Financial Planning For Retirement

Retirement planning often meant working for a large organization or government agency for twenty or thirty years and then collecting pension or Social Security. That however is no longer the case as many companies no longer offer pension plans and Social Security more likely than not won't yield enough to maintain a high standard of living assuming it exists in the future at all. Financial planning for retirement is a multifaceted approach requiring forethought and self-control to achieve long-term financial goals. Fortunately there are numerous tools available and plenty of organizations and individuals willing to offer free advice and guidance to ensure you have a stress free and productive retirement doing what you enjoy.

Start Young

By far the most important aspect of retirement planning is to get started as soon as possible. It is not unheard of for individuals who started saving or investing in their early 20s to have a million dollars or more in their nest egg when they retire. This large amount results from two primary reasons. As with any large endeavor it's best to start with baby steps. Much like running a marathon don't think it as 26 miles but as one step after another. An insurmountable task can often be accomplished by doing a little bit every day over a long period of time. $20 per paycheck put into a separate investment account adds up to hundreds of thousands of dollars over decades. That's only half the story because if that $20 per paycheck is invested in a mutual fund or some other investment account then the miracle of compounding can significantly grow your nest egg even more. Investing a small amount over a long time horizon with the benefit of compounding is how you can get to a million dollars when you retire.

Retirement Accounts

While pensions may be disappearing many other types of financial tools are available to help individuals plan for the future. While this does require significantly more personal responsibility to manage your finances it isn't very difficult to get started. Many organizations have shifted from pensions to employer sponsored plans like the 401(k) or 403(b). These types of retirement accounts allow employees to use pretax dollars, which lowers your tax burden, for retirement savings. An employee making $3,000 a month will contribute 20%, or $600, of their pay on a pretax basis to a 401(k) which funds their retirement. This allows the employee to save money for the future while lowering their taxable income. Many employers will also offer dollar matching up to a certain amount for retirement. So if an employee contributes $5,000 to their 401(k) their employer may also contribute $2,500 which is essentially free money.

If however your company doesn't offer retirement accounts or matching it is still possible for individuals to manage their own retirement by purchasing an Individual Retirement Account also known as an IRA. An IRA allows individuals to contribute up to a certain fixed amount, for example $5,000, and deduct that investment from their Adjusted Gross Income. While you don't get the benefit of matching from an employer sponsored plan you still receive a tax benefit and if made annually will hopefully result in a significant nest egg for retirement. The nice thing about an IRA is you can create this type of account with any broker or investment firm and are not limited to the employer only sponsored plan options. This allows you to be more aggressive with your retirement investment portfolio if you so choose which could possibly lead to significantly higher returns.

Lifestyle Changes

Starting to plan for retirement when you're young and investing in retirement accounts only works if your lifestyle choices support this long-term goal. It is very common for many individuals to spend what they make and live for today. This kind of carefree attitude often has long-term financial repercussions. Many people learn too little too late that partying every night and racking up large amounts of credit card debt often translates to not being able to afford medication or heat your home when you're 75. It's very difficult to have the dedication and insight to plan for something that may not happen for 50 years but that is exactly what financial planning for retirement entails. Everyone knows that getting a college degree has tangible benefits both financial and otherwise for the rest of your life. Retirement planning is just as if not more important to young people but unfortunately it isn't as highly emphasized.

Summary

Financial planning for retirement is easy to do if you arm yourself with knowledge and are proactive about your future. You can still live for today, enjoy life and have fun but be smart as well by setting something aside. Getting started early and setting something towards retirement every month is half the battle. Many people however lose this part of the battle if they didn't start early enough or save often enough and keep saying I'll do more tomorrow. It doesn't take a lot but it does take dedication and resolve to ensure you're future is comfortable and you can do what you want when you want when you retire. That level of freedom requires making smart decisions and as the saying goes no one plans to fail they only fail to plan.