People are living longer and retiring earlier, which gives them plenty of time to enjoy themselves. However, inflation is slowly decreasing savings over time, making it harder to reach retirement goals. With unexpected costs like healthcare, it is difficult for retirees to live on a fixed income.
So, planning your retirement to afford your desired lifestyle is essential.
From identifying your retirement goal to asset planning, this article explains more about this topic.
Identify Your Retirement Goals:
Even though retirement seems far off, it is better to start planning early. First, determine your retirement goals. Once you know them, you can split them into smaller, more achievable road marks.
How do you envision the perfect retirement lifestyle? Some might want to downsize, while others want to travel and explore the world. Some retirees might pursue a hobby or start a business to compensate for the opportunities they missed.
- Retirement lifestyle: Think about where you want to live and which activities you plan to do. If you wish to move to another state to live a calm life and see your grandchildren or plan to travel and do new things, it is crucial to have a clear vision.
- Future expenses: Estimate basic needs such as housing, utilities, and food. Add the costs associated with hobbies and entertainment. It is also important to determine which costs will decrease in retirement and which will increase.
- Retirement age: Consider your financial situation, career goals, and health to forecast the desired retirement age.
- Retirement income: Assess how much you should receive from different sources.
- Healthcare costs: review your insurance policies and double-check these meet your current and future needs.
Retirement Planning Rules: 3% Rule Versus 4% Rule
The 3% and 4% rules are two asset withdrawal strategies to consider. While each has pros and cons, consulting with a wealth management agent is essential to finding a solution tailored to your needs.
4% Rule:
The four percent rule recommends withdrawing 4% of retirement savings in the first year after retirement, removing the same amount adjusted to inflation for the next year. This rule, developed by William Bengen in the 1990s, was based on historical market returns and intended to balance spending and savings.
Advantages of the 4% rule:
- Provides a steady income
- Simple to understand and follow
Disadvantages of the 4% rule:
- The rule is very strict
- It is based on the past performance of the market, so it might not be relevant to the future
- Any large purchases can change the dynamics
The 3% Rule:
The 3% rule is a more conservative approach where you withdraw only 3%. This rule has been established to reduce the risk and overcome the adverse effects of market volatility.
Advantage of the 3% rule:
- Preserves the retirement savings for longer
- Works better for large portfolios
- Savings last throughout the retirement period
- Covering significant expenses is safer
Disadvantages of the 3% rule:
- A more frugal approach requires eliminating certain hobbies and activities
- The risk of inflation is still present
Assets Planning
Retirement means that you won’t have a steady paycheck from your employer. Planning your assets provides enough savings and investments to replace them. Diversifying your portfolio is an intelligent strategy to minimize risks such as inflation, increased healthcare costs, and market fluctuation.
- Defined contribution plans: Employee-sponsored plans like 401(k) take money from your paycheck, making tips convenient.
- IRAs: Traditional IRA, ROTH IRA, Spousal IRA, Rollover IRA, and SEP IRA are some of the available options.
- Traditional pensions: These are provided by employers in some industries and government sectors, and they provide a steady and predictable income.
- Owning a business: Business owners can sell the business for retirement and also contribute to Solo 401k(k).
- Real estate: Investing in real estate provides a passive income and allows portfolio diversification. Rental property and vacation homes are some of the options to consider.
Final thoughts
Creating a retirement plan isn’t a one-fits-all solution, as it depends on many factors. You might not have a choice over the plan provided by your employer, but you may choose another road-map more suitable for your personal situation.
This article is provided by Assets & Income, a local Denver wealth management agency specializing in retirement planning for individuals and families.
