One of the most daunting financial challenges a person faces is ensuring that the savings built during his/her career will support him/her through retirement. However, it does not have to be that hard. You can plan well in advance and have a hassle-free retirement. The thumb rule to follow is set a budget and self-fund your retirement. But how to do it?
The basic idea behind budgeting is to create a plan on how to spend money and determining in advance how much money will be sufficient to do the things one needs to do or would like to do.
Let us start by making your worries fly away. Before you set a budget, let us see the common mistakes that we incur during the planning stage.
Retirement Planning Mistake #1: Living Too Large
The first question one needs to keep in mind while creating their retirement plan is, ‘how much income do I need to maintain my current lifestyle in retirement?’ Not surprisingly, the vast majority doesn’t know the answer to this question or they’ve made an inaccurate assumption. Living too large might be vulnerable if you don’t plan for your retirement.
Studies show that we need about 80% of our current annual income in retirement. Things to note is that in general, retirees spend more on travel, entertainment and eating out especially earlier on in retirement when they have the time and good health to enjoy those activities. But in their later years, the main thing that plays a role in the healthcare and the cost can escalate.
Although it is important to make some assumptions, so as to have a pretty good estimate of how much you’ll need to save.
Retirement Planning Mistake #2: Disregarding Higher Health Care Costs
One of the most overlooked areas of retirement planning is estimating what health care costs could be in retirement, and including this in the calculation of income needs.
Fidelity estimated that a 65-year-old couple retiring in 2016 will need an estimated $260,000 to cover health care costs in retirement, according to Fidelity’s Retiree Health Care Cost Estimate. This is a six percent increase over last year’s estimate of $245,000 and the highest estimate since calculations began in 2002.
Retirement Planning Mistake #3: No Long-Term Care Plan
Anyone who has cared for an ageing parent knows first-hand the toll it can take on their loved ones and their savings. Both the time and money needed to give quality care can be staggering.
Check out all possible long-term care options and how you need to plan to pay for these future expenses if you need to.
Experts suggest that it is wise to plan for your retirement from the day you start earning.
Let us glance through seven rules of retirement planning advocated by experts for decades:
Rule 1: List down your financial goals
Your spending choices depend on your financial goal, so be wise enough to set realistic goals. A question you need to ask yourself before you set goals: One year down the line, what should be your financial status and achievements? List down your answer and decide your priorities.
Rule 2: Know your income and expenses
You probably know how much you earn each month but have you wondered where it all goes? Find out by tracking what you are spending. Spend as you normally would, but for a few weeks, jot down every cent you spend. It’s easy and you might be amazed by what you find out.
Rule 3: Categorize your needs and wants
Before you set your feet to buy anything, ask yourself -Do I really want this or do I even need it? If it is not something that is necessary at this point of time, then skip it. When you spend on something, ask yourself if it takes you closer to your financial goals or further away?
Rule 4: What’s your budget?
Ensure that you don’t end up spending more than you make. A good balance in your budget can help you save more. Your budget should accommodate everything you need to pay for like monthly bills, groceries, rentals etc.
Rule 5: List, plan and act
Your spending should match the time when you receive your income. Plan in advance how you would utilize your paycheques and pay according to your list. List down your necessities and allocate money for housing, food, utilities, transportation, etc. Also, track down your debt payments, unexpected expenses, savings, and the fun stuff.
Rule 6: Seasonal Expenses
Sometimes things crop up suddenly and if you don’t prepare in advance you might end-up in trouble. Things like school expenses, new shoes or an annual membership etc. that might require you to set money aside to pay for these expenses without going into debt.
Rule 7: Plan ahead to save more
Planning a budget and live with it can take a month or two to just fit in. All of a sudden, you cannot bind yourself to a budget, so give yourself some time to gel.
Planning your retirement is an essential step if you want to be merry and enjoy your retirement phase. Once you have saved enough for your retirement do not think of taking money out of your retirement savings until you retire. Lastly, there is no one size fits all approach to retirement planning. Most resources tell you to save a lot and invest wisely but it all depends on how well you follow it.