Getting ready for retirement requires thorough and lengthy planning. Having the perfect retirement plan is necessary if you want to enjoy a secure, comfortable, and fun filled retired life. You need to start building your financial cushion right now to be able to fund everything you would need once you stop working.
Here’s how you can do that:
1. Know your timeline
Creating an effective retirement strategy begins with your expected retirement age and your current age. Your portfolio can withstand a higher risk if there is more time between right now and retirement. If you have over 30 years until you retire, you should consider investing in riskier investments, like stocks.
It is true that stocks are highly-volatile, but history proves they can outperform other securities, like bonds over a longer period of time. However, you need to understand the primary word “long”. You should have at least two decades on your hands before you start putting your money in stocks.
2. Determine the kind of money you need
The second step is to determine your post-retirement expenses and spending habits. This will give you a clearer picture of the required retirement portfolio size. Most people believe their annual retirement spending will be lower than what they spend right now. They think they should spend about 70% of what they spend currently.
However, this assumption can be unrealistic, particularly when mortgages are not paid off. You need to think about inflation and expenses that you don’t currently incur now. For instance, your medical bills will be dramatically higher as you age. In addition, if you are adventurous, you need to keep a certain something aside for your bucket list. Travel can take a major chunk of your retirement fund if you don’t plan for it.
3. Calculate investment returns after-tax
After-tax real rate of return needs to be calculated to make sure that your portfolio produces enough income to be feasible. Getting ready for retirement requires a lot of forethought and planning. Expecting returns above 10% can be unrealistic, even before taxes. You need to understand that your return threshold will only decrease as you age.
This is because your investments will shift from high risk to low risk retirement portfolios. They will largely be composed of varied low-yielding fixed-income securities.
4. Assess investment goals against risk tolerance
Proper portfolio allocation is an important step when planning for retirement. Whether you take all your investment decisions, or hire a professional money manager, you need to balance the objectives of portfolio return against concerns of risk aversion. It is important to ensure that you are comfortable taking risks in your portfolio.
It is vital that you demarcate between luxury and necessity. This is not something you just talk about with your financial planner or advisor. You should also speak about this with your family members. Lastly, try not to be a micro manager that reacts to all market ups or downs. ‘Helicopter’ investors who over-manage their portfolios don’t understand that the mutual funds that are underperforming this year may be next year’s best performers.
This guest post was graciously provided by Alessia Olsen.