Many people look forward to retirement. You can do all the things that you never had time to do because of work and other commitments.
Retirement isn’t as easy as sitting by the pool or walking on the beach. It can take years of preparation and saving to ensure you can live a comfortable and secure lifestyle after retirement. It’s never too early to put money aside, even if it’s just a little. You’ll thank yourself later.
If it seems overwhelming, don’t worry. The best way to start is by asking yourself some basic questions about your retirement goals and schedule. Below we start with you.
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How much money do you realistically need to retire?
There is no exact number set in stone that someone should have to retire; it all depends on the person.
When planning your retirement, you need to ask yourself several questions to know how much is enough for you, according to Shweta Lawande, senior advisor at Francis Financial in New York City, which provides financial planning, wealth management and other services.
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When do you plan to retire?
These include: When do you plan to retire? How does your spending now compare to what you want to spend in retirement? What are you currently doing to save for retirement?
“For anyone thinking about (how much it will take you to retire), especially those approaching that retirement age, I can’t recommend enough to work with a financial advisor to create a tailored plan for saving and spending in retirement create retirement,” Lawande said.
Determine how much you need to retire
But if you want a more immediate and concrete idea, there are a few good estimates of how much you might need, such as assuming you’ll need about 80% of your preretirement income in retirement, Lawande said. Early retirement is the period in which you decide to retire and choose your retirement date.
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Things that determine what you need to retire
Because the amount of retirement savings you need depends on the person, it’s important to understand your current personal finances in relation to what you want to achieve in retirement, Lawande said.
In addition, you need to consider the finances you need to support your loved ones and family, as well as medical expenses.
Life can be unpredictable, especially when it comes to medical expenses, so it’s important to consider the cost of any procedures or medications, even if you’re in good health.
If you plan to travel, entertain, or pursue an expensive hobby, you may want to add additional savings for “More flexible, freely selectable expenses‘” says Merrill.
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A guideline to keep in mind is the 4% rulewhich allows a retiree to have a 4% withdrawal rate from their financial portfolio every year for 30 years, adjusting for inflation over time.
With that rule, people can decide if their investments are appropriate for them and if the number can support them in a given year of retirement, Lawande said.
When should I start saving for retirement?
In order to make the best possible provision for retirement, you should start as early as possible. If you have a full-time job, think about savings.
Lawande said if you’re earning an income, think about retirement by saving 10% and work your way up from there. Fidelity estimates that on average you should aim to save about 15% of your pre-tax income each year, including all employer matches and assuming you save while you’re between the ages of 25 and 67.
“It’s hard because retirement feels so far away for people so young,” Lawande said. “When you have that number of years on your side for your money to grow that way, it’s just priceless.”
What’s the best way to invest in retirement?
While saving for retirement is important, investing for retirement is just as important, Lawande added.
Investing lets your money grow over time, whether it’s through interest or the appreciation of stocks and dividends. You can contribute less money to reach your goal because investing early allows you to benefit from compound interest.
Compound interest, which Albert Einstein reportedly called “the most powerful force in the universe,” is when you earn interest on interest. For example, if you have $100 that earns 5% interest annually, you have $105 in year one and $110.25 in year two. It may seem like a small difference, but it adds up, which is why if someone offers you $1 million or a doubled penny every day for 30 days, you should take the penny. By day 30, that penny will be worth millions of dollars.
“Think of the investments,” Lawande said. “Let that work in your favor, especially if you have time on your side before you retire and even beyond.”