Financial planning requires you to look at your current situation and pursue steps that will help you protect yourself financially. This means getting insurance, emergency fund, investment, healthcare, and many more. Once you’ve taken care of these aspects, it is time to consider getting a retirement plan. In this post, we are going to have a discussion on how to choose a retirement plan that will work best for you.
What Is A Retirement Plan?
A retirement plan is basically the course of action you want to take as to how you are going to prepare for the future.
Let us explain further. Today, you are working at a good company and earning a decent income that helps get by. It may even enable you to pursue leisure activities. But the time will come when you’ll reach retirement age and you are no longer in the same physical condition as you did before. This means you would much rather enjoy the goodness of life instead of having to work a 9-5 job.
Living the good life at retirement age seems like a far-fetched dream for most people but that is only if you don’t have the right retirement plan at a young age.
Below are what you need to consider in deciding how to choose a retirement plan.
You need to have clear expectations of your retirement spendings. It would be best to start with your basic needs such as food, water, clothing, and shelter. Afterward, you can begin to calculate loans and any potential clinical spendings you may need to pay for in the future.
Most people believe that during retirement, their spending would be around 70% or 80% of what typically spend around their younger years. This is perceived to be unrealistic according to experts especially if you still have some unpaid mortgages to date.
Those are the important things to consider when it comes to spendings. But calculating your potential retirement spending does not stop there. You should also come and take a look at your goals.
What do you plan to do with your life at the age of 60? Can you take just sipping your cup of coffee and reading the newspaper every day? Or do you have bigger plans of travel and venture? If you are interested in the latter, it is something to consider to be part of your retirement spending calculation.
You need to identify your current age at which you are starting to build a retirement plan and the age at which you aim to be your retirement age. The retirement age usually starts at 60 as a default. But know that you can select a younger or older age for retirement. It is all up to you.
If you have a longer time frame between today and your retirement age, you’ll have an investment portfolio that can withstand a lot of risks. Take note that investing in the stock market, for example, does not mean that you will have immediate or even definite gains.
Investing in any asset can result in a loss or gain. The good news is even if the market is volatile if you’re planning to invest for the long-term, you are meant to win. This is because if your assets result in a loss in the next two years, it is still bound to increase in value in the next five or ten years anyway with aid from strategic investment planning.
Hence, if you are 25 today and want to retire at the age of 30, you’ll have very little money to show for it than if you were to set your retirement age at 60.
Consider The After-Tax Of Your Investment Returns
As far as investments are considered, it would be a good idea to work with an investment professional. That way, you can select which investments will bring you the most returns also considering the time frame you have until your retirement age. Most importantly, the investment professional can help you create an estimated amount of how much you will gain at your retirement age.
When you arrive at that number, the next thing you need to discuss with your consultant is the after-tax.
Let’s say that you have an investment portfolio worth $400,000. And then you have a spending need of $50,000 for retirement. If you were to take your money without taxes, you can expect a 12.5% return.
Now, we would arrive at a different gain percentage if we were to calculate it with taxes.
This sounds like a decent gain considering this is the kind of money that you never had to work for. You could say that you were able to generate money by making some of your old money work for you.
Most sprouting investors are aware of these taxation laws but there are only a few who knows the specific rates.
Unless you are aware of how much these taxes are going to cost, you could have an unrealistic idea of how much you will gain at the time of retirement.
Risk Management Vs Investment Goals
The term investment is typically juggled everywhere on the internet. It gives many people the impression that if you invest your money, you will certainly have more money in the future. Of course, the idea of investing is to double one’s money. But the outcome is not always definite. This is because aside from the high gains that we expect from investments, it is also tied with many risks.
Hence, when you invest there is a need to apply the right risk management system in how you set your cards. To properly manage your risks, you need to be knowledgeable about the market and be aware of its volatile nature.
If you don’t consider yourself to be an advanced investor just yet, again, we would recommend working with an investment expert or professional. He can properly guide you in creating a risk management strategy and most importantly, he can assist you on how you can follow it strategically.
What’s your biggest takeaway on our tips on how to choose a retirement plan? We would love to know in the comment section.