Retirement plans have traditionally consisted of three main components: personal savings, Social Security, and a defined benefit pension plan that provides lifetime income.
Things have changed quite a bit in the last couple of decades as most Americans no longer have an employee-sponsored 401K retirement plan. Instead, individuals are increasingly responsible for establishing and managing their sources of retirement income. So, as lifespans extend and the cost of living rises, proper retirement planning has become even more critical to ensure that your income will last your entire lifetime.
An effective retirement plan should include these four elements:
1. Set Specific and Tangible Goals
The goal of retiring at 65 is no longer feasible for many people, especially considering your extended life expectancy. To accurately predict your future needs, you’ll require a clear vision of your retirement life so you can conceive a realistic retirement plan. And you’ll need the discipline to carry it out.
Here are some essential questions to ask.
- Do you plan to stop working or will you earn some manner of income?
- When you retire, how will you live?
- What will be your place of residence?
- Do you have any goals in mind?
Once you have solid answers to these questions, you can make investment decisions – considering your current financial circumstances – that will help move you toward your retirement goals.
2. Work Out The Cost of Retirement
Calculating your retirement costs will help you determine your accumulation goal. Many retirees will only need around 75% of their pre-retirement income to maintain their standard of living during retirement.
But this assumption does not account for the actual cost of aging. And since life expectancy has increased, so have health care costs during retirement years. This means, of course, that the cost of retirement is becoming more challenging to calculate. Regardless, it’s wise to budget for unexpected expenses, such as potential healthcare costs. You’ll be that much more likely to live comfortably in retirement if you have a bit of a safety net.
3. Implement Long-Term Investment Plans
It can be challenging to accumulate enough capital to provide lifetime income sufficiency in an era of low savings returns and increased market volatility.
Confidence and discipline are essential for long-term investing, as is seeking counsel about how to invest your hard-earned money. Down the road, you want a return on your investment (ROI): when the investment objective meets your capital needs.
To determine the portfolio of investments that’s most likely to help you attain your goals while matching your risk tolerance, you need to develop a risk profile. So consult a financial advisor about your long-term investment plans, and you can rest easy that your money will yield a solid ROI.
4. Ensure Diversified Income Sources
Saving for retirement through options like 401(k)s and IRAs has been recommended for decades, though you should be mindful of the tax consequences of withdrawals and their impact on retirement spending.
While a 401(k) is treated as ordinary income if it is your only income source, your retirement income can last longer if you benefit from a tax-free Roth IRA or long-term capital gains derived from nonqualified investments.
In the past, retirement planning was primarily concerned with capital accumulation. But now, as you might live 30 years or more in retirement, it’s time to focus on managing your income.