Why retirement planning is important? For the young, it might be an irrelevant question. But ask your parents, and they will let you know the importance of retirement planning.
Retirement planning is all about your future. You plan for your retirement to make life go easy on you. It may help you in tackling expenses such as medical emergencies. Besides that, it also gives you freedom from any future financial constraints.
These are just a few reasons for planning retirement at an early age. There are more reasons for that, and I will be sharing more with you. I will also share some benefits of retirement planning to act fast even when it is late for you. Lastly, I will also share the process to start planning your retirement.
Why Retirement Planning is Important?
Life does not always go as planned. Unforeseen hurdles will keep you away from your plans. But you still have to have plans for the future.
According to Investopedia, the definition of retirement planning is:
“Retirement planning refers to financial strategies of saving, investments, and ultimately distributing money meant to sustain oneself during retirement.”
After defining retirement planning, I now give you ten reasons for the importance of retirement planning.
10 Reasons for the Importance of Retirement Planning
Here is the list of 10 Reasons why retirement planning is essential.
You Do Not Know About a Lot of Things
Even when you are the king/queen of your life, you cannot predict the future. There will be a lot of things you will not know of.
So planning for your retirement will help you in a lot of ways, such as:
- Planning for future payable taxes, savings, and investments.
- Knowing if you are eligible for social security benefits as a spouse.
- Planning for recession.
- Planning if you should roll over your dormant 401(k)
- The financial issues you may encounter in a year.
- Understanding if you need life insurance.
- How much should you withdraw from your pension? What to expect from investing it in various financial instruments?
- And more.
Even when you have answers to the above, you still cannot be 100% sure of what might come in your life. But again, planning is way more important than doing nothing.
You Will Not Work Forever
You will undoubtedly know that you cannot work forever. There will come a day when you have to retire and sit all day long watching your favorite shows. But what if you are cut off from your cable network or run out of food? Sounds daunting, right?
Retirement from work/business is inevitable. You will ultimately grow old and weak, and there you need time to relax and do whatever pleases you. And so, it becomes one of the reasons you need to plan for your retirement.
People who do not save for the future get into financial troubles. And so, to keep on moving, they work even when they are too weak to do so. You do not want to become that person.
The Average Life Expectancy is Rising
With better medical facilities, the average life expectancy is continuously rising. People live longer than before, at least in the US. That means, for longer life, you will have a more extended retirement period, and for that, you need more savings. That all comes from better retirement planning.
The average life in the US is going beyond 80 years. If you plan to retire at 60 or 65, you need to have savings of at least 20 or 15 years. It is even better if you could save for more than that since the life expectancy is rising.
Living as a Minimalist
A minimalist is a person striving only to use things that serve a purpose. They spend only on necessities and avoid luxuries. So it gets more accessible for a minimalist to plan better for retirement. But it is not always the case.
A minimalist lives a simple life. So they might not look for high-paying jobs or businesses. They might also plan to retire earlier than the average US citizen. That can put them in trouble.
Therefore, if you live a minimalist life, you also need to plan better for the future and save accordingly.
Money Problems Lead to Physical Health
According to research, over 70% of US adults worry about money, leading to bad health. Where the average life expectancy is growing, health issues are also rising. The most common health issue may lead to diabetes, heart disease, migraine headaches, poor sleep, anxiety, and depression. Why put your life in danger, and why not start planning?
Pay Fewer Taxes
Taxes will take a significant portion of your income, leaving you with fewer savings. Taxes will also follow you after your retirement. That means you certainly need a viable plan for your retirement.
Your tax planning for retirement must start while you are working. The taxes after retirement are quite different from those when you are working. It is easier to calculate taxable income during your working years. You have various ways to reduce these. Contribution to 401 (k) is one of the ways to reduce taxable income.
To plan better for retirement, you may want reasonable control over your income. The better you control the sources, the better you can manage your taxes. To better manage your after-retirement taxable income, you may want to consider these:
- Deferred Tax may include pension plans, social security, 401 (k)s, and pre-tax IRAs.
- Tax Free may include Roth IRAs, Health Savings Accounts (HSAs), and Municipal Bonds.
- Tax Managed will include standard brokerage accounts.
You can also diversify your income sources to save thousands in taxes upon retirement.
Live a Happy Married Life
You and your partner can also impact bigtime towards your retirement planning. If you both live a happy and managed life, your chances of planning better retirement plans are high. An adverse married life, however, can hurt your future planning.
Accumulate your income and savings on an excellent plan and look for profit-making investment opportunities.
Start Building a Bucket List for Retirement
Everyone has a dream bucket list, such as traveling across the world, enjoying high returns over the years, or buying a dream car. It is not easy for everyone to get all on the bucket list. But with proper planning, you can enjoy the list, at least most of the things.
