What Is Retirement Planning
Retirement planning is the preparation of finances for the period after retirement or when you stop working. Planning for retirement can start from the day you get the first salary. Inflation is known to erode the value of your money. You must invest in financial instruments that may offer the return above inflation over some time. It helps you to get the finances to enjoy a quality lifestyle in retirement.
Retirement planning must include an estimation of the expenses in retirement, determining the time horizon for your retirement, assessing the risk appetite, and tax-efficiency of your investments.
Life expectancy is on the rise. You will have to depend on children and relatives for money if you dont invest for your retirement. You must increase your investment towards retirement when you get a hike on your salary. Dont touch the money you have set aside for your retirement or you will lose the benefit of compounding.
Estimate Your Savings Rate
To estimate how much youll need to save each month from your income, determine how much youd like to start off with when beginning your retirement using the factors above. Consider the average return rate for your portfolio, the rate of inflation and your anticipated Social Security payments. Once you have a yearly income goal for your savings, think about how many years of retirement youre anticipating.
Using these factors, youll be better equipped to calculate your total retirement goal and your ideal monthly rate of savings to reach that goal.
Additional Sources Of Income
You might not need to survive on your retirement savings alone once you stop working full-time. You might have Social Security income to supplement the money youve saved. Alternatively, you might find that you prefer to keep working on a part-time basis and that you have some income coming in from paid work.
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What Is A Retirement Savings Calculator For
A retirement savings calculator is a handy planning tool that lets you see how much you might end up with during retirement based on how much you save monthly now. The calculator also helps you know what changes you might need to make to your saving and spending plans based on your current age and the age at which you hope to retire.
A calculator is a useful, if underutilized, tool. According to the Department of Labor, just 40% of Americans had figured out how much they were likely to need once they retired. Using a calculator can help you see if youre on track for retirement or if you need to make some adjustments to ensure you have a comfortable life in the future.
Retirement calculators often make several assumptions when determining the amount a person needs to save. They might assume:
- Inflation will increase by about 2 or 3%, based on historical averages.
- Your income will increase each year slightly, based on the typical cost-of-living wage increase.
- A certain rate of return, such as 5% before retirement and a slightly lower return after you retire.
Usually, you can make adjustments to the values in the calculator to better match your situation. You might change the estimated rate of return or interest rate to see how earning a higher or lower rate of return affects the amount you need to save. You can also change your retirement age to see how delaying retirement or retiring early changes your savings goals.
Other Sources Of Retirement Income
Home Equity and Real Estate
For some people in certain scenarios, preexisting mortgages and ownership of real estate can be liquidated for disposable income during retirement through a reverse mortgage. A reverse mortgage is just as it is aptly named â a reversing of a mortgage where at the end , ownership of the house is transferred to whoever bought the reverse mortgage. In other words, retirees are paid to live in their homes until a fixed point in the future, where ownership of the home is finally transferred.
A common way to receive income in retirement is through the use of an annuity, which is a fixed sum of periodic cash flows typically distributed for the rest of an annuitant’s life. There are two types of annuities: immediate and deferred. Immediate annuities are upfront premiums paid which release payments from the principal starting as early as the next month. Deferred annuities are annuities with two phases. The first phase is the accumulation or deferral phase, during which a person contributes money to the account . The second phase is the distribution, or annuitization phase, during which a person will receive periodic payments until death. For more information, it may be worth checking out our Annuity Calculator or Annuity Payout Calculator to determine whether annuities could be a viable option for your retirement.
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Retirement Savings Goal Calculator
- Retirement Savings Goal: How much do you want saved by the time you retire? Most would say more than we could ever save, so setting a realistic amount will allow you to estimate how much you could save by retirement.
- Initial Amount: If you have already begun saving for retirement then you are already on your way to your retirement goal.
- Interest Rate: The interest rate on your retirement savings will affect how quickly your money will grow.
Example of Savings with Different Interest Rates.$0 beginning balance, $100 saved monthly, compounded monthly, savings for 5 years. Example 2.00%
Saving for more years would earn you $258.17 more in interest than saving for fewer years.
Retirement Savings Considerations
Retirement Savings Terms And Definitions
- Retirement â cessation of work as your primary life activity so you can live according to your own priorities.
- Retirement Age â the age at which people can receive full benefits upon job retirement.
