Many people delay their retirement planning till they reach the age of 50. If you are one of them, then you are thinking it all wrong. You won’t have enough money available to lead a comfortable life after your retirement. It is better to start the retirement planning when you are in your 30s as at this age you will grow a sense of responsibility and confidence about life. By this time, you will know how you want to lead the rest of your life.
What is retirement planning?
Retirement planning involves finding out your long-term goals and taking necessary actions to reach those goals. You must include level of risk tolerance in your planning. You need to identify all your income sources and calculate expenses to find out where you stand financially at the moment. Then come up with a savings plan that will help you to reach your goal within a specified number of years.
The retirement plan will not be a fixed document. It will keep on changing in the coming years depending on your income and expenditure. Your goal may also change down the line and you have to make adjustments to your retirement plan accordingly. You should take into account your future liabilities, expenses and age limitation.
There is no magic number that you have to save for your retirement. It is very personalized and depends on your goals, income and expenses. Some people say about $1 million will be enough to retire. Others think you need to save 80% of your income to retire comfortably. Many people also think that it all depends on your lifestyle.
Steps to take for retirement planning at 30s
At this point in life, you will have more earning power than before and so you can start saving for your future. When you plan at your 30s, you will have 35 years of time to build the fund you want for your retirement. Here are the steps you should take to plan your retirement at your 30s.
Define your goals
If you can decide your goals at the beginning, then you will be on the correct path towards a financially sound future. Think about what you want to do after your retirement, like go on a world tour, buy a new house, or get your children married. You must also decide on your retirement age. Think about your future expenses, like your housing, healthcare, transportation, leisure activities, hobbies, and others. Now determine how much income will be sufficient to cover those expenses and maintain a good lifestyle.
Stick to your budget
Create a realistic monthly budget and try to stick to it all the time. Keep your spending in check by avoiding unnecessary expenses. Include emergency fund in your budget for unexpected expenses like car repairs or medical bills so that you don’t have to use up your retirement fund for emergencies.
Pay off debts
You must pay off debts as quickly as possible so that you can save up more money for your retirement. Don’t apply for any new loan unless it’s necessary. Try to pay off the high-interest loans first. Having debts after retirement will be the last thing you would want.
Save up money
It’s time to develop good saving habits. Your consistent savings will contribute significantly to your retirement fund. Start depositing small amount of money every month in a savings account. If you get bonus or salary increment, then increase your savings. You should save at least 15% of your income for retirement.
Make use of employer-backed retirement accounts
You must take advantage of your retirement account (IRA) or a 401(k) that gives tax benefits. These accounts come up with matching contributions from your employers. If you can put aside part of your income in these accounts, then you can create a good retirement fund. When your salary grows, try to add more money in these accounts. In the 401(k) retirement savings plan, your contributions are taken from your pre-tax paycheck, so your money grows fast but your income tax will be deducted at the time of withdrawal. The Roth 401(k) deducts contributions from post-tax paycheck and you won’t have to pay any income tax when you withdraw money. The maximum amount you can contribute to a traditional or Roth IRA account before turning 50 is $7,500. If your Modified Adjusted Gross Income is more than $150,000, then you won’t be eligible for a Roth IRA. You must not withdraw your 401K prior to age 59.5years, else you will be penalized.
Invest in annuities
You can consider putting your money in annuities as part of your retirement plan. You make a contract with an insurance company to pay a sum of money in return of income over some time. In the single premium immediate annuity (SPIA) you pay a lump sum amount upfront so that you are guaranteed an income over a specific period of time. In deferred income annuity (DIU), you can ask for the income during retirement. There are other types of annuities where you can invest, too.
Diversify your portfolio
When you start planning your retirement in your 30s, you have the benefit of time. So, you can easily spread your investments. You can diversify your portfolio with bonds, IRAs, mutual funds, and other opportunities. Diversification of the assets will lower the risk. Do a thorough research and invest in something that is less risky. Always stay updated with the industry news if you decide to invest in stocks and bonds.
Talk to a financial advisor
If you have a good retirement plan by your side, you can lead a good life in future. So, it’s recommended that you speak to a financial advisor about it who can develop a comprehensive retirement plan for you. Life events can change your financial goals, like marriage or higher education. A financial advisor will adjust your retirement plan accordingly.
You must take steps to protect your retirement savings. You can apply for a disability insurance which can help cover your daily expenses in case you are unable to work in future. You can think of applying for a private medical insurance too for covering your health expenses during your retirement age.
In your thirties, you focus on your career, family and mortgage. Just include one more item in your priority list, that is, retirement planning. The time is hectic for you undoubtedly, but this step will help you to be financially strong in future.