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The idea of retirement planning may not be the most exciting personal finance topic. Between retirement further away than immediate financial concerns and the complexity of understanding how to prepare for retirement, it’s easy for many to put the task off.
If you haven’t started saving for retirement, you’re not alone. One U.S. report indicated that only 49.5% of Millennials, 56.1% of Gen X, and 7.7% of Gen Z own at least one type of retirement account.
The complexity of retirement, compounded by immediate financial concerns, makes it easy for many to put off planning for their financial future. But getting started planning for retirement doesn’t have to be confusing or overwhelming.
Following these five steps to retirement planning will help set you on a path to better financial security and an enjoyable retirement.
1. Set Clear Financial Goals
Setting clear goals during the retirement planning process helps provide clarity and allows for effective planning. Without goals in mind, financial planning can feel like an aimless pursuit with an unidentified target.
A 2022 survey by the Federal Reserve indicated that despite an active savings process, only 31% of adults felt that their retirement savings were on track. Create a solid plan and stay on track with these tips:
- Consider the Desired Age of Retirement: Your age at retirement impacts your savings goals, as starting earlier or later will influence how much you need to save and the potential growth of your investments.
- Assess Your Current Financial Standing: Evaluate your current financial situation, including income, expenses, assets, and debts. This process helps you determine how much you can contribute or areas you may need to budget for more heavily.
- Evaluate Risk Tolerance: Investments tend to carry inherent risks. Deciding your comfort level with potential investment fluctuations and market volatility will help you determine appropriate investment strategies.
- Healthcare and Long-Term Care: When setting goals for medical expenses, consider the potential cost of insurance premiums, deductibles, co-pays, and long-term care insurance, as the average annual cost of a nursing home room is $108,405.
Financial goals should be specific, measurable, attainable, realistic, and time-bound (SMART goals). Consulting with a financially savvy friend or using an online retirement calculator are valuable approaches that can break these steps down into actionable steps.
2. Start Saving
After you’ve identified your goals, it’s time to start saving. If you’re starting your retirement contributions later in life, it’s important to understand the types of plans available to you. The Roth IRA and the traditional 401(k) are two types of retirement savings plans.
Roth IRAs are funded with after-tax dollars. That means contributions are not tax-deductible in the year they are made. However, one of the features of a Roth IRA is that withdrawals during retirement are typically tax-free. Roth IRAs also do not have required minimum distributions, which could potentially extend the period of tax-free growth.
Traditional 401(k)s, typically offered through employers, are usually funded with pre-tax dollars. Contributions made to a traditional 401(k) can often be deducted from your income for tax purposes in the year they are made. However, when you begin to make withdrawals in retirement, you are required to pay taxes on the amount you withdraw, including any growth the account has experienced.
It’s important to understand the features of these two types of retirement savings options, as they have different implications for your financial situation. Always consult with a financial advisor or retirement planning professional to understand which option may be best suited for your specific circumstances.
The key to maximizing your savings for retirement is to start as early as possible, giving you longer to work the magic of compound interest. Compound interest allows you to earn interest on the money you initially save, as well as earning interest on the interest that accumulates over time.
Compound interest can have a significant impact on your savings or investments. The longer you leave your money untouched, allowing it to grow, the more pronounced the effects of compound interest becomes.
3. Automate Savings
In order to work the compound interest in step two, you’ll need to put yourself first. Regardless of how much you’re saving, automate that deduction if possible. Automating savings ensures consistent contributions towards your financial goals.
Many employer-sponsored retirement plans, such as 401(k)s, offer automatic contributions. You can set a specific percentage of your salary or a fixed dollar amount to be deducted from your paycheck and contributed to your retirement account. As a bonus, the contributions are usually deducted before taxes.
You can also set up direct deposits with your employer to automatically route a portion of your paycheck into your retirement account. This way, the money is deducted from your paycheck before you even receive it.
This approach helps counterbalance the impulsivity of human nature. Automating contributions removes the temptation to spend money earmarked for savings on impulse purchases or unnecessary expenses.
It also ensures that savings are a priority. If money is set aside for retirement, it sends a clear message that your future financial security is important, which also helps to alleviate stress and anxiety when thirty years down the road starts looking more like five.
4. Reduce Debt Little by Little
Want to contribute a higher amount to your monthly automated savings? Reducing existing debt is the answer. While borrowing money may be considered essential in certain situations, having too much debt can impact your financial health.
The average American adult has more than $90,000 of personal debt. During the debt reduction portion of retirement planning, set your sights on loans with the highest interest rates.
Prioritizing the repayment of high-interest debt can save you a substantial amount of money over time. Two popular repayment strategies include:
- Bottom-up: Pay your smallest debt first, and then use the momentum to tackle each debt using the previous payment as added ammunition.
- Top-down: Target debt with the highest interest rate, pay it off, and then direct those funds toward the next highest-interest debt until they’re all eliminated.
Each approach has advantages. The bottom-up approach allows you to build on small victories, while the top-down method has the greatest savings impact.
5. Regularly Review and Adjust Your Plan
Life is full of uncertainties and changes. Ideally, those include many good things like homeownership, career promotions, and joyous life events, all leading to long-term financial stress or security.
Economic and market conditions can fluctuate over time and are outside the scope of control. Life can throw unexpected curveballs like health issues or changes in financial circumstances.
That’s why regularly reviewing your retirement plan can help you evaluate and make necessary adjustments. It lets you stay on track toward your retirement goals, making necessary corrections for internal or external factors. A regular review is a proactive approach to maintaining confidence in your planning efforts.
Are You Ready to Start These 5 Steps to Retirement Planning?
Planning for your retirement can sound challenging, but it’s actually an exciting opportunity to build a strategy for a secure financial future. If you follow the five steps in this article, this complicated process is taken into bite-sized pieces.
Take a look at your current financial reality and think about what you want your future to look like. Then start paying down any existing debt and start saving money where you can.
If you’re looking for a partner while you build your financial security, Juice Financial offers innovative solutions to help you stay on track and keep up your motivation. If you’re not already a cardholder, you can share information about Juice with your HR department.
Build your better future with Juice!
The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained on our Site constitutes a solicitation, recommendation, endorsement, or offer by Juice or any third party service provider to buy or sell any financial instruments.