You're likely here because you haven't started planning for retirement. Your first instinct might be to panic, but figuring out your options might be the better choice. Regardless of why you delayed preparing for your golden years, doing so could help you shape your financial future.
Of course, no one can predict the future. Retirement could be decades away, how can you figure out what you'll really need? It's often hard enough to plan just a few years down the road! Luckily, there are many things you could do to prepare for tomorrow. If you're uncertain about where to begin, here are some ways you could start planning for retirement — from scratch.
Allow Yourself to Dream a Little
Before you put pen to paper, you might consider dreaming a little first. Use your imagination: What would you like to do? What would you love to do? How would you like to spend your time? What is your ideal retirement lifestyle? Considering your options could help motivate you to start getting serious about your preparations.
Would you like to travel? Is spending time with loved ones the goal? Would you like to stay in your home or move? Would you like to start a new hobby or finally pursue that business idea (you know, the one you've always tossed around, but couldn't realistically juggle with your full-time job)? Knowing what you want could help you understand how much you might need to make your dreams a reality.
Consider Your Retirement Budget
Once you have visualized your ideal retirement lifestyle, you could try assigning dollar amounts to the expenses. A mock budget could be one way to get a better idea of how much your retirement could cost. And — as with most things in life — it could be best to start with the basics.
Considering the costs for the following line items could help give you a better idea of how much you might need:
- Fixed expenses: Your mortgage or rent, utilities, insurance, other bills you must pay and more.
- Flexible expenses: Groceries, clothing, transportation and other expenses where you have some control over the cost.
- Discretionary expenses: Essentially everything else, otherwise known as the "fun stuff." Travel, buying gifts for grandkids, leisure activities and more.
Also, consider factoring in unexpected expenses like taxes and health care. (You could also adjust your total number to reflect inflation.) There's no such thing as the perfect budget, but a mock budget could help provide a better idea of how much your ideal retirement could cost.
Let's say, for example, your mock budget comes to $4,000 per month. That means you would need $48,000 per year to fund your retirement lifestyle. That figure could give you a better idea of how much you might need to save.
A Penny Saved Is a Penny Earned
Once you have your mock budget in place, you could start thinking about ways to reach your financial goals. There are many retirement savings strategies out there, but it is important to consider your own needs and goals when choosing the right one for you. You could also speak with a financial representative to discuss your options.
Here are two of the most common strategies that could help you get started, according to The Balance:
- Multiply by 25: Multiply your desired annual retirement income by 25 to create your retirement savings goal. This savings goal anticipates an annual return of 4 percent.
- Four percent rule: Withdraw 4 percent from your investments every year after you've retired. Once you know your desired annual retirement income, you could calculate how much you would need.
Get From Where You Are to Where You Want to Be
Now, where do you currently stand financially? The answer to this question could help give you a better idea of how far you might have to go to meet your retirement goals. Is there a major gap between what you have saved and what you might need? That's OK! Putting a plan into action could be the first step toward getting on the right track.
Do you have a 401(k) or a 403(b) retirement plan at work? If so, consider contributing to your retirement account. An employer match — if you have one — could be a great way to amplify your savings. You could also consider establishing a retirement account like a traditional or Roth individual retirement account (IRA). Investing could also put you at an advantage — since it's possible for your wealth to grow through compound interest. (And the sooner you start, the easier it could be to reach your goal.)
Now, it can be tempting to use that money today rather than saving it for tomorrow. Automating your savings and investments, however, could remove that temptation from the equation. Consider making your contributions automatic — so they happen every month, without fail.
Dreaming about your golden years, calculating your desired retirement budget and choosing a retirement savings strategy could help you reach your goals. Even if you're starting from scratch, it's possible to get on the right track for tomorrow.