By Myles Leva
Last Updated: February 22, 2022
Retirement is a phase of life that lasts an average of 18 years, according to the US Census Bureau.
That’s a long time to live without the steady employment income working adults become accustomed to. Naturally, as people live longer, they should consider the possibility of spending over two decades in retirement.
Retiring isn’t something everyone has the luxury of looking forward to. 41% of Americans believe they will need a “miracle” to be prepared for it.
Well, being prepared is the topic of this article, and the only way to prepare is with long-term retirement planning. While it’s a daunting task, there are many things you can do to be ready for a comfortable retirement. Here are the 5 things you should know.
Your retirement window is the amount of time you have to get ready for retirement. So, subtract your current age from your planned retirement age and you have your window.
One reason this window is important is that financial professionals typically use it in determining what level of risk is acceptable in your investment portfolio. The more time you have, the more risk your portfolio can withstand.
The logic behind this can be fairly simple.
If you’re taking high-risk investments when you only have 5 years left until retirement, you can end up in a bad place. In the course of 30 years, there will be at least a few market corrections. But half a decade isn’t enough time for many portfolios to suffer a downturn and then recover on time for retirement.
As a rule of thumb, the older you are, the more you should focus on income and preservation. That means less risky securities and more emphasis on guaranteed income.
Most people assume their retirement spending will be roughly three-quarters of their pre-retirement spending.
Many of those people are correct. A worrying number of them end up being proven wrong.
The thing about retirement is that during it, people experience all sorts of unexpected expenses. As a rule of thumb, if you live a highly active lifestyle now and expect it to continue in retirement, you will need to save more than you think.
Many people’s expenses in retirement are as low as 55% of their pre-retirement spending, but it’s usually closer to 80%. That rate is a good guideline, but you must still account for your lifestyle’s demands and it’s never bad to expect that you will spend more than the first figure that comes into your head.
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Before you finalize your decision to switch jobs, look into your employer’s pension plan. You can ask for an individual benefit statement to see what your benefits are worth. But critically, you should find out what happens to your benefits when you switch jobs.
While you’re at that, you should account for:
All of these factors can be overlooked, so it’s good to take a full accounting of your current pension benefits before making big plans.
Early withdrawals from tax-advantaged retirement accounts usually incur significant penalties. For a traditional or Roth IRA or 401(k), the penalty for early withdrawals is 10%.
In addition to harsh penalties, disrupting your retirement fund is bad for retirement planning. Once funds leave these tax-advantaged accounts, they lose those tax advantages. The net impact is decidedly negative no matter which way you look at it.
For this reason, it is better to take other measures to avoid having to resort to withdrawing from retirement accounts. For example, building a separate emergency savings fund.
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In the US, there are two main cases where you can avoid early withdrawal penalties.
First, if you want to roll over funds into another account. If the funds make it from one retirement account into another within 60 days, you don’t need to pay penalties.
Many people also don’t know that you can use up to $10,000 of an early IRA withdrawal to buy, build, or rebuild a first home for a spouse or dependent. In these cases, you also don’t need to pay the 10% penalty.
There are many benefits to retirement planning, including:
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There are 3 types of retirement. Knowing which one you’re planning for makes each subsequent step clearer.
You stop working and never get back to work again. This requires the most aggressive savings strategies.
You leave your career, but with a plan to still work in some capacity going forward. This can include side hustles and hobbies that net an income, a part-time job, or something of that nature. Because you’re supplementing your retirement income, your retirement savings don’t need to be as great.
You retire early or at the normal retirement age, but with a plan to get back to your career. Many people don’t want to stop working entirely. If you love your career and it gives you heightened meaning, you may want to aim for this option. The other benefit is your retirement savings don’t need to be nearly as great as either of the above alternatives.
As early as possible.
Young people seldom want to think much about their retirement, and that’s understandable. But the sooner you get started, the less stressful your road to retirement is likely to be.
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