Retirement Planning Strategy – How to Do it Right the First Time
Retiring can be an enormous step in a person’s life. It is a time when adults wind down from their working life and try to enjoy their senior years. Hopefully they will have saved enough to enjoy their retirement without having to worry about how to pay their bills.
When to start putting money aside for retirement
Retirement can be a wonderful experience for those who have planned ahead and have taken care of their financial needs. In order for an individual to meet their financial goals it is important for them to start saving early.
By investing money early in life you can take advantage of the power of “compounding”. Compounding is an asset’s ability to generate earnings that are re-invested to produce their own profit. Compounds are linked to generating earnings from past earnings.
The power of compounding can be illustrated by the following example: if an individual puts aside $3,000 a year at the age of 25 for 10 years and then stops saving at the age of 35, by the time that they reach 65 – assuming an annual rate of return of 8% the amount of saving – they would have accumulated $472,000.
However if that same individual waited to 35 to start saving and then save $3,000 a year for 30 years, until he reaches the age 65 – assuming a 8% return on investing – his savings would be $367,000. That is $115,000 less even though the contributions of the person who began saving at age 35 contributed $60,000 more.
What is the best way to save for retirement?
When you decide to begin saving for retirement, ideally you would be able to put money into a tax deferred 401K account that receives matching contributions from your employer.
This type of contributions provides you with two perks; great tax advantages – such as a dollar per dollar taxable income deduction equal to the amount of money that you contribute to your account. The second perk is that you get free money from your employer equal to the amount of the matching contribution that they are willing to provide.
Many people also choose to start tax favored individual retirement accounts, or IRA. Contributions to IRA accounts are also tax deductible. You can contribute the smaller of: $5,500 (for 2015 and 2016), or $6,500 to an IRA if you are age 50 or older by the end of the year.
How to invest the money
Your employer may limit you investment choices in a 410K account. However you can choose how you invest your contributions to an IRA account. When you make investment decisions it is generally a good idea to invest in the stock market.
Stocks give your investments the best chance to outpace the cost of inflation. In the years from 1926 to 2009 stocks appreciated at an average rate of 9.8% versus bonds which had an average rate of return of 5.4%.
How much money will I need to retire?
In order to determine how much money you will need when you retire, you will first need to calculate your retirement income, how much income will you receive from your pension, 401K or IRA accounts; then calculate your bills and figure the difference between the two. Experts advise that you will probably need around 70% of your pre-retirement salary to live comfortably.
Of course, the amount of money that a person will need to live comfortably differs from person to person and on factors such as if they have paid off their mortgage or if they are willing to cut back on their daily expenses after retirement.
Do you have a financial plan set up for retirement? Because if you don’t you should make one right now. Whether you’d like to consider a fine wine investment or take higher risks and invest in the stock market, one thing’s for sure: unless you save or invest there’s no chance you can enjoy a comfortable, luxurious lifestyle in your 50s.
You have to be willing to take a risk, and as long as that risk is reasonable, then your chances of making money with a retirement planning strategy are quite significant.
Category: Retirement, Wine Investing
