The reason why most retirees face difficulties and pressure in their finance after retirement is as result of poor financial planning. Lack of proper financial planning most especially before retirement have caused depression amongst most retirees in the world today.
Most people thinks that it is not necessary to plan ahead of their retirement but little did they know that after retirement there still bills to pay and some other responsibilities which will require money to sort out. There is this popular saying that says, when you fail to plan, you have already planned to fail.
It is important that you understand this truth before your retirement, no more paychecks as usual, you're no more on a salary payroll except if job comes with a retirement benefit such as pension.
Financial planning for retirement is very important in order to eliminate pressure on your finance and savings. This article will give you an indepth knowledge on financial planning before your retirement, how to create a financial plan for retirement, the four rules in retirement planning and the necessary steps you will need in planning your retirement.
What is financial planning?
Financial planning is a process design to help you reach your targets in life and also your financial goals. Financial planning also refers to charting and following a roadmap in order to navigate from where you are to where you want to be 10 to 15 years or even 20 years from now.
Financial planning is not just a time to get down in weeds with numbers. It is a time to think big about what you want your future to look like and establish financial goals that can help you get there.
What is Retirement?
Retirement is the act of stopping a work or job especially when an individual has worked for a long time and reached a certain age in a company or in a public organization.
To create a good financial plan ahead of your retirement, it could be 5 to 10 years from now or even less. You have to create a list of things you would like to plan for, this things includes;
1. A monthly budget to help you keep your expenses below your income before you retire.
2. A plan to clear your debts if there is any at all, and also a spending Plan using your budgets.
3. Acknowledgement of all your bills and their due dates.
4. Make a provision for a funded emergency savings account and also an account where you will save up for your retirement.
5. Have a diversified portfolio of Investment in your retirement accounts and also in your non-retirement accounts that you're leveraging for investing.
6. Have a multiple streams of income and savings for your other goals such as your short-term, mid-teem and your long-term goals. These are things which are outside of your retirement plans.
7. Finally, ensure to have the right type of insurance coverage. When making your list, also determine the type of plan needed. Example, are you planning just for yourself or the plan that involves your partner and your children or parents.
It is important that you understand the type of plan you're creating, in order to build all these different aspects into your plan as well.
After all these, the next thing is to start implementing the steps to create your financial plan for retirement.
Below are some steps to follow to create a financial plan for retirement.
1. Create Specific and Measurable Financial Goals: You have to write down your goals in a way that, they are specific and measurable so that you can track your progress towards achieving them.
Let's say you have 5 years before your retirement from now, how much money would you want to save exactly? Your goals need to be specific as possible as it can and also tie to a timeline so that you can track your progress.
2. Begin a Savings For Emergencies: Start an emergency savings for unplanned life circumstances, because in life anything can happen.
There are going to be situations that you did not plan for in your budget, which your emergency fund , if you have it in place can really help you cover.
You also have to include saving specifically for planned expenses, especially the one you know is coming forth. Examples includes, home repairs, car repairs etc.
Your emergency fund and your sinking fund are two key savings account that you would want to build into your retirement financial planning.
3. Create a plan to start paying off your debts: Debts are basically a hindrance which will hinder you from being able to achieve your financial goals before retirement. If you have any unpaid debt while on a job , try as much as possible to create a plan to pay them off by making extra payments in excess of the minimum required payment.
4. Start investing for long-term to grow your money: This could be investing in real estate, investing in the stock market, investing in business or in all three ways but make sure that before you retire from your job, you already have an investment.
This is how you can be able to grow your money through the power of compounding and also earnings on your investments.
5. Getting the right insurance to protect you and your loved ones: Having the right type of insurance protects you and your loved ones, for instance, you have to make sure that you have health insurance, auto insurance, life insurance, disability insurance, home or rental insurance, pet insurance, personal article insurance and business insurance. Though it all depends on what you need.
6. Creating a plan for retirement: This is not just putting money in your 401k account but this is also determining how much you are going to need in order for you to afford the lifestyle that you want when it comes time for retirement.
This is basically identifying how much you need to save over the timeline that you have between now and when you want to retire.
7. Creating a plan for taxes: When your money makes money, there is one thing you're most likely to pay for and that's taxes. You have to make sure that you have a plan for taxes, as your money makes you more money and that could be as simple as designating 25 to 30 percent of all your earnings towards taxes.
Whether it's capital gains tax or income tax depending on how the money was generated.
8. Creating an estate plan: You need to have an estate plan in place, which you can create with an estate planning attorney on how exactly you want to transition the wealth you have built to your family when you are no more.
9. Frequently make out time to review your plan: It is important to review your plans and the reason is because, sometimes you may experience changes in your life or your goals and timeline may change.
This requires you to adjust your financial plans accordingly.
10. Staying the course: Finally, this means managing your spending, staying on top of your debt repayment, investing consistently, learning for your mistakes and leveraging these lessons to move forward.
These are some of the key steps required to create a financial plan for your retirement.
The 4% Rule In Retirement Planning
The 4% rule is also known as the safe withdrawal rate. It is also the rate at which you can spend your money without ever running out of money after your retirement.
An easy way to calculate what this means and how much money you will need to retire with, is by simply flipping it around the 4% rule and multiplying your yearly expenses by 25. Example if you and your family spends $40,000 per year, you will need to have $1,000,000 invested in order not to run out of money.
Though there must be some limit how long you can withdraw the 4% and still have money left over.
Trinity Study
What is trinity study?
Trinity Study is the study that explains the 4% rule, and it looked at how much money you will need to retire for every year between 1926 and 2009.
The study found out that if you invest 50% of your money in stocks and 50% of your money in bonds, withdrawing 4% of your money will be pretty good for over 25 years, 100% of the time. This study went further to show that doing it for 30 years, you will still have money left over 96% of the time.
However, if you retired in a very unlucky year and never made any money after retirement, including pension or social security, the 4% rule won't be effective or workout.
To make sure that we are all clear, the 4% rule is not 100% fully proofed but those odds are pretty good and even while hoping to retire from regular jobs longer than 30 years. I know I will continue to make money doing things I love, which will make sure that the 4% rule works out.
Although, for the benefit of those who want to be 100% sure about the 4% rule, your money will never run out.
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