Be sure not to put off retirement planning until the last minute.
Retirement is a great thing if done right. When you’ve put in your time and effort for decades, it’s time to relax and do anything you want.
Making sure you’re financially set up for retirement is vital, whether your retirement goals are to see the world, enjoy more time with loved ones, or spend your days on the golf course.
Here are four things you should do to retire in the next decade.
Identify the yearly budget requirements.
Working out how much money you’ll need in retirement is a crucial first step. There is no magic figure, but the 80% rule is a decent starting point: retirees should expect to need 80% of their pre-retirement earnings when they retire if they want to keep living the way they do now.
A good starting number is 80%, but you should alter it down if you intend to shrink back and up if you want to expand.
Find out how much money you’ll need to set aside altogether.
If you know how much money you’ll need each year in retirement, the 4% rule can help you determine how much you should save overall. According to this guideline, retirees can safely withdraw 4% of their savings each year for 30 years (after accounting for inflation) without risking financial ruin.
For instance, if you have $2 million in retirement savings, you would take out $80,000 in the first year. Withdrawing $82,400 one year later equals a 3% inflation rate. Following a year of 2% inflation, you would take out $84,048. Following that, etc.
Multiplying 25 times your desired annual income will help put the 4% guideline into perspective. If you earn $100,000 per year now, your retirement goal should be $80,000 per year and $2,000,000 in savings ($80,000 x 25 years). The 4% rule, like the 80% rule, is flexible in that the proportion can and should be altered to reflect the state of the economy.
Determine your Social Security benefit amount.
When you reach retirement age, you can start receiving a portion of the Social Security taxes you’ve paid. In retirement, Social Security can be a lifesaver for some people, while it’s merely a supplement for others. In any case, it’s helpful to have a ballpark estimate in hand for planning purposes.
Sign up for an SSA online account and review your recent earnings and estimated monthly income to get a ballpark figure. If you want, you can utilize a calculator provided by the Social Security Administration.
If you’re ten years from retirement, the number you see today isn’t necessarily going to be the number you get in retirement, but it might be helpful to give you an indication of the range you’re in.
If you have a ballpark figure in mind for your Social Security payments, you’ll have a better notion of how much you’ll need to withdraw from your savings each year. Hence, if you require $80,000 per year but will get $1,500 monthly from Social Security, you’ll need to save $62,000.
Check that your 401(k) choices reflect your comfort level with risk.
It’s easy to lose track of where your 401(k) money is invested because many individuals treat it as a “set it and forget it” account. Your 401(k) allocation to stocks should look different in your 30s and 40s than when you’re a decade from retirement.
The conventional wisdom on investing states that one should become more risk-averse as retirement approaches because there is less time to compensate for losses. If you enroll in them, target-date funds in 401(k) plans take care of this rebalancing over time. If not, you’ll have to take matters into your own hands.
You should expect to find four main types of index funds available in your 401(k): large-cap, mid-cap, small-cap, and international. There is no one-size-fits-all allocation since people have varied comfort levels with risk.
But for those within a decade of retirement, a fund allocation of 60% to 70% large-cap is a good starting point.