Essential Steps for Retirement Planning

Planning for retirement may seem unusual when it’s still more than 40 years away, but starting early makes a big difference. Here are some helpful tips to help you invest in your future.

It might feel odd to think about retirement while you’re still young and focused on your career, but this is actually the best time to start planning for it.

“Starting early is key when planning for retirement,” says Francisco Fernandez, a financial advisor with Regions Investment Solutions. “Time is your greatest advantage.”

By following these seven steps, you can set yourself up for a successful retirement.

1.    Set Long-Term Goals

Retirement can last a long time — for a young person today, it could span 30 years or more. Start planning by making a list of factors that reflect how you envision your retirement:

• At what age do you want to stop working full-time?
• Do you want to live in your home without paying rent or a mortgage?
• What changes do you think will occur in your budget and expenses?
• Given your family history, do you expect to have significant medical expenses as you get older?
• Do you hope to travel and see new places?

The goals you set will help determine how much income you’ll need in retirement. For example, if travel is important to you, try to estimate how much you might spend on it each year. As a general guideline, the U.S. Department of Labor suggests saving 70 to 90 percent of your pre-retirement income to maintain the same standard of living after you stop working. While programs like Social Security are designed to help cover some expenses, they are only meant to supplement your personal retirement savings.

Remember that inflation will impact the value of your savings over time. As prices rise, it will cost more in the future to buy the same goods and services you purchase today.

2.    Understand Compound Interest

The earlier you start saving for retirement, the more you’ll benefit from compound interest. Here’s how it works: If you leave your money in your retirement account, the interest you earn gets added to your balance. Over time, you start earning interest on that larger balance, including the interest you’ve already earned. Essentially, you’re earning interest on your interest. You can use an online calculator to estimate how much compound interest you could earn based on your specific financial situation.

Compound interest is also why it’s important to avoid withdrawing money from your retirement account before retirement, if possible. Withdrawing early means you lose out on years of potential growth from compound interest. Plus, you might face early withdrawal penalties. If unexpected expenses arise, consider other options before tapping into your retirement savings.

3.    Evaluate Your Options

Most people depend on several primary sources of income for retirement. These may include:

• Social Security: This provides only a portion of your income at retirement and depends on how much you earned and when you choose to retire. It’s meant to supplement, not replace, the savings you’ve built up over your career.
• Employer-sponsored retirement plans: Many employers offer retirement accounts like a 401(k). Teachers and employees of some nonprofits have access to a similar plan called a 403(b).
• Individual Retirement Accounts (IRAs): IRAs allow you to save for retirement outside of employer-sponsored plans. There are different types with various tax benefits, but they come with IRS restrictions.
• Pensions: While fewer employers today offer pensions, where you receive regular income in retirement, it’s still important to have other savings plans in place.

If you’re worried that you’re not saving enough cash, you may also want to consider continuing to work in retirement. While that’s not a perfect solution because you don’t know how healthy you’ll be or what the market will be like in the future, continuing to work in retirement could reduce the amount you need to save to cover your expenses.

4.    Learn About Your Company’s Benefits

When you start a new job, carefully read the benefits offered to you. Taking advantage of these benefits can be a key step toward building your retirement savings.

Generally speaking, employer-sponsored plans have one major advantage: Both your contributions and those of your employer are tax-free until you take distributions. Additionally, earnings on your investments are nontaxable until you withdraw funds from the account.

You can usually request that contributions to your retirement account be automatically deducted from your pay. If you receive a raise, you can increase the percentage of your contribution to the account. Keep in mind that the IRS imposes a maximum contribution amount each year.

You have a number of options for investing the money you contribute to your  plan. Some of the most common options include mutual funds, stocks, and bonds. It’s also a good idea to consult with a financial professional to find out what mix of investments is best for your situation.

5.    Learn about Social Security

Social Security is a federal program that provides benefits to you, and in some cases, your spouse, children, or parents. While you work, a portion of your paycheck is taken out to fund Social Security. When you retire, workers still on the job will help fund your Social Security benefits through their payroll taxes.

You can view your Social Security account online to see your earnings history and estimate your retirement benefits. You have the option to start receiving reduced Social Security benefits at age 65. If you wait until age 67, you can receive your full benefits.

6.    Start Budgeting and Saving

To know how much you should save for retirement initially, you first need to have a complete picture of the money coming in and going out each month. If you don’t already have a detailed budget, pick a month to track every dollar you spend.

Once you have a complete list of your expenses for the month, subtract your total expenses from your after-tax income to get an idea of ​​how much you have left, and from there, create a budget to start saving. To increase your savings, look for ways to reduce your spending. For example, you could review your credit card statements to see any subscription services you don’t use regularly.

Even if you can’t save as much as you’d like right now, you can start with a small amount each month. If possible, automate your transfers. The sooner you develop the habit of saving for retirement, the easier it will be to reach your long-term financial goals. You can increase your contributions as you earn more money or adjust your everyday expenses. The goal is to strike a beneficial balance between your short- and long-term goals.

7.    Adjust Your Goals as Needed

What matters to you in your 20s might not be as important when you reach your 40s or 50s. If you have a spouse or partner, you may set new retirement goals together that differ from those you made early in your career.

If your goals have changed, think about how that will impact your savings. If you find yourself falling behind, don’t worry. Review your budget and look for ways to increase your retirement contributions when your situation improves. It’s better to make gradual corrections than to take on risky investments that promise quick gains.

Although it might feel odd to plan for the end of your career when you’re just starting out, the choices you make now can greatly affect your future. Stay flexible, adjust your plan when necessary, and keep investing in your future.