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Retirement is typically one of the top financial goals you’ll be working toward. It may be the furthest out, but any good financial plan starts with:
- Calculating how much money you’ll need to live on during your retirement years.
- Putting a strategy in place to get there.
- Addressing your shorter-term needs.
Here’s closer look at these retirement planning steps.http://
Retirement funds: How much do you need?
Many financial professionals believe you’ll need approximately 80 percent of your peak pre-retirement income to maintain your current lifestyle in retirement. (Retirement calculator)
If your peak income is, for simplicity, let’s say $100,000, then you may need $80,000 or more each year. Multiply that annual figure by your expected years in retirement and that’s your target. Given today’s longer life expectancies, you could be nearing the $1.5 to $2 million range. Don’t let those numbers scare you. Again, everyone is different. Maybe you’re accustomed to living on $40,000 per year, in which case your goal is roughly $32,000 times your retirement years. That’s a big difference. (Retirement income gap calculator)
Also, nest eggs grow over time. So when figuring out your target, keep in mind the time it will take to get there.
- Where your retirement savings should be in your 30s
- Where your retirement savings should be in your 40s
- Where your retirement savings should be in your 50s
Envision the retirement you want
Another factor in figuring out how much income you will need in retirement is envisioning how you want to spend your retirement years. (Learn more about setting retirement goals)
- Do you want to travel or live abroad?
- Own a second home?
- Leave a legacy to your family, charity, or alma mater?
Or maybe you just want to live a simple lifestyle with the primary goal being to cover your basic expenses. Now’s your time to think through the world of possibilities, because the sooner you start planning — and saving — the better able you are to reach your retirement money and savings goal.
Planning: Time is your friend when saving for retirement
Setting aside even a small amount of money each month can add up over time. One common and effective strategy is to use traditional retirement vehicles, such as an employer-sponsored 401(k) or Individual Retirement Account (IRA), and set up automatic contributions. While each of these types of retirement accounts has unique rules, all offer tax benefits that can add up over the long-term.
Even if nearing retirement, it’s not too late. If you are 50 or older, “catch-up contributions” help pre-retirees stash even more money into their 401(k) or IRA than the basic contribution limits each year. (Related: Saving in your 40s and 50s: It’s never too late to get started)
Planning: How should you allocate your money?
How you decide to allocate the money you've accumulated — and the goal-related products you choose — are probably the most critical factors when it comes to creating a retirement plan.
As mentioned, there are IRAs for retirement goals, as well as guaranteed lifetime income products, but depending on your life stage you may want to consider other solutions as well. Maybe that means cash value life insurance to help protect your family’s financial security and as an effective estate planning tool.
Planning: Diversification helps balance risk
Diversification can be summed up in one phrase: Don’t put all of your eggs in one basket. Regardless of what types of retirement product solutions you choose to buy, don't bet your retirement nest egg on just one.
The types of products you select will vary depending on several factors, including your risk tolerance and retirement time horizon. These two factors work hand in hand. The more years you have left until retirement, the higher your risk tolerance may be. (Learn more: Winning with a steady investment strategy)
Shorter-term needs: Maintaining balance
Life will throw challenges at you. The cost of raising a family, for example, will make demands on your budget. Balancing those demands with your retirement planning may be complex.
And there will likely be emergencies. Depending on the severity and seriousness of those challenges, it may be tempting to tap retirement funds.
What to do in budgeting and emergencies will depend on individual circumstances. But in making decisions, remember that retirement planning must remain a priority. You don’t want spending on your children or covering an emergency out of retirement funds to jeopardize your retirement plan or make you a burden on those you tried to help.
Preparation is key.
- Careful budgeting can help you plan out living expenses in accordance with retirement savings goals.
- Creating a source of emergency funds will be a bulwark against the unexpected.
Throughout all the circumstances you may face, recognize that properly funding a retirement is a priority commensurate with other needs. (Related: Keeping retirement on track)
Conclusion
When it’s time to determine the products and financial strategy that’s best for you, you may want to consult with a financial professional who can help you map out a plan. In the meantime, make sure you have a clear vision for your goals so you’ll be better prepared to plan your financial future.
Learn more from MassMutual...
Retirement planning: What women do right
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