Retirement planning is one of the most important financial commitments that you can make in life. For a comfortable retirement, you may need to save hundreds of thousands of dollars over the course of a few decades before leaving the workforce. A good retirement plan begins with goal setting. From there, you can calculate the amount of money you need to be saving each month in particular accounts to secure your vision of retirement.
Retirement lifestyle goals add purpose to your plan. In terms of lifestyle, you may wish to retire to a Pacific Coast Highway condominium for oceanfront living, daily rounds of golf and weekly Hollywood movie premieres. With a list of goals in mind, you can further define your retirement plan according to time frame and total costs. Perhaps you will need to save up $2 million within the next 20 years to finance your retirement to Southern California.
You can pull up a retirement calculator to make regular savings projections. With the retirement calculator, you can toggle through investment amounts and the projected rates of return necessary to arrive at a future lump sum of cash. After using the retirement calculator, you can install a monthly savings goal within your budget.
Risks Versus Rewards
The financial calculator also helps you to balance risks versus reward. For example, you should purchase more conservative investments, such as bonds, as you age and near retirement. Because bonds offer smaller returns than stocks, however, you may need to invest more money to achieve your goals. Stocks are ideal for long-term investing, but can be especially volatile from year to year. As a measure for U.S. stock market performance, the S&P 500 Index has averaged an 11 percent return since its 1957 inception. This 11 percent average, however, includes 38 percent gains in 1995 alongside 37 percent losses in 2008. Because of the volatility, you may invest all of your retirement savings into stocks as a 20-something professional, and gradually reduce stock market exposure to 60 percent of your portfolio when you enter middle age.
You should make it a priority to put money into retirement accounts, such as 401k, traditional individual retirement arrangements, or IRA, and Roth IRA plans that allow you to save money over the long term on a tax-deferred basis. Tax deferral means that you will not owe taxes on interest income, dividend payments and capital gains as they occur within retirement account investments. You fund 401k and traditional IRA accounts with deductible contributions. Upon retirement, 401k and traditional IRA distributions will be taxed as ordinary income. Alternatively, a Roth IRA is funded with after-tax money, so it allows for tax-free withdrawals. For the 2010 tax year, you are generally limited to $5,000 in traditional and Roth IRAs contributions, combined. Further, you can put $16,500 into a 401k. It is critical that you take advantage of any 401k employer match. As part of your benefits package, your company may match your 401k contributions on a dollar-for-dollar basis until a certain point.