It’s important to have time on your side when planning for retirement. The earlier you start, the easier it can be to work towards your goals.
That’s because building a nest egg is no small task. You need one that can support you for the rest of your life without working another day.
If you are still clueless where to begin, here’s a step-by-step guide to help you get started:
Step 1: Assess your situation
Your retirement plan may look different from everyone else’s because of your unique situation. To set realistic goals, take the time to evaluate your physical and financial fitness.
a. Physical health
If you’re young and in the pink of health, physical fitness may not be a major concern right now. However, for retirees, medical expenses often end up taking a huge chunk of savings.
As early as now, you can start planning how to cover health-related costs. Consider the things you can do for your health today to avoid big medical bills that can drain your retirement funds in the future.
b. Assets and liabilities
To know what you need to reach your goals, you must first track what you currently have. Find out your net worth by listing down your assets and liabilities. Then, subtract the liabilities from the assets.
If your liabilities outweigh your assets, the next thing to do is to work on paying off obligations.
Step 2: Plan how to pay off any debt
The longer you wait to clear your debt, the bigger it can grow through interest. You don’t want to end up with this burden when you can no longer work but still need to make payments.
Prioritize paying the ones with the biggest amounts and highest interest rates. Once you’re debt-free, you can start exploring ways to manage your money better.
Step 3: Manage your cashflow
With any life goal, you have higher chances of making things happen if you stay on top of your finances. This involves budgeting your money wisely and preparing for emergencies.
a. Create a budget
A good budgeting strategy can help you stay consistent in working for your retirement goals. You can choose any budgeting method as long as it helps you reserve enough money for savings.
b. Build an emergency fund
If you’re not prepared, emergencies can easily ruin any progress you’ve made toward your goals. To prevent this, you should have an emergency fund worth 3 to 6 months of your average living expenses.
Most experts recommend building an emergency fund before you even invest. With this safety net, your strategy is less likely to be disrupted by unexpected events.
Step 4: Set your targets
Make your retirement goals as specific as possible so you know exactly how to reach them. Your time horizon and target amount are two things to figure out.
a. Time horizon
How soon do you want to retire? This will tell you how much time you have left to save up and grow your nest egg. You can also calculate your target amount based on your time horizon.
b. Target amount
When setting a target amount, think about what you want to do during retirement. Do you plan to travel or pursue hobbies? Do you want to start a business to keep earning?
You’ll find different ways to calculate your retirement needs online; just make sure to consider expenses like:
- Travel plans
- Childcare and education costs
- Capital to start a business
Revisit this amount regularly to factor in life events that can affect your spending, like switching jobs or starting a family. Rising inflation rates could also increase your costs.
Step 5: Look into investing
After knowing your target number, compare it with your expected provident funds or government-mandated retirement benefits. You may find that these benefits are not enough to support your lifestyle.
That’s why you should explore other ways to grow your money, such as investing. You can invest for retirement as soon as you’ve paid off debts and created an emergency fund.
So how can you invest to retire? Here are 3 ways:
- Join voluntary savings programs to start your retirement fund.
- Put money in income-generating assets like bonds, certain stocks (like Real Estate Investment Trusts or REITs), and real estate.
- Invest in products with the highest growth potential to help you reach your target amount.
Learn more about choosing investment products for retirement in this article.
With everyday matters to worry about, a lot of people treat retirement planning as a problem for another time. However, focusing only on the present can leave you unprepared for what’s ahead.
If you lay the groundwork today, you can set yourself on a smooth path toward a worry-free retirement.
