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When compared to other types of funds, the retirement savings process has always stood out as curious. Nobody has a personal-made reference on how to do it and, since everyone has different retirement goals, consulting with others’ experiences isn’t that accurate, to begin with.
For these reasons, people tend to leave their retirement savings planning to their guesswork. However, in doing so, even the slightest mistake could end up in losses up to thousands of dollars. Still, that doesn’t have to be the case at all, especially for you.
Based on some common issues that tend to affect people’s retirement efforts, here are some tips for you to consider when doing yours.
Always consider future inflation
The actual value of money is constantly changing. Usually, leaning to a side forces us to pay larger amounts of money for a given product. That’s inflation.
Sadly, a common mistake is for people to make their retirement calculations based on money’s current values. They completely forget to consider yearly inflation rates!
When making a retirement plan, consider all the necessary expenses you’ll need to cover your day-to-day lifestyle. Then, picture their respective financial behaviour every year for a given amount of years. When doing so, try and apply a hypothetical inflation rate for each year to get a more accurate estimation of your retirement expenses in the long run.
Ever since 1980, the average annual inflation has been about 3%. Try and use that value for your calculations. Start by calculating your expenses based on today’s prices, then add said value subsequently with the pass of each year.
Alternatively, many online tools can make this entire process for you, even to the point of considering ongoing inflation. While most of them already assume this average of 3% per year, some even allow you to input your own estimated value. If interested, try and look for these retirement calculations and give them a use.
Save up for a long-lasting retirement
Another common error is for people to underestimate the actual length of their retirement. In reality, a proper retirement won’t come even close to lasting a maximum of 15 years. Best case scenario, it will last for several decades even.
Even if it seems more plausible to reach your goal if you work with shorter time frames, retirement’s always better when living a long life with an excess of money than a long one with no money at all. Always aim to save money for the best case scenario regarding your life expectancy.
To assist you on the matter, you can also use The Social Security Administration’s life expectancy calculator. It could prove as a helpful starting point for designing your long-lasting retirement savings plan. Of course, it also helps to be aware of your personal and family health history.
Remember that taxes still apply in retirement
Unless your savings account is a Roth account, you’ll still be expected to pay your taxes yearly once you step into retirement. The amount of each tax payment will change depending on your tax bracket and how much you withdraw from your account each year.
Unfortunately, you can’t entirely predict these types of conditions. However, you can still make a rough estimate of how much you’ll be spending in taxes by calculating how much you think you’ll spend in retirement each year and assuming which tax bracket you’ll end up in.
There’s nothing wrong with using today’s tax brackets for reference, but do remember that inflation will still apply to them as well. In response, try to adjust your calculations accordingly.