Only a few persons would argue against the notion that it is important to prepare for retirement. Indeed, the majority would understand the importance of planning for retirement. However, knowing what to do, knowing how to do it and actually doing it are three different spheres.
Everyone might prepare for retirement in a different way. For those close to retirement, preparations would be financial, social and psychological. Those who have some years to go could afford a one-dimensional focus on retirement (finances). However, to prevent retirement planning from becoming retirement panicking, you have to know how to go about it.
1) Assess your financial status
Even if you have already started planning for retirement in earnest, you need to review your retirement plans and your overall financial health. If you are saddled with debt, this would most likely affect your plans. Assessing your situation is necessary before you proceed. You also have to know and understand what happening with your existing retirement portfolio. After all, retirement planning is a function of financial planning.
2) Create your retirement vision
You should literally dream about your ideal retirement. While you have some latitude with dreaming, do not hope for pie in the sky. The reality check would be your finances, resources and your willingness to sacrifice if necessary.
3) Set your retirement goals
Your retirement goals will translate your dreams to measurable targets. When you set your goals, you would have a time frame in mind. You should also have an idea of what your retirement dreams would cost. Then you'll be able to set definitive targets in terms of an accumulated retirement fund and your income stream (pension/annuity payout).
4) Compare where you want to be to where you're at
Suppose that your lifestyle requirements dictate that you need $2,000,000.00 in 20 years. If you currently have only $100,000.00 saved for retirement, then you will determine through a simple financial calculation how much more you will need to reach your target at a given accumulation rate.
5) Factor in inflation and a retirement period of 30 years
Increased life expectancy, contingent expenses, fixed income and the consequences of an increasingly higher life expectancy are just part of the reality of retirement. If you do not fully cater for it, you may be residing happily in fool's paradise. You'd only moan and despair when you realise that your target income was too low or that you failed to account for the impact of post-retirement inflation.
6) Determine what you need to do to reach your target
You have some degree of influence over:
i) The lifestyle you want in retirement
ii) Your average rate of return on retirement savings and investment
iii) The financial products that you choose to prepare for retirement with
iv) Your retirement age
You could manipulate all those variables to determine how you can reach your goal. Maybe you have to set a more realistic target or forego globe-trotting in the future because you started too late.
7) Develop or improve your retirement portfolio
Portfolio diversification applies especially to your retirement fund. Whether you are on the cusp of retirement or far from it, you need to create an optimal portfolio that has security from income and cash options and the capital appreciation offered by growth options.
The way that you diversify your retirement portfolio would be based largely on your investment horizon. You have a choice among money market funds, mutual funds, annuities (fixed or variable), stocks and the forex market. Those on the cusp of retirement would focus more on creating an income stream. Those who have a larger investment period can place more emphasis on capital growth.
8) Develop a budget to support your retirement plan
The previous steps focused on the planning stages as preparation. At this implementation phase, you will allocate your resources accordingly. You will know what vehicles you are using and how much will go towards debt servicing, mortgage reduction, your fixed annuities, preferred stock and money market funds. You will abide by this budget to ensure that you are not sidetracked or distracted.
9) Monitor your plan
Preparing for retirement is a journey, not a one-stop destination. Your circumstances change every so often, as might your retirement goals. Your retirement preparation must reflect this.
It doesn't matter what stage of life you are at. Planning for retirement is more than doing a calculation and investing in Roth IRAs or 401Ks. How you plan for retirement and the level of awareness of retirement challenges would determine the success of your method. There are many paths to retirement planning success. However, your chances of identifying these multiple paths are greater when you follow these broad guidelines.