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Trying to prepare for the day you'll eventually retire is a daunting task. But it doesn't have to be an impossible one. In this article, we'll break down how to plan for retirement into some simple steps that you can follow with confidence.
Why plan for retirement?
In today's hard economic times, many people have just about given up on the concept of retirement. More and more workers expect to keep working past 65, with a substantial minority expecting to spend not only their 60s but also their 70s hard at work in order to help make ends meet.
But counting on being able to continue earning a living indefinitely into the future isn't very realistic. With high unemployment and the ever-present danger of layoffs as well as injuries or illnesses that can hamper or prevent your being able to work, you can't afford not to come to grips with the idea that your career will end at some point -- and that you may not be in complete control of how it ends.
By planning for retirement, you can put yourself in the best position to handle whatever contingencies end up happening. To start planning today, follow these four easy steps:
1. Look at what you have.
In figuring out where you're going financially, you first have to figure out where you are. Start by building a personal balance sheet, first tallying up all your assets, with an emphasis not just on financial assets but also on the value of your human capital. Next, figure out what your liabilities are -- loans you owe from various categories, ranging from home mortgages and student loans to credit card debt. Look also at any future commitments you've already made and incorporate them into the picture.
2. Figure out where you want to be.
Once you know what your current financial status is, the next step is to get a sense of your eventual destination. Too many people plan for retirement with only a vague idea that they want to have as much money as possible when they retire. That leaves you with no sense of how far along you are in reaching your goals and runs the risk of forcing you to keep chasing a phantom target until you've missed out on what could have been comfortable retirement years.
Instead, plot out well-founded thoughts about what you want from retirement, and take a stab at determining how much money you'll need to get there. You won't be perfectly able to predict the costs of everything you want, but even getting a ballpark estimate early on can help make sure you're moving in the right direction from the start.
3. Decide how you'll get there.
Once you know where the end points are between right now and when you want to retire, it's time to figure out the best way for you to reach your desired destination. The right path will include a number of important variables, including career planning, smart investing, and prudent financial management. For instance, with students coming out of graduate school with professional degrees now often shouldering six-figure debt, many decide to take grueling, high-paying jobs right out of school to get their loans paid down. Once they're in better shape financially, they then consider options more suited to them.
Similar trade-offs exist in investing. Aggressive investments can produce higher returns over the long haul, but they also involve greater risk. By melding all of your financial resources -- that is, both your paycheck and your portfolio -- you'll be able to find the right balance for your situation.
4. Stay on guard.
Once you finish the three steps above, you'll have a viable plan for retirement in place. But things change at a moment's notice, and being able to adjust to changing circumstances defines the difference between a good retirement plan and a great one. Whether it's adjusting planned spending downward to account for an unexpected fall in the stock market or ramping up your expectations due to a promotion or other career windfall, being able to roll with the punches and take advantage of opportunities will leave you with the best chance of having the retirement of your dreams.
One last thing: The true key in figuring out how to plan for retirement is having the discipline to start right now and to see the process through. It takes some effort, but the results are well worth it.
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