Brian E. Murphy
4 months ago
To plan for your retirement, you need to start with your goals and then work backward.
So basically, that means thinking about what kind of lifestyle you want, what it’s going to cost you, and how long you have to save for it. Saving is one thing, but making your money grow is another. You need to invest it in a way that balances risk with reward, and you also need to think about the tax implications. Every country has its own rules so you need to find out if you need to pay tax on your pension income
1. Your Time Horizon
If you’re young with 30 or more years of work ahead of you Then most of your assets can go into riskier investments like stocks. Even though the stock market can be volatile, historically it goes up over the long-term, doing better than securities like bonds. If you want to maintain your purchasing power during retirement then you need to select investments that will outpace inflation. Over 24 years a small inflation rate of 3% can reduce the real value of your savings by 50%.
Conversely, anything you can squirrel away during your 20s can grow enormously over the years thanks to compound interest.
As you get older, your portfolio should be focused on generating income and preserving capital, which means putting more money into securities like bonds. They don’t pay big interest rates, but on the plus side, they’re not as volatile.
2. Work Out Your Retirement Spending Needs
It’s important to have realistic expectations about your spending habits in retirement. Many people think that they will only spend about three-quarters of what they spent while earning, but we are all living longer and the cost of living increases every year. It’s probably better to plan for spending that stays the same. If you aren’t working eight hours a day then you have more time on your hands to travel, shop and do other expensive things. The idea is not to outlive your portfolio, so you need to plan carefully and give yourself a clear idea of what you can afford to spend, factoring in unforeseen expenses as well as the regular ones.
3. Save Something
The best time to start saving for retirement is yesterday. Seriously. Anything at all that you can put away is better than nothing. Many countries offer tax-free savings accounts to retirement savers, so the money that you put away doesn’t get eroded by the government. It frequently also isn’t considered as taxable income, so by saving for retirement using one of these accounts you also lower your income tax for the year as well. Of course, they get you at the other end by taxing the money that you withdraw. Oh well. Can’t win ‘em all!
This is a generalization of course, and it’s best to check on the arrangements in your country.
4. By Age
In your 20s it’s important to save at least 10% of your gross salary towards retirement. Waiting till your 30s means you’ll need to save 20% of your salary or more to reach that retirement target. If your workplace offers a pension scheme then sign up and take advantage. Some employers will match your salary contributions, which is like a pay rise that you didn’t even know about.
If your workplace doesn’t have a plan or you’re a freelancer then there will probably be private retirement schemes that you can contribute to.
In Your 30s
Aim to contribute 15% of your gross salary if you’re just getting started and don’t be tempted to cash out if you hop from job to job. It’s sometimes possible to take your pension with you to a new employer, which makes good sense, and it’s also possible to get back the cash you contributed, which does not. This may trigger a tax penalty depending on where you live, and wherever you live you’ll be stealing from your future self, so try to resist the urge.
In Your 40s
Now is the time to look at where you’re going to be financially in 20 years. If an online retirement calculator tells you that you’re going to be coming up short then look at your lifestyle. Look at where you can cut back so that you can move that money into retirement savings.
In Your 50s
By the time you reach 50, experts advise you to have six times your salary saved. By age 55, that rises to seven times. Again, online calculators can help you to work out how you are doing.
5. Work Longer
A few additional years of work can help to build that extra bit of cushioning that your pension will benefit from.
6. Pay off Your Debts
Interest rates on credit cards, loans, and mortgages, will always be higher than most interest rates earned by various types of accounts. So it makes sense to prioritize getting those debts down as low as you can or paying them off entirely. Pay your mortgage off and you live rent-free, effectively giving yourself a pay rise.
7. Live Within Your Means
Many people feel the pressure these days to keep up appearances, spending more than they can truly afford on things like new cars, which only depreciate. Stick to a sensible budget and you won’t be wasting money, and what’s more your future self will thank you for it!
Brian E. Murphy