regular savings accounts. However, if you start late, you should prioritize a balanced investment approach. In other words, consider growth and risk when investing.
– Diversify Investment Portfolio: Combining stocks, bonds, real estate, or alternative assets like cryptocurrencies can achieve stability and growth.
– Gradually Increase Contributions: As your income grows, gradually increase your contributions, even if only by a small amount. Over time, this incremental increase will lead to more savings.
– Consider Professional Help: Financial advisors can help you develop strategies that align with your goals and risk tolerance. Additionally, they can help mitigate fund loss risks as you approach retirement.
Medical expenses can quickly deplete retirement savings. According to some studies, a 65-year-old couple may need up to $351,000 in retirement savings for healthcare.
Basic Medicare does not cover all healthcare costs. It only becomes effective at the age of 65 and does not include long-term care, such as assisted living or nursing home care.
– Explore Health Savings Accounts (HSA): If you are still working, do not overlook an HSA. You can deduct contributions and withdraw funds tax-free for eligible medical expenses.
– Consider Long-Term Care Insurance: Long-term care insurance can help protect your retirement savings. Since premiums increase with age, it is best to start purchasing insurance in your 50s or early 60s.
– Maintain Health: By exercising regularly, eating healthily, and accessing preventative medical care, you can avoid costly health issues in old age, saving more funds for other retirement needs.
While pursuing an ideal retirement life is essential, if you start late and find it challenging to reach your target amount, consider the following strategies:
– Delay Retirement: Extending your working period, even part-time, can significantly increase your retirement savings, delay withdrawals, and extend the lifespan of your funds.
– Downsize Lifestyle: Moving to a smaller house or a cheaper area can reduce living expenses and free up assets.
– Explore Retirement Income Options: Supplement your retirement fund with income-generating hobbies, freelance work, consulting, or part-time jobs.
Saving for retirement is crucial, but it is only half of the battle. Ultimately, you want your savings to last as long as possible. To maintain financial security and comfort in retirement, you must develop withdrawal or asset consumption strategies.
– Required Minimum Distributions (RMD): You are required to withdraw a minimum amount each year from qualified retirement accounts. While RMDs can provide a reliable income source, they may also increase tax burdens.
– 4% Rule: According to the 4% rule, you withdraw 4% of your retirement savings each year, adjusted for inflation. However, this is not a universal solution and its effectiveness may vary based on market conditions and individual needs.
– Tax-Aware Withdrawals: Withdraw from taxable accounts first, followed by tax-deferred accounts, and lastly tax-free accounts like Roth IRAs. This strategy can minimize the overall tax burden on savings.
– Fixed Amount Withdrawals: This strategy involves withdrawing a fixed amount annually from retirement accounts. While it provides predictable income, it may not be the best choice during market downturns.
– Income-Only Withdrawals: By withdrawing only investment earnings, your principal remains intact. However, this strategy may not be reliable during market downturns as earnings fluctuate.
– Total Return Strategy: With this approach, your investments generate a total return, including income and capital appreciation. You can withdraw a portion of the total return annually.
– Bucket Strategy: Divide your retirement savings into three buckets: short-term, mid-term, and long-term. The short-term bucket provides immediate income, while the other two buckets are invested for maximum growth and returns.
Depending on your financial situation, risk tolerance, and lifestyle goals, you may need different withdrawal strategies. In addition to your life expectancy, social security benefits, and other income sources, other significant factors should be considered.
Planning for retirement can be challenging, especially if you start late. Certified Financial Planners (CFPs) can develop strategies based on your current financial situation and future goals. Additionally, advisors can help you stay accountable and make adjustments as circumstances change.
Delaying the establishment of your retirement plan is unwise, but it is not irreparable. By taking action now, such as evaluating your financial situation, maximizing contributions, making prudent investments, and considering medical needs, you can build an investment plan that supports a comfortable and fulfilling retirement.
Lastly, the most crucial step is to start immediately.