Retirement Planning for US consumers
Retirement planning is crucial for securing financial independence in your later years. With increasing life expectancies and the rising cost of living, preparing for retirement has become more important than ever.
So, how can you start retirement planning?
Start Early and Maximize Compound Growth
The earlier you start saving for retirement, the more time your money has to grow through the power of compound interest. Compound growth allows your investments to generate earnings on both your initial contributions and any accumulated interest. You can use our compound interest calculator to find out how much your savings could grow.
Retirement Accounts: 401(k)s, IRAs, and Roth IRAs
Retirement accounts provide tax advantages that help your savings grow. Here are some popular options:
- 401(k): Offered by employers, a 401(k) allows employees to contribute pre-tax income, reducing current taxable income. Many employers also offer matching contributions, which is essentially free money for retirement.
- Traditional IRA: Contributions to a traditional IRA may be tax-deductible, and the investments grow tax-deferred. However, withdrawals in retirement are taxed as income.
- Roth IRA: Contributions to a Roth IRA are made with after-tax dollars, but qualified withdrawals in retirement are tax-free. This is especially beneficial if you expect to be in a higher tax bracket during retirement.
Each of these accounts has contribution limits, so it's important to know how much you can contribute annually and to take advantage of any employer match available.
Diversify Your Investment Portfolio
Diversification is key to minimizing risk and maximizing returns in your retirement portfolio. Instead of relying on a single asset class, such as stocks, a diversified portfolio spreads your investments across different assets, including stocks, property, bonds and mutual funds.
The right balance between these investments will depend on your risk tolerance, age, and retirement goals. If you have less time to save until retirement age, you may want to take on less risk to guarantee you meet your goals.
Estimate Retirement Expenses
To plan effectively, estimate how much you’ll need to cover living expenses in retirement. The general rule is that retirees will need about 70-80% of their pre-retirement income to maintain their current lifestyle. This includes housing, food, transportation, healthcare, and leisure activities.
Healthcare is a vital part to factor in to your budget as an expense you can’t avoid and many underestimate.
Social Security
Social Security benefits provide a financial safety net, but they should only be part of your retirement plan. You can begin collecting Social Security as early as age 62, but the benefit will be reduced if you claim early. Full retirement age is 66 or 67, depending on your birth year, and waiting until age 70 maximizes your benefit.
You can estimate your benefits using the Social Security Administration’s online calculator, but keep in mind that these benefits may cover only a portion of your retirement needs. It’s wise to plan as though Social Security will be a supplement, not your primary income source.
Plan for Inflation
Inflation erodes the purchasing power of your money over time, so your retirement savings need to grow faster than inflation to maintain your standard of living. Historically, inflation has averaged around 2-3% annually, but this can fluctuate.
Additionally, with people living longer, be prepared for the possibility of supporting yourself for longer than expected.
Work with a Financial Planner
Retirement planning can be complex, and a certified financial planner can help you navigate decisions such as investment choices, tax strategies, and retirement income planning. They can also help adjust your plan as your goals change over time. Having a financial planner can help to take the stress off and make sure you know your future is safe.
