If you plan on spending your retirement years soaking up the sun on the beach reading books, traveling the world, or spending more time with your loved ones, you’ve probably thought about the costs of retirement. Rising medical costs,tax, inflationThere are many things to consider when saving for the future.
Checking these five items off your retirement savings to-do list will set you up for a comfortable retirement years ahead.
1. Determine your retirement savings goals
The first step when thinking about saving for retirement is to ask yourself what you want your life to be like in retirement: How do you want to spend your time?
A general rule of thumb is that you’ll likely need about 80% of your pre-retirement income in retirement (since you’ll no longer be contributing to retirement accounts or paying Social Security and Medicare taxes), but Emily Millsap, financial planning manager at tax-focused wealth management firm AvanTax, says it’s important to consider your specific goals, like travel, volunteering or dining out with friends, and how much they’ll cost.
2. Calculate the amount you need
Once you’ve determined your retirement goals, calculate how much you need to save based on your current income and expenses, and your income and expenses after retirement.
General savings principles – Replace 80% of your pre-retirement income with Withdraw 4% Projecting how much you’ll need to save in your first year of retirement can help you determine how much you need to save. Bankrate Retirement Savings Calculator It will help you know if you are on the right track.
Be careful not to ignore unexpected expenses that may come up.
“It’s really important to plan for all of your basic living expenses, and then account for the larger expenses that will probably come up after that,” Millisap says, like car repairs or replacing your roof.
3. Plan for the unexpected
Even after you’ve determined your retirement savings threshold and factored in any additional expenses that may arise, it’s important to remain flexible.
“You have to be prepared to adjust your plans when the unexpected happens in life, whether it’s health, finances, family relationships, or whatever, because life inevitably brings unexpected events,” Millsap says.
Receiving long-term care. The average cost of care for a private room in a nursing home is more than $116,000 a year. Insurance company New York Life Latest research on the cost of long-term care. Requiring long-term care sooner than expected can disrupt your financial plans.
In addition to being flexible with your retirement plan, Millsap says it’s important to continually monitor your savings as you approach retirement so you can make necessary adjustments.
4. Choose a retirement account
There are many tax-advantaged investment accounts available for saving for retirement.
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401(k): These workplace retirement accounts often come with employer contributions. Contributions to these accounts grow tax-deferred, so your money grows without worrying about taxes until you start making withdrawals after age 59 1/2.
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Traditional Individual Retirement Account (IRA): Similar to a 401(k), a traditional IRA allows you to make pre-tax contributions to your retirement savings and pay taxes when you withdraw the money in retirement. As the name suggests, these accounts are held solely by individuals and are not offered through an employer.
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Roth IRARoth IRAs are taxed in the opposite way to traditional IRAs: You can contribute after-tax amounts and then withdraw those amounts tax-free in retirement.
Other retirement savings accounts include Simple IRA, SEP IRA and Solo 401(k). Health Savings Account (HSA) It’s a triple tax advantage for saving for medical expenses in retirement: pre-tax contributions reduce your taxable income, and withdrawals are tax-free as long as you use them for qualified medical expenses.
5. Start saving
When it comes to investing for retirement, time is your best ally: Investing $500 a month for the next 30 years at a 7% return would add up to more than $560,000, even after taxes and inflation.
Financial advisors say putting even a small amount of money away in a tax-advantaged retirement savings account now can make a big difference in the future.
Conclusion
The key to saving for retirement is to think early about your goals and how much you’ll need to achieve them. Even if retirement is decades away, going through this financial checklist can help you stay on track and ultimately live the retirement of your dreams.