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Planning For A Financially Secure Retirement

After spending decades working day in and day out 30% of retirees consider Social Security to be their primary source of income. If you want to avoid that fate it’s important to begin planning as soon as possible. Believe it or not, planning for retirement on your first day of work is not too early to start.  The following are a few tips on how to organize for your retirement.

Start Saving Early

RetirementYou have probably heard this over and over again, but maybe you have never taken it too seriously… You can’t just say that you will start preparing for retirement when the time comes, the earlier you start the better. Quite a number of people behave as though retirement is light years into the future and, as a result, live life like there is no tomorrow. Consumerism is never really beneficial to the consumer; in fact it can be quite detrimental.

With every paycheck you receive, from the very first one, it is important to set aside a specific amount to go to a savings account and preferably one that limits the frequency of withdrawal like an IRA or 401k. Doing so will enable you build up a significant cash reservoir by the time you retire. The key is to get started as soon as possible even if you have to start small; the earlier you start doing this the better because of the compounding factor of time. One good tip is, whenever you get a raise put most of it into increasing your retirement withholdings. After all, if you are already used to living on a certain salary you won’t really notice that it hasn’t increased, since you never see it and never had it before. So it is a relatively painless way to save for retirement.

Invest

Whatever you are making in your current job is of no consequence, it is always important to expand your income sources. Saving in a fixed deposit account, where your money accrues interest, is a good thing, but in today’s low interest environment it is not enough. In today’s investment environment you need to diversify your investments over a variety of different investment types and categories.

Retirement Funds

Quite a number of employers today offer retirement saving plans for their employees. Do not ignore such plans as they can be very beneficial because of the compound interest, regular investment and the time factor. It is very important that you avoid touching this money before retirement because you may end up missing out on tax benefits, in addition to losing interest and paying a 10% penalty. Having a separate savings account should not be used as an excuse for not joining retirement plans. The best factor of an employer sponsored plan is if they provide a “matching program” it may be 1:1 or 2:1 or whatever. The company feels saving for retirement is so important that it wants to encourage you to save by agreeing to contribute one dollar to your retirement fund for every $1 or $2 you contribute, so you should try to contribute the maximum because it is free money i.e. if you don’t contribute you don’t get the matching funds.

Remember the Importance of Passive Income

The key to growing your savings is passive income, but it is also the foundation for a viable retirement income. After all, the idea of retirement is to have a source of income that doesn’t require you to continue working. In years past, interest was sufficient in that if you amassed enough principal you could live off the interest. These days however, interest is almost non-existent so you need to find other sources of passive income. One of the most common types of passive income is a company sponsored pension plan. According to a recent Gallop survey, 24% of current retirees get their primary income from a company pension plan, possibly because it is easy and most of the work is done by the company. But these days, many companies are promoting self administered plans rather than taking the responsibility of administering a company plan. So you need to take more responsibility for your own retirement.  According to the same Gallop Poll, other types of passive income retirees rely on are one or more of the following:

1)  401k’s, Iras or other tax advantaged retirement savings accounts  with 46% of retirees relying on them.

2) 25% rely on regular savings accounts or CDs.

3) 20% rely on withdrawals from home equity either through reverse mortgages or other types of equity withdrawals.

4) 18% rely on Stocks and mutual funds which also generate passive income through dividends and capital gains.

5) Only 6% rely on rents and royalties which is another good source of passive income.

6) One method of generating a guaranteed passive income is an annuity or insurance plan and 9% of retirees rely on them.

7) 8% of retirees were fortunate enough to have parents who amassed enough savings to last through their retirement and were able to pass that along to their children (who are now retirees themselves).

Unfortunately, 21% of retirees do not (or did not) understand the idea of passive income and are therefore relying on part-time work to help fund their retirement. So if you don’t want to become one of them, you need to plan ahead and look at ways to generate passive income during your retirement years, whether that be through a pension, dividends, rents, royalties, or annuities… you need to begin planning and saving so that you will be sure to have a secure and enjoyable retirement. Remember, the savings alone is not the key factor, savings can be depleted. The key factor is the passive income, whether it is generated by the savings or by some other means.

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