If you plan to retire in 2040, you still have some time, but it's also a good idea to start thinking about retirement. The good news is that if you haven't saved as much as you might have hoped for retirement at this time in your life, there's still time to catch up. But you also shouldn't delay. Read this before you collect your first Social Security check.
Make sure you have a plan in place
Everyone plans for retirement differently. Some people start thinking about it as soon as they leave college, while others are more laissez-faire or simply unable to save due to financial challenges.
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Regardless, everyone needs to make a plan. The first step in creating a plan is determining what you want in retirement. Some have grand ambitions to travel or buy vacation homes, while others simply want to maintain their current lifestyles or even try to live more modestly. Once you figure out what you want retirement to look like, or at least have an idea, then you can start thinking about how much money you will need to cover your daily expenses and the other aspects of your future retirement life.
This is where meeting with a financial advisor, or even a friend with financial planning skills, can be beneficial. They can help you determine how much to save and set aside each year and where to invest this money.
Remember, the cost of living tends to rise each year, due to inflation, so whatever you think you need to save for retirement now, it will likely be much higher in the future, which is why a financial advisor or friend can help you apply a long-term rate of inflation. It may also be a good idea to save more for retirement than you initially think you will need.
A retirement plan should also include all your sources of income and savings over the years, including Social Security, annuities, retirement withdrawals from an employer plan or individual retirement account, and any other forms of passive income, such as rental income or dividends from stocks you may own.
Start thinking about Social Security
Before collecting your first Social Security check, it's also a good idea to understand how benefits are calculated and where you stand in the process. Many retirees rely on Social Security to supplement their retirement savings, so understanding how much your benefits could potentially be is also crucial to understanding your full retirement picture.
The Social Security Administration (SSA) considers the number of years a retiree has worked and paid Social Security taxes, as these factors are taken into account in benefits calculations. Typically, retirees will want to have worked for at least 35 years because the SSA calculates benefits using one's highest 35 years of earnings.
Retirees can claim benefits between the ages of 62 and 70. If delaying benefits longer means reaching 35 years of work, it might be worth considering.
The SSA also considers how much in earnings a retiree made over their career, which translates into how much in Social Security taxes you've paid over your career, and also what age you will claim benefits at. There are pros and cons to claiming benefits earlier or later. Fortunately, there are Social Security calculators available online that allow people to estimate their benefits.
Planning for retirement is a significant task, and numerous factors must be considered. That's why creating a holistic plan and thinking about Social Security in advance is key to approaching retirement from a position of strength.
