What Is The First Step In Retirement Planning

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The First Step When Planning Your Retirement

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Clients often comment on how radically different our advisors approach is from the big-name banking and investing firms you are familiar with on Wall Street.

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Start Planning As Soon As Possible

Its never too early to start retirement financial planning. For example, some people start putting money away for retirement as soon as they get their very first job.

But also, dont get discouraged if youre preparing for retirement later in life. A 2021 Personal Capital survey found that the average age of first-time investors was 33.

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Work With A Financial Advisor Or Investment Professional

Investing isnt a solo activity. You need someone who can help you create a retirement investing plan that fits with your life and your goalsand that means working with a financial advisor or investment professional that you can actually trust.

Retirement planning is too important to figure out on your own! According to the National Study of Millionaires, 68% of millionaires said they worked with a financial advisor to achieve their net worth! They know the value of having someone there to guide them throughout their financial journey.

Your dreams and goals are too important to chase on your own. Thats why its so important to get an investment professional on your team to help you along the way. A SmartVestor Pro can work with you to create a retirement plan for your specific situation and help you understand all your investment options. Find a SmartVestor Pro today!

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

Invest For The Long Term

Retirement Planning

Fear, anxiety and impulsivenessthose are the three biggest enemies youll face while trying to invest and plan for retirement. Not only will they cause you to panic and make dumb decisionslike pulling all your money out of your 401 when the stock market has a bad daybut theyll also keep you from investing all together.

To build wealth and invest with success, you need patiencelots and lots of patience. Slow and steady wins the race every time. There are no shortcuts.

Remember, investing is a marathon, not a sprint. And its not for the faint of heart. The stock market is a roller coaster thats going to go up and down, but youve got to be strong enough to stay on the ride through all the twists and turns that pop up.

Keep in mind that as you approach age 60, youll want to purchase long-term care insurance. LTC insurance will protect the money youve saved for retirement by helping to pay for a nursing home or in-home care if you need it. So, make sure to factor in LTC insurance as you estimate your retirement budget. Its a necessity!

Also, until youre self-insured, term life insurance needs to be part of your plan to cover those who depend on you.

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Start Because Its Never Too Late To Start

To summarize, what you need is a focused approach and prioritizing of your requirements. The step-by-step financial approach detailed above is an excellent way to start the journey for your retirement planning. Choosing the right products that suit your risk appetite is a critical component of this plan.

Sure, it is never too late to start planning your retirement. But, one cannot deny that an early start would have reaped far more benefits. With retirement aspirations of individuals now shifting, your goals for your non-working years are as important as those in your early years.

When you start earning your paycheck, spending money, and thinking of immediate concerns is tempting. However, it is extremely important to think about the long term as a sizable financial corpus during your lifetime is spent on the long-term goals.

How To Build Your Net Worth

While your investment portfolio is a big part of the net worth equation which you can calculate by adding up the value of your assets and subtracting your debt it’s not the only thing that can potentially contribute to your financial well-being in retirement. Here are five ways to increase your net worth.

Depending on where you live and when you purchased your abode, a house can end up being your most valuable asset and a lot of people do sell their home later in life and then use that money to help fund their retirement goals. Real estate can be a great asset because it tends to rise in value over time though as we saw during the Great Recession, that’s not a guarantee by any means. While renting can be cheaper, and you can then invest the difference and potentially earn more over time than you would on a house, real estate essentially forces you to save. As you pay down your mortgage, and as the value of your property rises, your net will increase.

A business can add a lot of value to someone’s net worth or not. While many businesses do provide a decent living for their owner, they’re an illiquid asset, often hard to value that takes time to sell. Putting a price on a business is a lot harder than coming up with a sale price for a home, though, so talk to an expert who can help you set a valuation and determine how much your operation may net.

How to recover from a setback

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Discover The Best Retirement Accounts And Plans

The absolute most important source of retirement income will be from your decades of investments through tax-advantaged accounts, like GRRSPs, RRSPs and TFSAs.

The first place you should put any retirement savings is in a work GRRSP that offers matching funds, and youre free to put up to 18% of your previous years income into one of these plans, up to a certain maximum dollar amount, which changes annually. The current max can be found here.

If you dont have access to a GRRSP with matching funds, you have a choice between investing through an RRSP or a Tax Free Savings Account . Like an RRSP, a TFSA is tax-advantaged, with one major difference. You receive immediate tax relief from an RRSP in that any amount you contribute wont be taxed until you withdraw it in retirement, and at that point, youll also pay taxes on any of the accounts investment growth. You will pay taxes in the current year on TFSA contributions but wont be required to pay taxes on the principle or the gains upon withdrawal. And unlike an RRSP, a TFSA is designed to be easily accessed before retirement if the funds are neededwhich is good, unless you happen to be the type whos never been able to resist smashing a piggy bank. TFSA are generally preferable for those earning less than $50,000 a year, for reasons more fully spelled out in this article.

Consider Retirement Planning By Your Life Stage

Video: The first steps to planning your retirement

One way to approach retirement financial planning is to plan by life stage. In other words, what retirement planning steps should you be taking at each of the key stages of your life?

