Careful financial planning is imperative for a secure and comfortable life after retirement. However, a survey conducted by the Employee Benefit Research Institute reveals that only 42 percent of American retirees had established financial goals and a written financial plan for retirement.
Lack of knowledge is one of the reasons reported for failing to identify financial goals in retirement. No one-size-fits-all rule determines how much money to set aside for your retirement savings.
According to many experts, saving 15 percent of your annual income for retirement is advisable. In reality, however, the amount each individual needs to be financially comfortable after retirement will vary depending on the lifestyle one expects to lead.
Generating a ballpark annual estimate based on your current living expenses and how they might change after retirement is a helpful starting point. To help you in preparing for the years ahead, this article explores three financial considerations you must know after you retire.
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1. Retirement Income Sources
Determining your sources of income in retirement is important for making more informed decisions about your financial future. It helps ensure you have enough money to live comfortably and support the lifestyle you envision in retirement.
After you retire, you will likely depend on your retirement income to cover your needs and expenses. You'd want to determine how much they will provide.
Different income sources will help you create a realistic budget for your retirement years. But most retirees expect to depend on their retirement income from these sources:
- Social security benefits
- Fixed or variable annuities
- Company or government pension
- 401(k) or online IRA accounts
- Savings accounts or certificates of deposit
- Home equity
- Stocks and mutual funds
As you consider the retirement income sources available, categorize them as lifetime, dividend, and interest income. Many retirees rely on lifetime income sources, such as Social Security benefits and pensions, to meet their essential living expenses because of their predictability.
2. Retirement Savings
Your retirement savings are another important financial consideration. These savings can give you extra income after you retire. From this point forward, consider asking whether your savings will be sufficient for the retirement income you'll need.
How much or how little generously sized accounts can provide throughout your retirement may surprise you. That's why maximizing your retirement savings is critical to retirement planning.
Make it a priority to contribute as much as possible to retirement accounts like IRAs and 401 (k)s. If you're over 50, take advantage of catch-up contributions to save and earn more for retirement.
It’s crucial to note that the amount you save is only one component of your retirement income. Still, starting as soon as possible can make a big difference in your financial future, no matter the amount you can contribute to your retirement accounts.
3. Retirement Spending Needs
The size and longevity of your nest egg will depend not only on the amount you save and invest. How you plan to spend your money after you retire also plays a significant role. Hence, taking the time to determine your retirement spending needs is imperative.
By understanding your expenses after retirement and your potential income, you can estimate how much money you need to draw from your retirement savings every year. This will aid you in developing a realistic budget and ensure you’re well-prepared for the years ahead.
Everyone has different lifestyles, so how you spend your retirement may differ from others. Nevertheless, here are some typical expenses to consider in your retirement planning:
- Healthcare
- Housing
- Transportation
- Food
- Entertainment
- Taxes
The amount you spend on each category will differ based on your specific needs and preferences. Your spending pattern will likely change as you transition into your retirement years. However, for many people, health care is the most unpredictable and expensive outlay in retirement.
Common Financial Risks To Consider and Prepare for After Retirement
There are potential risks to financial security that you may encounter after you retire. Such risks can lead to sudden costs or lower income, compromising your retirement plan. Thus, take the time to consider and prepare for the following financial risks after retirement:
Outliving your savings
The possibility of outliving savings is a concern for retirement savers and retirees. An individual is the most critical factor when estimating how long retirement savings might last. But there’s no way to predict it completely.
Ensure to keep longevity risk in mind. Otherwise, you can quickly run out of money after you retire. Securing a reliable and lifelong retirement income is the most effective way to combat it. Be mindful of discretionary spending and have a flexible budget in place.
Costly healthcare costs
As mentioned earlier, healthcare can be one of the most considerable expenses in retirement. Any unexpected medical bills and out-of-pocket health care costs can dent your savings.
Increasing the amount you contribute to your retirement accounts can help mitigate the impact of this risk. It’s a good idea to open a health savings account to handle your medical expenses in retirement.
Rising inflation
Rising inflation can reduce an individual's purchasing power over time. As prices increase, the same amount of your retirement money buys fewer goods and services. Since those in retirement rely on fixed sources of income, they are particularly vulnerable to this risk.
When estimating your retirement spending needs, it’s crucial to consider inflation and ensure your retirement income stays in line with rising costs. An experienced financial advisor can give you proper guidance on minimizing the impact of inflation on your retirement plan.
Take Steps Now for Your Desired Retirement Lifestyle
Developing a financial plan early is critical to making the most of your retirement years. When planning, you must balance your needs, expectations, and the reality of your financial situation.
Remember that retirement planning isn’t only about financial factors. It’s essential to prepare for your emotional needs. Seeking mental health care can help you make a successful transition. Likewise, emotional support from friends, family, and loved ones will be valuable.