It is never too early to start preparing for retirement. It is never too late to start either.
Understanding retirement planning is one of the keys to reaching your financial freedom. The earlier you start saving, the easier it will be for you to reach your goals and the more flexibility you will have when making choices about what kind of life you want.
A 401(k) plan is a common savings vehicle for people who have full-time employment and an employer that offers such a plan.
The most common question people ask when they are in their 40s and want to save for retirement is how can I afford to do it? If you’re wondering when you should start saving for your retirement, this article provides some retirement planning tips, whether you’re wondering how to save for retirement in your 40s, 50s or 20s.
Your time horizon
The first step to a successful retirement plan is understanding your time horizon. What does this mean? The time horizon is the length of time that you have before you’re financially independent. It’s how much time we have to make our investments grow and do well for us. For example, if someone has a short-term horizon, they might need their investments to generate income for them in just a few years, which is generally the case when you want to retire early or start saving for retirement in your late 50s or 60s.
Spending needs
A key to retirement planning is accurately understanding how much you need to save for retirement so that you can live the way you want. But what is the best way to figure this out?
The main question when it comes to retirement planning is how much money will I have to live off of? There are a number of factors that come into play:
-How long you can expect to live
-If you have children or other dependents
-If you plan on buying a home
-Whether or not you want your children to go to college.
-If you’ll still be paying your mortgage or any other debts when retired
People usually calculate their spending needs at 70-80% of their spending before retiring, which is generally unrealistic if you have a mortgage to pay and because your medical bills will increase the older you get. Therefore, you should try to calculate your retirement with a number as close as 100% of your expenses before retirement.
Understand compound interest and your 401(k)
The earlier you start saving for retirement, the more you will be able to retire on. Retirement planning is essential to help ensure that you’re able to live comfortably in your later years. Your 401(k) is an important retirement savings option, and it gives you a lot of control over the way your investments grow.
A 401(k) is one of the most popular types of tax-advantaged retirement plans and lets employees save for retirement on a pretax basis, which means their contributions have already been taxed before they’re added to their account balances. The money grows tax-deferred until withdrawal at age 59 1/2.
With a 401(k), you can start saving for retirement at any age. But the earlier you start, the more time your savings have to grow and compound. What does compound interest means?
A 401(k) allows people to set aside funds on a pre-tax basis, meaning that any income earned from the funds is taxed at the time of your withdrawal from the account, not at the original time of investment.
This means that if you invest $10,000 and earn 10% in interest over 25 years then withdraw it when you’re 60 years old, only $5,000 will be subject to taxes.
However if you spend it before then, then all $10,000 will be taxed.
So while saving in a 401(k) allows you to avoid paying taxes at the time of withdrawal, withdrawing your money too early can have costly consequences.
A 401(k) account is managed by a financial institution and typically consists of mutual funds and other investments. Your employer may match contributions from your paycheck up to a certain limit, typically 6% of your salary. Contributions are taken automatically out of each pay check and deposited into a tax deferred account.
Risk and investment goals
A good portfolio allocation usually balances between risk aversion and return objectives, so don’t neglect this step in retirement planning. How much risk are you willing to take to meet your objectives? Should some of your income be set aside in low-risk Treasury bonds to cover your expenses?
You should know the risks you’re taking in your retirement portfolio while avoiding being a micromanager—over-managing your portfolio depending on everyday markets. You’re not a professional investor trying to make immediate income; you’re planning for retirement so you’re in it for the long run.
It’s never too late to start saving for the future. Momentum Financial Services offers retirement planning tips with their 401(k) program to help you get started today. Contact us right now.