Whether you’ve just started earning or are in the midst of your career, this is a question that might have lingered now and then. We’ll try to answer the question and make things simple for you in this post.
Every individual is working hard in this world to earn money. Our financial goal remains the same, i.e., to fulfill our needs and desires. However, there comes a stage in our life when it’s time to bid adieu to our professional life and retire. Post- retirement, we probably don’t have regular income sources anymore, but we wish to do everything we couldn’t during our working days. For that, the regular flow of finances is essential. Some employees do enjoy pension benefits from their company. But at times, even it’s not sufficient. So, you need to save money in the present and invest it properly to retire with peace of mind. That is where you need retirement planning.
Retirement Planning: What It Is And Why It Is important
When you cross the age of 60 or 65, you wouldn’t be able to work. So, it is crucial to think about yourself and your family at that time. Your kids might earn well, but you eventually cannot depend upon them forever. Hence, if you don’t wish to feel unemployed at that time, then preparing a retirement plan at the moment is necessary.
Retirement planning is the determination of the actual income/cash flow needed after ending the normal salary cycle for an employee. It includes various steps, such as recognizing various sources of income, identifying different types of post-retirement and daily expenses, estimating net savings, and implementing broader savings and investment plans.
Retirement planning is not the only financial forethought, but it includes other preparations for a better life after retirement. The plan of savings, investments, and distribution of the money is a critical aspect for sustaining one’s life after paid work ends.
Here, implementing a few savings and investment methods will not be sufficient for a full-proof retirement plan. Instead, one must keep a strict eye on lifetime assets and liabilities. Moreover, future cash flow estimation and subsequent planning are necessary.
Planning for retirement is crucial for enjoying retirement to the fullest. It is also essential to support your family even after you have retired. Your family might face some financial woes in the future. So, you must be well-equipped for that. Furthermore, there are way more things to complete before you get old. Here, finances play a key role and allow you to retire with peace of mind.
Saving vs. Investing for Your Retirement
No matter you are earning an annual salary in millions, your future is never secured. It’s your investments and saving that can hold your back.
Saving money almost always has to come before investing money. Think of it as the foundation on which your financial institution is founded. The reason is straightforward. Without you inherit much wealth, it is your savings which will feed your investments with the capital. When times are tough, and you need cash, your investment will probably be sold at the worst possible moment. That’s not a way to become wealthy.
As a general rule, your savings should be sufficient to cover your personal expenses, including your mortgage, loan payments, insurance costs, utility bills, food and clothing expenses for at least three to six months. Thus, if you lose your job, you will be able to have enough time to adjust your life without the extreme pressure that comes from living paychecks to paychecks.
Only after these things are in place, and you’ve got health insurance, should you start investing.
How Much Money Do You Need to Retire?
If you keep your income and expenses a monthly budget-and, you should! – you know exactly how much money you are spending and how much you are making. It gives you a sense of how much you probably you will need for your retirement.
The “Multiply by 25” and “4%” Retirement Calculations Rules
A frequently used rule of thumb for your retirement calculation is the “Multiply by 25” for how much you should save, and another one is the “4% rule” to calculate how much you can safely withdraw per year.
By multiplying your desired income by 25, you can get an estimated amount you should have for your golden years. For example, if you think $3,000 per month will be enough for your expenses, you will need around $900,000 ($36,000*25). It is also the amount to which you would apply the 4-percent rule. The 4% rule estimates that you can withdraw 4% of your retirement savings per year.
Do these rules guarantee you to never run out of money in retirement? Unfortunately, no.
But both of them assume that your only source of income in retirement will be your savings. But it cannot be the only source. So, when determining how much money to retire, you can take all your income sources into account. To begin with, you should be receiving social security payments when you retire. While social security is nowhere near enough to fund your full retirement, it still helps.
There are a number of different solutions for retirement income that you should consider. Some of these options are more active, such as taking part in part-time retirement work. However, others are more passive, such as renting out some real estate you own or simply buying an annuity. In general, combining multiple revenue streams is often the best way to ensure your financial security.
Finally, there is no fixed formula to calculate the total amount of money saved for retirement. However, there are some theories and postulates to guide through the retirement planning process —the emphasis on financial planning for retirement changes throughout a person’s life stages. During the early stages of a career, a person focuses on setting aside some money for retirement. Next to this phase comes the career peak when an individual tries to invest more and acquire a huge amount of assets. Once the retirement phase starts, all the assets and incomes retaliate towards distribution. If you wish to retire peacefully, develop a comprehensive retirement plan with the support of an advisor who can keep an eye on your money and guides you through the economic and lifestyle changes.
Get in touch with Wealthface’s experts to make decisions based on the solutions provided by a financial professional.