Here is a four-step practical guide to prepare for your retirement.
1. Make an estimate of how much you would need in retirement. Financial experts use a factor to multiple with a certain amount based on your current salary and the desired age of retirement. The factors are as follows: Age 35, Income x 1; Age 45, Income x 3; Age 55, Income x 5; Age 67, Income x 8. So if you are making $50,000 annually, you would have saved $150,000 if you retire at 45.
Other factors that will help in your estimation include the lifestyle that you want, the costs of your healthcare, your retirement age, and expected payments from the Social Security and pensions plans.
2. Adjust your monthly expenses so you can start adding to your retirement fund. Here’s how to do this. List down your current expenses. Create a column opposite your list where you can place your adjustments; that is, the expenses that you will reduce and the once that you will totally eliminate. Foot both columns. Deduct the sum of you revised budget with the sum of your current budget. The difference represents the amount you can place into your retirement plan.
3. Maximize your tax-advantaged retirement savings plan. You can reduce your taxable income by maxing out your 401(k) contributions since this is free money in a real sense. If you are eligible for Roth IRA, you might as well max this out. If you have other potential tax-advantaged deals like annuities and insurance, you might as well take them.
4. Invest some of your savings in non tax-advantaged accounts. Once all tax-advantaged options have been maxed, channel your savings in brokerage accounts, traditional bank accounts, certificate of deposits, rent income properties, or life insurance annuities. These are some of your non tax-advantaged options.