For many of us, we do not think about retirement till we reach our late 40s and realize that we should start preparing for it. But, as you know, the earlier you plan for something, the more options you get, and the more opportunities. Planning for your retirement as soon as possible by just setting some groundwork will pay off in the long term by not having to stress about it too much the older you get.
The start of planning stage doesn’t begin when you start acting, it begins when you start researching the different options available, how to make the most of your means, weighing out the options, and the steps you are going to take. It is easy to think that there are only two accounts you can open: savings and current because they are the most common ones, but did you know that there are different types of retirement accounts that support your retirement plan by raising money to fund it? To take it a step further, you can invest the money you saved to grow your retirement funds.
It is assumed that planning for retirement is only for old people, but that couldn’t be further from the truth. You can plan for retirement at any age: 20,30,40, etc…. The one thing you need to know is that the later you plan, the more stressful it might be. So, let’s get into how to start planning for a stress-free retirement.
1. Understand your timetable
First things first: before you start putting your retirement plan together, understand that your retirement goals and current age serve as the building blocks of the plan, hence, a good retirement plan looks different to everyone. For instance, if you plan early, you can consider investing in riskier portfolios to get the benefit of a higher rate of return. Early in this case would mean that you have at least 10 years to retire.
The second thing is to consider inflation and the time value of money. Definitely, the same amount of money today won’t give you the same purchasing power as in 10 years, so make sure that you check the expected inflation rate within your timetable to put that into consideration. A major mistake in retirement planning is focusing on the compound interest alone without weighing in the inflation rate which will result in unrealistic expectations.
On the other hand, if you have a few years till your planned retirement date, it is better not to invest in risky portfolios and find ones that have a risk rate within your risk tolerance. Also, since the inflation rate won’t vary a lot in a few years unless a crisis happens, then it makes it easier to invest in portfolios with a lower rate of return because you are not too worried about your purchasing power in the future.
2. Calculate the after-tax rate
As mentioned before, there are several factors that go into the amount of money you will actually have and your purchasing power when the time of retirement comes. So, after you have your investment portfolio set, make sure that you calculate the after-tax rate on the returns you get to have an accurate representation of the amount of money you will have.
Also, it depends on the state you live in, some states have higher tax rates which will affect your calculations drastically. The older you are, the less the returns on investment you’ll make since you’ll invest in less risky portfolios which means that you will have less feasible income after taxes.
3. Reverse mortgages
Reverse mortgages have been getting more popular than ever now, especially for their usefulness in planning for retirement. If you have never heard of reverse mortgages, they’re exactly what their name suggests: the reverse of paying off mortgage payments. This means that you receive income in exchange for equity in your property. Opposite to conventional mortgages, the more time passes, the less your equity in your property.
If you’re not sure which reverse mortgage lender to choose, you can go on a reverse mortgage reviews website to have a better idea of what each lender has to offer.
4. Your risk tolerance
A portfolio could be risky for someone but considered secure for another. It doesn’t matter whether you go to an investment advisor or construct your investment portfolio yourself, ensure that you understand your risk tolerance. You want to construct a portfolio that makes your risk tolerance, and your financial goals while taking into consideration the number of years you have left for retirement.
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