How to start planning for retirement

As you enter the later years of your life, it’s important to begin planning for retirement if you haven’t already. The average American lives 20 years past retirement, creating the possibility you outlive your savings. Accordingly, proper planning and saving are paramount to ensuring the quality of life in your older years. 

Planning is the first step in making retirement decisions and starting early always helps. The sooner you figure out how much money you’ll need in retirement, the easier it will be to save it. When planning, you should carefully consider your future expenses and lifestyle. 

Just like life, retirement is an individual process. Each person must plan according to their specific needs and desires. Most retirees require around 80% of their previous income to maintain their lifestyle. As such, if you live a modest lifestyle with few expenses you will need far fewer savings than an individual with expensive tastes and many expenses. While that fact is obvious, you should carefully review the different expenses you might incur when creating a retirement plan. If you know you’ll need medical care or have to support another individual, integrate those facts into your plan. 

After figuring out your average monthly spending and how much you’ll need over retirement, the next step is finding the best retirement plan for you. There are many different retirement plans that can provide you with income after you stop working. 

Pensions are among the most common plans. In a pension, employers take on the responsibility of funding and overseeing the investments for your retirement. Through your employer, a pension guarantees a certain percentage of your monthly income. The percentages vary based on your age, time with the employer, and past income, and not all companies offer pensions. Consult with your employer to see if they offer a pension and review the details as they vary greatly between organizations 

A common alternative to pensions, a 401k allows you to designate portions of your paychecks into a retirement plan. Many employers offer a 401k as a company-sponsored retirement plan and often match a certain percentage of your contribution, allowing you to instantly earn extra money for retirement. This plan still enables employers to help you save for retirement but places the responsibility of funding and choosing investments within the plan on the individual. Ask your employer about the different retirement plans they offer to ensure you’re choosing the plan that works best for you.

Individual retirement plans are another great way to fund your retirement. Annuities allow you to guarantee future income through an insurance contract that can be tailored to your specific needs. Check out this article on Peacefully to learn more about annuities. Alternatively, Individual Retirement Accounts, or IRAs, allow you to contribute up to $6,000 annually while also choosing your own investments. IRAs mainly come in two different types: traditional or Roth. The main difference is the tax structure of your contributions and withdrawals, although they both provide certain tax advantages. 

Finally, the government can help you earn income in retirement through Social Security benefits. Americans who earned 40 Social security credits over their lifetime qualify for retirement benefits. Every $1,510 earned in wages or self-employment income provides 1 credit with a maximum of four per year. If you work steadily for ten years or more, you most likely qualify for the retirement benefit, which averages around $1,600 per month in 2022. While the benefit likely won't cover all your expenses, it can help get you closer to your necessary income. 

After you find the plan or mix of plans that work best for you comes the most important part: saving and investing! Designate a portion of your monthly income towards your retirement plan before choosing investments that make sense for you. Make sure you set aside enough money each month to hit your savings goals. Depending on your age, you might want to choose more or less risky investments. If you’re young, you have time to recover if your investments don't perform well. When you’re older, it’s best to choose safer investments less susceptible to market fluctuations. 

Finally, it's important to realize that plans don't always work out. Expect the unexpected and incorporate this uncertainty into your retirement planning by setting aside extra money for unforeseen problems if possible. It’s also important to think about finances after you pass. The average funeral costs around $7,000, so it can be helpful to designate some money for the costs of funeral and burial processes. Consulting a professor financial advisor can also help you navigate retirement planning if you’re struggling through the process. 

Overall, early planning and saving can significantly ease the stress of retirement. Even if you don’t start early, creating and executing a plan will get you ready to enjoy the rest of your life without worrying about money

— Constantine Desjardins