Although you might think that you can delay planning for your retirement, the truth is that you cannot. If you want to be able to afford a long happy retirement and you have not already started to prepare for it, don’t delay another day – start now!
How much income will I need for retirement?
To feel secure in retirement you will need at least 66 percent of your current income. On average, social security will cover around forty percent of your current income, leaving you to fund the rest out of savings.
As everyone is different, it is important to be realistic about your retirement needs and goals. For instance when do you plan to make your transition? Will you have paid off your mortgage or will you need to continue paying it off during retirement? Will you need to finance your children or your grandchildren’s education? Will your succession in the family business be in place or will you still need to be involved? Do you intend to downsize your home? Do you have plans to travel? What about medical expenses?
Where will the money come from?
The first thing you need to do is identify all of your possible retirement income streams. For instance:
- Social security (as mentioned above)
- Pensions from your various employers
- Employee contribution plans in which your contributions are tax free
- Individual Retirement Account (IRAs) which also have tax advantages
- Private investments
- Earnings during retirement
Closing the gap
If these income streams will provide all you need, then you are very lucky. For most people there is a significant shortfall and they need to close the gap between the cost of their needs and their income.
In order to close that gap you will need to save, and the earlier you start saving and the longer you save for, the more likely it is that you will meet or even exceed your retirement goals.
Developing a retirement investment plan
Developing the right investment plan for you depends on many factors. These include the number of years you have to work before you retire, how much risk you are happy to take with your savings, and the tax implications.
Retirement tax breaks
Generally, it is wise to have a balanced portfolio, though it is also advisable to concentrate on retirement investments that have tax advantages. Let’s look at some of these:
- U. S. Treasuries are the safest way of saving and provide tax free income, but the interest rates are low; often lower than inflation.
- Municipal Bonds also provide tax free income and are beneficial to people in the higher tax brackets
- Annuities provide tax free earnings though tax is due when the annuity is cashed
Retirement and your investments
Although the above investments have tax advantages, they provide relatively small returns. So in order to provide better returns your portfolio should include some taxable retirement investments. There are many of these to choose from, but a few examples are:
- Certificates of Deposit (CDs) provide a fixed income and offer better rates of interest than savings accounts with low levels of risk, but they are unlikely to keep pace with inflation
- Corporate bonds are a little riskier but with higher returns
- Corporate stocks provide the best long term investment returns, though they carry higher levels of risk
- Mutual funds are managed investment funds that provide the best vehicle for most investors
The sooner you start retirement, the better…
The sooner to start your retirement plans the more likely it is that you will achieve your retirement ambitions, though make sure that you have a diverse investment strategy so that you can ride the ups and downs of the markets and the economy. Make the best of tax incentives, but for better returns you will need to take some risks.
