Retirement Planning 101: 6 Things to Keep in Mind
Planning for retirement can seem like a massive task. There’s all this time between now and then, and there are so many pitfalls that need to be avoided along the way. However, retirement planning doesn’t have to be overly difficult. You just need a few simple tips to help you get started and get on your way.
In this article, we are going to look at six things that you should keep in mind when planning for your retirement. By doing so, you will probably find that a greater nest egg awaits you when you arrive.
General Information About Retirement Planning
Retirement planning is the process by which an individual or a family plans for how to have enough money to live on once they officially leave the workforce. This could take place when an individual is 35 or 65, although 65 is the traditional retirement age.
There are multiple different ways to achieve solid financial planning, and many different talking heads have their own ideas about best practices for doing so. Consumer advocate and research group Bankrate recently released a pretty savvy 10-step guide for planning for retirement that is pretty all-encompassing. However, other famous authors like Dave Ramsey and Jim Cramer have their own ideas about retirement planning as well.
5 Tips for Retirement Planning
Tip 1: Know What Type of Account Is Best for You
There are different types of accounts to suit your retirement needs. Some offer tax benefits for investing now, while others don’t offer any tax benefits right now but offer substantial benefits down the road. Still, others don’t really offer any tax benefits at all. However, they can be the best choice for you depending on your circumstances.
Tip 2: Starting Early Is Key
It may seem like common sense to many, but getting after your retirement really early on is critical. This is because the powers of compound interest and time working together are massively important for improving your long-term investment values.
For instance, using Buyupside’s nifty recurring investment calculator, I was able to see that a person who made a $150 monthly investment into a retirement account starting when they were 25 would have a massive $300k saved for retirement at age 65. Furthermore, an individual who did the same thing starting at age 55 would only have a paltry $24k (assumes a 6% annual rate of return, compounded annually)!
Tip 3: Choose Investments with Low Expense Fees
Most investments that involve multiple stocks or bonds (i.e. ETFs, Mutual Funds, ETNs, etc.) have an expense fee associated with them. This is the fee that the asset administrator charges for transaction fees and generally running the investment for you. However, high expense fees can kill your long-term returns.
Using the same calculator (isn’t it nifty?) from the above step, an added expense fee of .25% over the course of 40 years can reduce your long-term earnings by as much as $20,000! That’s $20k that you don’t get to use for retirement!
Tip 4: Seek to Diversify
There are basically two types of risk present in investing: systemic risk and diversifiable risk. Systemic risk is the risk that the whole market will go down due to economic shock like what happened during the Great Recession. This sort of risk is unavoidable.
Diversifiable risk, on the other hand, is a risk that can be avoided by having multiple types of investments. For instance, if your entire portfolio is concentrated in energy stocks and then the energy sector takes a downturn…then your portfolio is shot. However, if you have multiple sectors in your investments, then your portfolio only takes a small hit when any one sector performs poorly.
Tip 5: Invest for the Long-Term
Whenever investing, you should seek to invest for periods greater than 15 years when possible. Why? While the market has occasionally lost money over periods spanning ten years or more, it has basically never lost over periods greater than 15 years. In fact, TraderHQ argues that attempting to time the market is basically a fool’s game.
If you don’t sell when the market goes down, you haven’t lost anything. However, when you choose to sell during a market downturn, you lose the dividends that the investments paid out. Also, you lose the capital that was invested.
Tip 6: Get Professional Retirement Planning Help
Planning for retirement isn’t easy. Even the most intelligent investors need good counselors on their side. These experts can help them bridge the gap between now and retirement. A good financial advisor can help you to put together a plan. This strategy will get you from point A to point B successfully.
Alternatively, robo-advisors are becoming a very attractive method for investing one’s money. With these tools, you don’t have to think through the validity of the investments being made. As Investor Junkie points out, the rise of automated investing platforms has helped common investors with low net worths get into the retirement game for the first time ever. If you can’t afford a financial advisor, using a robo-advisor could be a great option.
The most important tip listed above for retirement planning is the one about starting early. Compound interest is, undoubtedly, the most important factor for having a successful retirement later in life. As a result, if you haven’t already started then you should begin saving for retirement right now.
You should start now and follow the other tips listed above. This way, we guarantee that you will experience a far better retirement than if you continued along without acting. Still, make sure that you make wise investments that increase your odds of a great retirement. Don’t just plunge in wholeheartedly without a sense of direction.