Here are a few guidelines to help you with life stage retirement financial planning.

  • Young adulthood While young adults who are just starting their careers may not have a whole lot of money to devote to retirement savings, they do have something else working in their favor: time. By starting to save for retirement at an early age, young adults can potentially benefit from the power of compounding. Those in young adulthood usually have decades to go until they retire, which typically allows them to assume a little more risk with their retirement investments. For example, a young adult might choose an asset allocation thats heavily weighted toward riskier stocks, such as 80% stocks, 10% bonds and 10% cash equivalents.

Read More: How to Talk to Your College Grad About Money

  • Early middle age For many people during this life stage, their income is growing as their career advances but so are their financial responsibilities. For example, they may have started a family and assumed financial obligations like a home mortgage, life insurance, multiple car payments, and all of the expenses involved in raising children and paying for their education. With competing priorities, its important to set specific and attainable goals.

Read More:5 Tips to Keep Smart Investing Simple

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Tips For Getting Retirement Ready

  • Consider working with a financial advisor to create a financial plan for your retirement needs and goals. Finding a qualified financial advisor doesnt have to be hard. SmartAssets free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If youre ready to find an advisor who can help you achieve your financial goals, get started now.
  • Make sure youre investing in the right retirement plan for you. A 401 might be a good option for you if your employer offers one and a match to go with it. But that isnt the only option. You may also want to consider traditional IRAs and Roth IRAs.

Here’s A Look At Some Of The More Popular Investment Options:

Stocks for growth

The majority of savers still buy stocks either directly or through a mutual fund or exchange-traded fund which are shares in a publicly listed company. Stock prices tend to rise over the long-term, which is why people buy them. Since 1926, the S& P 500 has posted a 10.24% average annual return with dividends reinvested, according to S& P Dow Jones Indices. In other words, if you invest in equities in your 30s and retire in your 70s, there’s a high likelihood that your money will have grown over those 40 years.

The downside is that stocks can fall. In the Great Recession of 2008 and the more recent pandemic stock market plunge, stock prices dropped by more than 35%, which caused a lot of problems for those in and nearing retirement.

Bonds for safety

Bonds are another popular investment for savers as they can move a lot less in price than stocks. Investors lend money to a government or company in exchange for an annual payment based on a predetermined interest rate. At the end of that bond’s term usually between one and 30 years you get back your original investment. Investors like bonds for two reasons: they get some guaranteed annual income and there’s less risk, depending on the kind of bond you buy, of losing any money. Because of this, bonds tend to fluctuate less than stocks and so they balance out a portfolio’s overall ups and downs.

Alternative asset classes

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Create An Emergency Fund

Before you even start saving for retirement, make sure that you have an emergency fund of between three and six months of your total living expenses put safely away in a safe, easily-accessed place, like a high interest savings investment account. There are going to be constant surprises in life that you’re not expecting when youll need access to funds, whether your basement floods, you need a new roof, or you have a health emergency. An emergency fund will prevent you having to rely on credit cards or loans that will come with high interest rates that will quickly erode any of your savings.

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Retirement Planning  a 40 Year Process?

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Create An Income Stream For Monetary Stability

Among the chief priorities in your non-working years will be to have enough funds for your day-to-day living expenses. Whether you are working or not, you will continue to need a steady income. Heres where insurance solutions can come in handy.

Income solutions make for ideal income replacement tools and go a long way in facilitating financial continuity once you have stopped working. There are now products available in the market that offer multiple options, wherein you can provide for specific time durations short or longer term. These income solutions can give you a monthly payout and let you maintain a healthy income stream at least for some years into retirement. Similarly, annuity plans can also help create a steady income source for your non-working years.

Annuities are pension plans that pay a fixed amount of money at predetermined intervalsmonthly, quarterly, half-yearly or annual. The key advantages of these plans are that they provide an assured payout for the rest of your life. However, one must remember that these products offer relatively lower returns as they arent risky assets like equities.

Retirement Planning Is A Subset Of Financial Planning And Maybe The Most Critical Because:

  • Social Security is becoming less solvent all the time. Read: Social Security by the Numbers and Social Security Revisited: A Plan to Fix It
  • Most corporations no longer offer defined benefit retirement plans, and many companies have terminated the plans that they offered at one time.
  • You are truly on your own to fund your retirement no one is coming to help you.

    So, the first step in retirement planning is to get a handle on personal finances. We published some ideas on how to do that in 1992, which you can find here Personal Finances . Essentially, analyze your current assets and liabilities and work to manage your debt.

    Once you have a balance sheet and a plan for managing your debt, create an income statement showing what money comes in and what money goes out . This will help you understand what it costs you to live today, doing the things you are doing today.

    And finally, on the third sheet of paper, write down all the goals and hopes and dreams you have for the future. What is all the saving and investing for? Whats your money for? If possible, mark down the date by which you want to achieve that dream, and how many dollars that dream costs today.

    With those three sheets of paper, you have a pretty good idea of where you are and where you want to go. The rest is just coming up with a plan for getting there creating the roadmap from A to B, and with flexibility about changing the route along the way due to detours, roadblocks and accidents.

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