Planning for retirement could be an excellent motivation to build a bucket list and live your dreams. If you have a long list, you certainly require more when you are retired. This helps you work for the future.
Your Future May Bring More Financial Challenges
The future is hard to predict. It may get quite challenging for you to cope with the financial challenges you may face in the future.
Recall your past. You were probably under less financial stress compared to the present. If that is the case, you can realize that it will not happen even in the future. That becomes one of the reasons why retirement planning is essential. And if you do not have a solid futuristic plan, you will have to face troubles in the future.
Become a Cool Parent and Grandparent
My grandmother has been a super cool person for us, especially for me. She contributed a ton when terrible financial constraints surrounded us. She helped me through my education and contributed a lot to building a money-making property. That sounds interesting.
The question rises here, “how does she manage to do that all?” She planned a solid retirement plan. She saved good time and invested some of it in great investment plans. Her investment plans give her impressive returns to cover her monthly expenses, live her dream life, donate big time, and contribute a lot in helping her children and grandchildren.
Want to become like my grandma? Start planning now and live a financially independent life.
Benefits of Retirement Planning
Retirement planning is a blend of benefits. While it would be critical to add all of them here, I’ve shared the List of benefits Below.
That is one of the best benefits of early retirement planning. It relieves you from a massive chunk of financial distress you may encounter in the future.
Coping up with Financial Constraints
It is pretty easy to manage your finances while you are working. No emergency expense will matter for you. You always have a way out to deal with them.
However, the retirement life is quite different from your previous life. You might not have a continuous income source, but your expenses would not halt with time. If you have a doable plan, the emergency expenses will help you come out of hurdles.
Retirement can also help you save your expenses. For example, the payable insurance premium for retirees is relatively lower when working.
Affording Exotic Trips
Talking about bucket lists, many retirees want to travel the world but cannot due to poor retirement plans. In contrast, those having a good retirement plan can have everything on their bucket list.
Living a Retired-investor’s Life
Ever thought of the great investors of all time? Most of them started planning way too early and lived a life we only dream of. I have a list of the best investors of all time. And among them, Warren Buffet is on top. His life is full of impressive lessons, and he is one of the reasons I became a stock investor.
If you too desire to become an excellent investor like him, you need to start now and start learning stock investment.
Planning Your Retirement
Planning for retirement works quite well when you start earning. It is the time when you can save huge bucks for the future while bearing fewer expenses. It helps you accumulate all you may desire in the future. People often delay planning their retirement, thinking they have enough time to do that. That is not the right approach.
While you already have the reasons to start planning and know the benefits, you also need to create your retirement plan.
Steps to Start Planning for Retirement
Broadly speaking, retirement planning is a 6-step process. You may come with additional steps.
Determine Your Retirement Age
To start planning, first, determine your retirement age. For example, for me, it is 50 years. Then calculate the number of years left until retirement. That is the investable age or the investment horizon. I am 36, and my investable age is 14 years only. You also need to find the age until you want your plan to work out. For me, it is 80, i.e., 30 years to plan for. Now you can plan better.
Calculate Your Monthly Expenses
So now you have an investable age and an after-retirement expense plan. You now need to estimate your post-retirement expenses. To do that, calculate your current monthly expenses. That should include only the necessities, such as monthly grocery expenses, cable fees, travel costs, etc.
Estimate Medical Expenses
It is inevitable to avoid medical expenses. Everyone requires some medical treatment over the years, and it generally increases over time. Estimate medical costs for retirees and add a buffer amount to that.
Create a Wishlist
A wishlist or bucket list will help you stay motivated and save more for the future. But the list has to be realistic, matching your current income.
Finding the Best Investment Opportunities
Depending on your savings, you have plenty of options to invest. If you have a large portion of available funds, you can think of investment properties. Else you may consider investing in stocks. You may hire a financial advisor to find the best investment options for you.
Once you have the correct mix of investment opportunities, start investing.
Do Not Use Your Retirement Funds
No one can stop you from using the retirement funds. But you should not use those unless necessary. And if you have used these funds before your retirement, try to fill the gap by working a few extra hours or cutting down your expenses.
Now that you know the importance of retirement planning, the benefits, and the steps to plan for retirement, it is time to start acting. Even when you are too late, it is still good to start planning and working on it.
List of Commonly Asked Questions and Answers on a Website About Topics “Why Retirement Planning is Important”
Q1. Why is Financial Planning for Retirement Vitally Important?
Financial planning for retirement is as essential as planning your career path. It will help you cover various emergencies, necessities, and wants. It relieves you from unforeseen future expenses that may strictly disturb your life.
Q2. How Should You Plan Your Retirement?
Start by setting up your retirement age. Then calculate the time remaining to reach the retirement age. Finally, estimate the age till you want your savings to work for you. In the next phase, estimate your future expenses. While making your retirement plan, look for the best suitable investment opportunities and start investing immediately.
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