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No matter how bad it sounds, aging is inevitable. The worst part is that old age catches many unaware. Regardless of how young you feel or look, it’s important that you start planning for your retirement. Some people past their retirement age are still working to make ends meet. This can be avoided through good planning.
What is Retirement Planning?
Retirement planning is an evolving process. To enjoy your post-retirement age, you should build a financial cushion to support yourself. Planning how you’ll get there starts now.
First, you should consider your retirement goals. Note that goals differ from one person to another. Also, review various retirement accounts that can enable you to raise enough money for your future. In case you need long-term care, you’ll need a life insurance policy. That’s because some life insurance policies can be converted into a long-term care plan.
If you’ve decided to save your retirement money with a retirement account, you can invest it so it can grow. However, your retirement money in some accounts is subject to tax deductions every year. Therefore, you can consult experts on how to minimize tax deductions on your saved retirement money.
Now let’s focus on how to build an effective retirement plan regardless of your current age;
1. Consider Your Time to Retirement
Your age and estimated retirement age will form the basis for your retirement strategy. If you have at least 30 years to your retirement age, you have more opportunity to make riskier yet profitable investments like stocks.
Note that it’s different when a 60-year-old starts planning for retirement as compared to a 30-year old. That’s because they’ve got different needs and younger people with more time to save can make riskier investment choices.
2. What are Tour Retirement Spending Needs?
To determine the size of your retirement portfolio, you must calculate your retirement spending needs. According to most people, they speculate that they’ll only spend from 70 to 80% of what they’ve been spending. But you can’t rely on such figures considering that unexpected medical expenses may arise.
For you to live a quality life after retirement, your saving ratio should at least be 100%. Note that the cost-of-living rises each year.
3. What’s the After-Tax Rate of Your Investment Returns
You must calculate the after-tax real rate of return to evaluate the possibility of your portfolio producing the required income. Actually, a rate of return that exceeds 10% before taxes is considered unrealistic. And this also applies to long-term investment.
As you age, the return threshold tends to go down. That’s because a low-risk retirement portfolio mainly comprises low fixed-income securities.
4. Evaluate Risk Tolerance Against Investment Goals
Even where a skilled professional money manager is engaged in investment decisions, the need for an accurate portfolio allocation that strikes a balance between the return objectives and risk aversion concerns is a crucial step when planning for retirement.
You should ask yourself questions such as how much risk will you accept to hit your objectives. Should you set aside some income in risk-free treasury bonds? Just ensure you’re comfortable with the risks you’ll take.