Retirement seems far away, but it is a reality that everyone needs to face. With life expectancy increasing, individuals will have more time to spend in their golden years. However, they cannot depend on the steady income of a pension or the assistance of social security to support them.
Therefore, it’s up to each person to plan for retirement. Meeting with a certified financial planner is a good way to map out your investment strategy. However, there are some things you can do on your own.
Establish Your Plan
Before you start to calculate the savings you will need, figure out what your net worth is today. Your net worth is the total value of your assets minus your liabilities, which includes expenses such as your mortgage and other debts. If your net worth is negative, don’t worry. Now you can determine what you need to do to move toward a positive number.
Next, calculate how much savings you will need to reach your retirement goal. Plan on generating a nest egg that can generate 70 to 80 percent of your pre-tax, pre-retirement income. Once you have come up with that amount, think about what you can do to save money on a regular basis.
Create a budget which includes your recurring expenses. As part of your monthly bills, include your savings contributions. A budget will show you where you are spending your money, and it will help you prioritize which debts should be paid off first.
Adopt a Savings Mindset
When you look at the amount of money you will need to save, the number can seem overwhelming. A retirement fund such as a 401(k) or a Roth IRA can significantly increase in value over time. Therefore, make regular contributions to your funds so you can maximize your account’s growth potential.
If a significant portion of your spending is going toward credit card debt, pay it off as soon as possible. The high interest rates usually exceed any earnings you will receive on your savings.
Utilize Workplace Retirement Plans
Many people don’t take advantage of retirement plans at their place of work. In many cases, employers match contributions, which translates to increased savings. If you don’t contribute, you are turning down the opportunity to obtain free money that will earn compound interest!
Individuals who are self-employed and work for small businesses have options in this area too. Check with your tax specialist to see what types of retirement funds are available.
If you want to protect your nest egg, a financial consultant will advise you to diversify your portfolio with a combination of stocks and bonds. Your savings configuration should reflect your age and the level of risk you are able to assume during each phase of your life. For example, Fisher Investments has a number of publications that review a variety of retirement investment strategies.
Additionally, invest in unrelated industries to minimize risk. For instance, there is little chance that the performance of stocks in pharmaceuticals will affect the high technology sector. Also, consider investing in different economies, rather than funds that are focused on a single country or region.
Watch Your Mortgage
If you are a homeowner, your residence is a significant asset. If you have a mortgage and interest rates fall, consider refinancing. The cost savings over time will be significant. If your monthly payment has decreased, put the extra money into your retirement savings.
If possible, pay off your mortgage before you are ready to retire. Eliminating your monthly mortgage payment will automatically increase your income.
You don’t have to stop working when you reach retirement age. Instead, reduce your hours or find a less-demanding job. When you work over a longer time span, you will be able to increase your savings portfolio, which allows compound interest to continue to work its magic.
Although you will be making less money, you will probably have fewer expenses during this time of your life. For instance, your mortgage will be paid off and your children will be finished with college and hopefully on their own.
Planning for retirement doesn’t have to be an overwhelming experience. If you follow these simple steps, you will have well-defined plan that will point you in the right direction. Once you start saving, you will be able to look forward to the bright future that lies ahead of you.