- Retirement Fund â the amount of money saved to fund lifestyle expenses during retirement.
- Current Savings â total savings including both retirement and taxable.
- Savings Goal â the amount of money you want to accumulate by some future date.
- Annual Interest Rate â the rate of return on your invested capital.
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What If You’re A Saver
Another problem with the “replace your income” rule of thumb is that this advice assumes that you spend most of your income. It implies that you spend somewhere from 70% to 85% of your income if you save 10% to 15% for retirement, and perhaps another 10% to 15% for other non-retirement types of savings.
This approach assumes that you don’t expect your spending habits to change at all during retirement.
It isn’t always the case that people spend the bulk of what they earn. In fact, some spend more than what they earn, ending up in , while others spend much less than the amount they earn.
This is another reason why basing your retirement projections on your former income is not the best framework for planning.
How Much Money Do You Need To Retire
The exact amount you need to live comfortably during retirement depends on several factors. One of those factors is how long you expect to live after you retire. The average person spends about 18 to 20 years in retirement, but some live for much longer. The longer you live after retiring, the more youll need to have in savings.
Another factor influencing how much money youll need after retiring is your current income and spending needs. Many retirees find that they need anywhere from 70%-90% of their income to keep up their living standards after they stop working.
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Prioritize Your Financial Goals
Retirement is probably not your only savings goal. Lots of people have financial goals they feel are more pressing, such as paying down credit card or student loan debt or building up an emergency fund.
Generally, you should aim to save for retirement at the same time you’re building your emergency fund especially if you have an employer retirement plan that matches any portion of your contributions.
Pensions 401s Individual Retirement Accounts And Other Savings Plans
401, 403, 457 Plan
In the U.S., two of the most popular ways to save for retirement include Employer Matching Programs such as the 401 and their offshoot, the 403 . 401s vary from company to company, but many employers offer a matching contribution up to a certain percentage of the gross income of the employee. For example, an employer may match up to 3% of an employee’s contribution to their 401 if this employee earned $60,000, the employer would contribute a maximum of $1,800 to the employee’s 401 that year. Only 6% of companies that offer 401s don’t make some sort of employer contribution. It is generally recommended to at least contribute the maximum amount that an employer will match.
Employer matching program contributions are made using pre-tax dollars. Funds are essentially allowed to grow tax-free until distributed. Only distributions are taxed as ordinary income in retirement, during which retirees most likely fall within a lower tax bracket. Please visit our 401K Calculator for more information about 401s.
IRA and Roth IRA
In the U.S., pension plans were a popular form of saving for retirement in the past, but they have since fallen out of favor, largely due to increasing longevity there are fewer workers for each retired person. However, they can still be found in the public sector or traditional corporations.
For more information about or to do calculations involving pensions, please visit the Pension Calculator.
Investments and CDs
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The Countdown To Retirement Is On
Is there anything else you can do to boost your savings before youre ready to retire? These retirement savings tips can help as you near the finish line.
Savings goal: 20+% of your annual income, or as much as you can affordSavings checkpoint: 6x-8x annual salary by age 60, 9x-10x by age 67How to get there: Make the most of your final savings years.
What Are The Best Retirement Plans As Per Your Age
Saving or investing for the purpose of retirement should start right from the time one starts working. But one need not worry if they havent started that early in life. Different age groups see life differently. People in their 20s are more inclined to spending or saving for short-term goals rather than long-term ones. In the 30s, people tend to be busy with loan repayments and kids. Its in their 40s that people start investing/saving for their retirement. Even though they have 15 odd years in their hand until retirement, most of their savings have to be channelized towards their retirement. But its never too late to start investing for retirement. Agree that starting early has its benefits but better late than never right! Heres a guide for people of different age groups that they can refer to for saving and investing.
In the 20s
If starting in the 20s, investing or saving 5% of ones salary towards retirement is enough. They can gradually increase it to 10% in their 30s. It is because the investment horizon is around 30 plus years, and compounding will do its magic in the long-term. The success of compounding lies not with starting early but sticking to it till the age of 60. It doesnt matter if one starts investing at the age of 20 if he discontinues the investment soon. In the 20s, one has to look at investing more in equity than in any other asset class. Close to 90% of the investments can be in equity.
