Retirement is exciting and scary at the same time.
Knowing what to do before retirement is the key to having enough money to live your golden years as you wish.
Leaving work at the right time, choosing the right retirement plans, and knowing how much to save are some of the largest factors to consider when retiring.
Saving from Day One, Why It’s Necessary
The earlier you start saving for retirement, the more funds you'll have. Even though in your 20s, retirement feels like a lifetime away, this is the most important time to save.
Why?
Compound interest and earnings have the greatest potential early in your career.
Any earnings you make from your savings or investments continue growing. This isn't money you actively earned but passively earned and can help you reach your retirement goals.
The longer you wait to start your retirement fund, the more money you must save from your active earnings, and the more challenging it is to reach your financial goals.
How Much Do You Need for Retirement?
How much money you need for retirement depends on your financial goals and intended lifestyle.
For example, will you stay where you are and live a simple life, travel the world, or retire from your full-time job but still work in some capacity?
It's important to consider your long-term plans and save accordingly.
For example, someone with plans to travel the world would need much more than someone who plans to spend time with family and stay in the home they've paid off already.
Common Retirement Goals
There are no right or wrong ways to retire. Everyone has different goals, but two of them tend to open a lot of discussion:
- FIRE – Financially Independent, Retire Early allows retirees to live life how they want, instead of relying on their 9 to 5 jobs.
This may mean not working at all, or it may mean pursuing your dream career or opening your own business.
FIRE looks different for everyone, but anyone can strive to achieve this goal. - Retire abroad – If your retirement goals include retiring abroad, whether because the cost of living is cheaper or you’ve always dreamt of a life abroad, the steps to reach your goal will look different.
You must know the cost of living, the legalities of moving abroad, and what you must do differently to manage your finances to achieve your financial dreams, especially since you’ll likely not work and must rely 100% on your retirement savings.
What About Inflation?
As you create your retirement plans, you must consider inflation. As we’ve seen in recent years, it can increase significantly, greatly decreasing our purchasing power.If you’re relying on savings and the cost of living dramatically increases, you’ll suddenly have less money saved for retirement.
If you’re relying on savings and the cost of living dramatically increases, you’ll suddenly have less money saved for retirement.
Use historical numbers to determine the average amount inflation may increase throughout your retirement so you have plenty of money saved no matter what happens to prices throughout the years.
Why You Should Spend Less in Retirement
It's natural to spend less money during retirement, but you must be aware of your spending.
|
During your younger years, you were starting your career, buying houses, and raising families. |
During retirement, you've likely satisfied each of those 'tasks' and no longer have a mortgage or need to support as many people. |
You could spend as much as 20% less during retirement, which means your savings will last longer, giving you more years during retirement when you don’t have to rely on a job.
Choosing a Plan for Retirement
How you save for retirement is important, and you have many options:
- Traditional 401K – This employer-sponsored plan allows you to set aside a percentage of your salary tax-free, and some employers may match a percentage of your contributions.
You pay taxes at your tax rate during retirement when you withdraw funds. - Traditional IRA – An IRA is individually owned and not sponsored by an employer.
The contribution limits are lower, but you get a tax break for the funds you contribute, and like a 401K, pay taxes at your retirement tax bracket when you withdraw funds. - Roth 401K or IRA – A Roth 401K or IRA also sets money aside for retirement but after taxes.
Your money grows tax-free, and if you wait until age 59 ½, you can withdraw funds tax and penalty-free during retirement.
When choosing your retirement plan, always consider taxes and how they'll affect your current and retirement earnings, as each plan has different tax consequences.
Step by Step Out of your Office
When you’ve decided when you want to retire, be sure to discuss your plans with your employer.
You'll have paperwork to complete and certain timelines to consider, especially if you have any employer match or a Roth 401K since you can't withdraw funds penalty or tax-free until they've been in the account for at least five years.
What to Expect after Leaving
After retirement, life changes drastically and could be challenging at first.
You no longer need the habit of waking up early, going to the office, working, and coming home to the family.
You suddenly have a lot of free time and no more rigid schedule.
It's important to find things to fill your time, including socializing with more people since you no longer have co-workers.
You should also think about building healthy habits such as exercising, volunteering, and keeping your mind busy to enjoy retirement to the fullest.
Final Thoughts
Knowing how and when to retire is something you should consider early in your working years.
Saving as early as possible, diversifying your income and investments, and knowing how much to save for retirement is the key to reaching your goals.
Your golden years should be the most exciting and rewarding years – they are the years you worked hard to achieve. Now it's time to learn how to make the most of them.
