A retired couple walking on the beach.

It's never too early, or too late for that matter, to start planning on how you will spend your retirement. How much money will you need? What lifestyle will you live? Will you ever retire at all? The answeres to these questions will change as you get older, as will your retirement goals. One thing is true: The earlier you start planning, the better off you'll be.

How Will You Live in Your Golden Years?

When you reach your forties, you should begin considering the lifestyle you'd like to have in your golden years. Are you planning to travel? Do you feel like you will keep working part-time to keep yourself busy? Start thinking about what you want your retirement to be and what kind of income you'll need to live comfortably. Keep in mind that retirees are living longer than ever before, so you may need more money than you think.

This is also the time to start planning for quality of life issues. After retirement, how much medical coverage will you be able to afford? Remember that any medical insurance you carry will be paid only by you, not your employer. Also, keep in mind that as we age, medical insurance premiums rise significantly. How will you pay for nursing home care if you need it? Will you be able to afford an at-home nurse? Medical concerns are potentially the most expensive aspects of retirement planning. Long-Term Care Insurance is an idea worth considering. These plans will help pay for nursing home care so you don't have to worry about losing your home or other assets in the event of an illness or serious injury. The premiums will be relatively inexpensive if you start a plan sooner rather than later. There are many different options offered in these plans, so consult an insurance professional for help finding the best plan for you.

Now that you have reached your forties, it is also time to start reallocating your retirement funds into investments that will give you more income than growth. (Click here to learn more about investments.) However, you still want a significant growth component to your portfolio. Retirement is twenty years away and you do not want to lose two decades of growth potential. It is highly recommended that you consult a financial advisor to help you allocate your funds in a manner that is appropriate to your situation.

The important thing to realize is that once you reach this point in your life, you'll need to think more about your retirement than about wealth accumulation. Give yourself a chance to really think about what you want your retirement to be and plan from there.

In Your 30's

By the time you've reached your thirties, you've probably hit a few milestones. Chances are that you have found your career path, you are no longer in school, and you may have a family of your own. The first and most important step to retirement planning is to establish a budget that allows you not only to handle your expenses, but also to save money (See "Creating a Budget"). It is not difficult to set up a workable budget, but it can be a challenge to stick to it. Budgeting does take some discipline on your part. It is very important to keep away from wasteful spending and put your effort into creating a financial cushion for yourself. Without a cushion, it is almost impossible to save for retirement.

Once you have been able to establish a budget and save some money, the next step is to increase the amount of money you contribute to your retirement accounts, particularly to your 401(k) plan. It is generally recommended that you start contributing at least ten percent of your income, more if possible. Now is a good time to examine your investment allocations, but you still want to stay on the aggressive side. At this age, you are still in the wealth accumulation mode, so it is a good idea to strive for higher returns.

If your financial situation is more stable than it was when you were in your twenties, it is often advised that you think about buying a home. A house can be a tremendous financial asset. You will gain the following benefits with home ownership:

  • Over time, houses tend to increase in value. Like any other investment, an increase in the value of your home will increase your overall net worth. Keep in mind that home prices do not always go up. Real estate is subject to market forces like any other investment.
  • If you buy your home with a mortgage, like most of us do, you will build equity in the home. Equity is the value of the home minus your mortgage balance. The equity is essentially the share of the house that you own. As you pay the mortgage down, your equity increases. If you are lucky enough to buy a home without a mortgage, the entire value of the home is yours. The point is that you will own a tangible, valuable asset that can be drawn upon when needed.
  • A portion of the interest in a mortgage is tax-deductible. Unfortunately you cannot deduct ALL the interest. The amount you are allowed to deduct depends on your income tax bracket, but a tax break of any kind keeps money in your pocket.
  • Homeowners often get better insurance rates. Many insurance companies offer package deals that combine auto and homeowner's insurance at good discounts.
  • Owning a home gives you the option to take a reverse mortgage to supplement your retirement income after the age of 63. See "Reverse Mortgage Basics" for more details.

In Your 20's

For most people in their twenties, retirement is a long way off, but that does not mean you should put off your planning. Most people in their twenties are just starting out. There are apartments to find, cars to buy, student loans and credit cards to pay, weddings, babies, and all the other things that are necessary to start building a life. It's understandable that retirement is often at the bottom of the list, if it's on the list at all.

The steps you take to establish yourself in your twenties can have a significant impact on the quality of your retirement. Fortunately, at this stage the things you'll want to do to establish yourself are not difficult, they just require a little discipline.

Establish a Budget

By putting together a workable budget, you will be in a better position to handle unexpected expenses. Keeping track of your spending will help you keep on top of your day-to-day finances, and give you a clear picture of what you can and cannot spend.

Establish Good Credit

Paying your bills on time and keeping your debt level under control will serve you well throughout your entire life, including in retirement. How so? By handling credit wisely you will have more money to save for retirement. The more you save, the better off you will be.

Contribute to a 401(k) Plan, IRA, or other Tax Deferred Account

Being in your twenties gives you a tremendous financial advantage: time. Investments grow through what's called Compound Interest. Compound Interest is when new interest is earned on top of interest you've already accumulated. Here's an example: If you place $1000 into an account earning 10% interest that's compounded yearly for 10 years, you will have $6727.50 in 10 years. Now, suppose you decide to keep the money in the account for another 10 years. After another 10 years, your $6727.50 will have grown to $45,259.56!! Remember that we started with an investment of just $1000. This example illustrates that you do not have to save large amounts of money for retirement if you start early.

Another big advantage of contributing to a 401(k)Plan or IRA is that they are tax deferred investment accounts. What this means is that the money you put into these plans is not subject to income tax until you begin withdrawing the funds. If you make your contributions via a direct deduction from your paycheck, you will pay less income tax.

Since 401(k)'s and most other retirement plans are investment accounts, you want to pay close attention to how your money is invested. When you're young, it is recommended that most of your money is invested aggressively. This means that you will want most of your holdings in the form of stocks. Historically, the stock market has gained more wealth for investors over time than any other type of investment vehicle. The reason you want to be aggressive is that your goal at this stage is to make your money grow. As you age and get closer to retirement, your goal will change to preserving your gains, and therefore it is recommended that you shift your investments to less aggressive plans as you age. It is always a good idea to consult an investment professional to help plan the best strategy for your situation.

These steps will help you create a solid financial foundation that will serve you well for the rest of your life. The sooner you put together a financial plan, the easier it will be to retire.

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