Counting on Social Security for retirement is risky. It would be better to not count it into your retirement plan. This will keep you from an income shortage if the program runs out of funds—if it is still around by the time you do retire, it could be an unexpected income source for you. Beyond that, there are other ways to set yourself up for retirement income. One such way is an annuity, a type of life insurance product that provides for guaranteed income over a given period of time. Planning for Expenses A good financial plan will account for these various sources of retirement income. Consider how they meet your income needs before deciding. Since your expenses will likely look very different than they did in your working years, it is important to understand both. By the time you reach retirement your home mortgage may be paid off, significantly decreasing your housing expenses. But the amount you spend on medical bills will likely go up as you get older. Your retirement plan should anticipate the switch in expenses you'll have in retirement, and make sure your various sources of income will cover them.
Investing Your Savings It's not enough to just save a bunch of money in a tax-advantaged retirement account. To make sure that your money grows and multiplies, you should invest it. It is good to keep enough money in savings and checking accounts to cover expenses and emergencies; however, if you keep more than this in savings, it will essentially shrink in value—savings accounts do not provide enough interest to keep pace with inflation. The time value of money concept states a dollar earned today is worth more than one earned in the future—if that dollar is invested and can earn interest. If you have enough to cover expenses and emergencies, consider investing the rest. Portfolio Allocation So what should you invest in? There are volumes of information available on this topic. An accepted rule of thumb is the one in which your portfolio should consist of 100 minus your age in stocks, and the rest in mutual funds and bonds. The older you get, the more you should transfer to funds and bonds.
Even if you truly love your work, the day will come when it's time to punch out for the last time and start your retirement. When that time arrives, you'll want to have a robust financial plan in place. How to Plan for Retirement Your primary financial goal throughout your work years is to amass enough in savings to support that plan—to sock away enough money to support your lifestyle without a steady paycheck. But saving as much money as possible is just the beginning: You'll also need to account for taxes, determine which investments will best grow your money, account for other sources of retirement income, and plan for retirement expenses. Key Takeaways Save as much money as you can. Put your money in tax-advantaged retirement accounts. Invest your money in the markets, adjusting your asset allocation as you get older. Consider your retirement expenses and income needs. Use your savings and other income sources to meet those needs. Retirement Accounts Saving money must be on your list of priorities.
Getting ready for retirement requires consistent saving, prudent investing and successfully avoiding penalties and fees. You can build a nest egg faster if you take advantage of workplace retirement benefits and make optimum use of government programs, including Social Security and Medicare. Here's how to make a basic financial plan for retirement: Save Regularly When Planning for Retirement The key to retirement planning is to save a portion of each paycheck beginning as early in your career as possible. Meghan Murphy, a director at Fidelity Investments, recommends aiming to save 15% of your pay each year for retirement. If you can't save that much, save a smaller amount and then increase it each time you get a raise. "A 1% increase might mean $30 or $40 each pay period, " Murphy says. "If that's in line with a raise or a pay increase, you don't even miss the money because you didn't have it to begin with. " [ Read: How to Max Out Your 401(k) in 2020] Maximize Your 401(k) Match If your employer provides a 401(k) match, save at least enough to get the maximum possible 401(k) match.
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