How to Prepare for Retirement: A Complete Guide
We all know that preparing for retirement is important, but when you’re young it can feel lightyears away. Don’t let a lack of financial planning now stop you from enjoying your retirement years! This detailed guide will outline everything you need to know, from IRAs to emotional preparation.
Unless you want to work until you’re 80, it’s time to start preparing for retirement now.
Why prepare for retirement?
Many put planning on hold because they don’t know where to start. They convince themselves they “still have time” or the government will take care of everything later.
Don’t fall into the same trap — when it comes to retirement, time is literally money! The earlier you start, the more money you’ll be able to accumulate. There’s no way of knowing what the future holds.
The more you manage to stow away now, the more likely you are to have a retirement lavishing your grandchildren with gifts and traveling the world instead of trying to make ends meet. It could even make you healthier!
Here’s our guide to preparing for retirement both mentally and financially.
Steps to prepare for retirement
Here’s a quick overview of ways to prepare for retirement:
- Decide what kind of retirement you want
- Create a budget for that retirement that includes:
- Figure out how much money you’ll have/need
- Sort out life and/or medical insurance
- Open tax-efficient retirement accounts
- Find out about employer-matched pension plans
Let’s break these down.
Planning your lifestyle in retirement
After working all your life, packing it all in suddenly can be a shock to the system — no matter how much you were looking forward to it. Avoid this by creating a plan for what you’ll do after retirement.
Ask yourself what you want. Will you spend every day at home reading books and doing jigsaw puzzles, or will you be sightseeing in a new place every week? Where will you live? All these factors affect your future cost of living.
Once you know what kind of lifestyle you’re aiming for, it’s easier to figure out how much money you’ll need to fund it.
How to prepare for retirement financially
Now you’ve had a think about the type of retirement you want, it’s time to do some quantifying.
Using what you’ve decided about how you want to live, you should figure out how much disposable income you’ll need each month.
Without work to fill your time, you might want more income to spend on leisure activities, hobbies, and vacations. And while you may have paid off a house and your kids will likely be supporting themselves, you can expect medical bills to rise.
Assuming a 30-year retirement, you can figure out how big a lump sum you’ll need to retire. If you’ll need $2,500 a month, that’s $30,000 a year — or $900,000 over 30 years.
Of course, most people will get extra income from investment returns or government benefits, but it’s best to make a conservative estimate — especially since inflation will make your money worth less in the future.
Budgeting isn’t easy for many people, but fortunately there are ton of tools online today to help you out with your personal budgeting.
Your budgeting checklist for retirement
Will you have a pension?
Depending on where you live (and your field), the government may offer a state pension or support in your retirement years — the US government gives pensioners around $1,500 a month on average right now.
But you can’t assume that these benefits will remain the same forever. Some estimates suggest they will be cut by 20%, or maybe even disappear – right now only 31% of Americans receive pension.
Have you invested in tax-efficient retirement accounts?
When it comes to retirement, the two most important account types to be aware of are: employer-sponsored retirement accounts like 401(k)s, Roth 401(k)s, and individual retirement accounts (IRAs and Roth IRAs).
All these accounts are “tax-efficient”, but they work slightly differently.
With 401(k)s and IRAs, you contribute using “pre-tax” dollars — meaning that tax won’t be deducted when you deposit and you can save more money. However, you’ll have to pay tax on your earnings if they’re over the taxable threshold when you withdraw. This can take a significant cut out of your savings.
With Roth 401(ks)s and Roth IRAs you make contributions with after-tax. So you don’t have to pay tax when you withdraw the money later, after years of earning compounded interest.
Most employers also offer to match your contributions to 401 (k)s making 401(k)s and Roth 401(k)s more attractive for the salaried employee. But if you’ve already used up your maximum contributions for your employer, you can then opt for an IRA or Roth IRA on top.
Do you have life insurance?
Although not directly linked to retirement, you’ll likely want to think about life insurance. Especially if you have dependents who you want to take care of when you pass like a spouse or children.
All insurance companies offer better life insurance deals to people who are younger and healthier when they take out their policy – so the sooner you open one, the better.
In fact, there are even ways to transform long term life insurance policies into tax free income during retirement, but we won’t explain that here.
Are you investing?
The prospect of saving $900,000 ready to go at retirement might sound almost impossible, but that’s where our good friend, compounding interest comes in.
Investing and reinvesting your assets over the years is the surest way to help you build up a large body of income when you retire.
Where can you invest your money to earn consistent compound interest you ask? We have a suggestion.
Where to start earning interest at rates of 7% today
You can take advantage of steady, hassle-free, compounding interest today by opening a peer-to-peer (P2P) investment account with MyConstant.
P2P investment is a growing investment class with huge growth potential. Investing in fully-collateralized loans through MyConstant’s crypto-backed investment yields a steady 7% APR every 6 months.
If you’re closer to retirement and you’d like something more stable, you could also consider the Flex account, which offers 4% APY compounded every second with anytime withdrawals. Ideal for anyone hoping to keep their investments locked in even after retirement.
No matter how old you are or how much risk you’re prepared to take on, one thing is certain: you don’t want to snooze on retirement preparation.
Create your account with MyConstant today and start preparing for a great retirement without the hassle.
Share this article