In the 30s
In the 40s
In the 50s
In the 60s
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Canadian Retirement Income Calculator
The Canadian Retirement Income Calculator will provide you with retirement income information. This includes the Old Age Security pension and Canada Pension Plan retirement benefits. To estimate your retirement incomes from various sources, you will need to work through a series of modules. You will then need to compare them to your goal income. It also allows you to see the impact of the changes you make in how you save.
If you are married or living in a common-law relationship, you must each use the calculator separately and compare your results to understand your overall situation. It is also important for couples to know how a partner’s death or the end of the relationship could affect their financial situation.
The calculator’s results are estimates. You should not use them for financial planning.
The calculator does not collect personal information or identifiers.
Keep Retirement Money Out Of Reach
Your life’s savings could become an easy solution to life’s every problem. As you face difficulties that are sure to appear in the future, you don’t want to be able to easily dip into your hard-earned retirement funds. You might be surprised at how resourceful you can be when there isn’t another easy button option sitting in your savings account. Life will throw you curve balls, and your savings will become the easy solution without any barriers to protect it.
Some savings methods, like government-sponsored retirement plans, will have many rules and penalties if you try to access your money early. These difficulties will present a roadblock to those who would struggle with strict discipline themselves.
If you lost your job or had your car break down unexpectedly, you might think you are in a crisis that calls for dipping into your savings account. This, however, is exactly what you want to prevent from happening or you will get nowhere fast when it comes to retirement. You don’t want to spend a dime of retirement money until you are actually retired.
Retirement is an easy concept but difficult to live by. You will not achieve your goals by mistake it takes careful planning and educated decision-making to develop the nest egg you want. You have to live out these principles on a daily basis and not let anything else get in the way of your goals. If you are successful, you will achieve the financial freedom that many covet but few attain.
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Finding Your Social Security Full Retirement Age
Before 1983, the full retirement age was 65, but it has since changed. Congress raised it because people were living longer and getting healthier as they age.
If you were born in 1960 or later, the retirement age is 67 years old. However, if you were born before 1960, use this tool from the Social Security Administration to find out when you can celebrate and start cashing out.
Determine Smart Retirement Goals And Strategies
A good retirement goal should be a S.M.A.R.T. goal. In order to know if you are succeeding or falling behind in your attempts, you have to know what you are aiming for. There is no way to accomplish your goals if you have not clearly laid out a plan with desired end results.
This will require careful consideration and planning in the form of a written financial map. It is important your plans are written down, and it is likely best you share your goals with your financial planner or significant other. Research has shown, written goals and sharing weekly progress reports increases follow through and success rates in personal goals.
Your financial success is a choice that results from the culmination of small decisions made each day. Your end goal will be supported with checkpoints along the way to help you make smart spending, investing, and saving decisions each day. It is important you start planning today just a few years of small monthly amounts set aside will add up quickly and mean less has to be set aside later.
Your plan should include aggressive accumulation goals during career years, asset growth plans for your semi-retirement, and spending reduction goals after retirement. Time will be the most important factor in amassing retirement wealth, so don’t procrastinate!
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Figure Out How Much Money You Need To Retire
The amount of money you need to retire is a function of your current income and expenses, and how you think those expenses will change in retirement.
The typical advice is to replace 70% to 90% of your annual pre-retirement income through savings and Social Security.
For example, a retiree who earns an average of $63,000 per year before retirement should expect to need $44,000 to $57,000 per year in retirement.
Choose The Best Retirement Plan For You
A cornerstone of retirement planning is determining not only how much to save, but also where to save it.
If you have a 401 or other employer retirement plan with matching dollars, consider starting there.
If you dont have a workplace retirement plan, you can open your own retirement account.
There is no single best retirement plan, but there is likely a best retirement plan or combination of retirement accounts for you. In general, the best plans provide tax advantages, and, if available, an additional savings incentive, such as matching contributions. That’s why, in many cases, a 401 with an employer match is the best place to start for many people.
If you don’t have access to a workplace plan , or youre already contributing to a 401 and youre looking for the best options for additional retirement savings, you may want to consider an IRA. This is a plan you open yourself at an online broker or other account provider. An IRA is hardly a consolation prize.
Here are seven types of retirement plans that might work for you. Click the links to read more about how each one works.
» Go deeper: Read more about how to choose a retirement account
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