You do not think about retirement when you begin your career. Most likely, you have either taken a few college courses or earned your college degree. You search for a job, endeavoring to find one in your field of interest. You receive your first paycheck and suddenly your adult life has begun. Sure, you know that your company has a 401K and you invest in it, at least minimally, with the expectation that retirement is a long time from now. Actually, the importance of planning for retirement cannot begin early enough.
One of the common misconceptions about retirement is the amount of money you will actually need to do so. Many people assume by the time they reach the end of their career, they will not need as much money as they currently do. However, people usually set goals for when they retire. Among those are traveling or enjoying time pursuing their hobbies. With this in mind, people usually spend more money in the beginning of their retirement than they did when they were working. There are things you can do to combat this problem before you reach that golden age. Putting away at least 30% of your income into savings will help ease the financial burden. Also, striving to pay off or at least pay down your mortgage is a wise move when considering retirement planning.
Some people assume that moving to a state with no income tax, such as Florida or Texas will benefit them when they stop working. They often fail to consider that these states have higher real estate taxes. Also, if they relocate, they might spend a significant amount of time traveling to see their family, which brings added expenses.
Considering that you may need the same amount of money when you retire as you do now, your yearly tax bill will not lower significantly. In addition, you have to understand that withdrawals from your 401K will be taxed and tax rates, which are currently low, are adjustable and could be raised in the future. Thinking about taxes is part of the importance of planning for retirement.
You might be tempted to pay off your debt or help your children pay off their student loans before you save money for yourself. That may be the wrong path to take. At the end of the day, if you run out of money for retirement, you become a burden to your children. No one wants to do that. In addition, you have to consider the situation in reverse. People are blessed with longer life expectancies, which may mean you will have to take care of your own parents when you are ready for retirement. Also, younger generations are staying home for longer periods of time. You have to consider all of the possibilities about the number of people you could be supporting when you get close to retirement age.
Also, remember to invest your savings in different ways. It is not enough just to put money into a 401K. The stiff tax penalties will cost you more in the long run. Learning to invest in other places, such as real estate, a Roth IRA and a mutual fund, is important for proper retirement planning.
Finally, you should keep in mind that you may not be able to count on the ability to work to make up for the money you are lacking. You always have to take into account that your health could deteriorate as you get older impairing your ability to work. Don’t give up! Even though it seems like retirement is just a pipe dream, understanding the importance of planning for retirement is a step in the right direction.
Ed Dressel is a financial planning consultant who writes on topics related to retirement plans at Ask Trak, a financial planning software development company based in Dallas, OR.