Given much thought to retirement lately? Don't make the mistake of thinking about what you'd like to do when you retire, but not how you're going to finance that retirement. Start planning now, following these key steps:
Determine how much income you'll need for retirement.
First, decide how you'll spend your retirement years. Do you want to travel extensively or are you content to stay at home pursuing inexpensive hobbies? Will you remain in your current home or move to a different city? Do you want to retire totally or will you work part-time? Depending on your plans, you may need anywhere from 70% to over 100% of your current income. If retirement is so far away that you're not sure what you want to do, use a range of retirement income assumptions, such as 70% at the low end, 90% in the middle range, and 110% at the high end.
Decide when you want to retire.
Although many people want to retire early, supporting yourself for those additional years may make that difficult to achieve. You may want to work longer to save the amounts needed or consider part-time employment after retirement.
Estimate your current retirement benefits.
Assess how much you're likely to receive from Social Security and company pension plans. Over the years, these benefits have been providing a smaller percentage of retirement income, so use conservative estimates.
[READ MORE: Social Security Benefits | Pension Planning and Benefits]
Total your current retirement savings.
Prepare a net worth statement to help you determine how much you currently have saved for retirement. Also consider other financial needs that must be met, such as paying for a child's college education or providing nursing home care for an elderly parent. These needs can seriously reduce assets left for retirement.
Develop your retirement savings plan.
Based on the above factors and your estimate of long-term inflation, you can make a reasonable estimate of your total capital needs at retirement. You can then calculate how much you need to save on a monthly, quarterly, or annual basis.
Don't give up if you can't afford to save the amount needed.
You can start out saving what you can and increase your savings in subsequent years. You can also revise your retirement plans. Reducing your financial needs, delaying your retirement date, or working part time after retirement can substantially change the amount needed for retirement.
Review your retirement plan annually.
This allows you to assess your progress and make any needed changes.
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