1. Prioritize Your Financial Goals  

Make a list of your financial priorities from short, mid, to long term; what is most pressing? What will you need to feel comfortable in retirement? An amount that would allow you to meet your basic needs, protect your credit score, as well as prevent financial stress is ideal.

Most financial advisors would say to start by paying off high-interest debt, or anything with an APR above eight percent. While paying down your credit card debt is essentially the first step to financially preparing for retirement it’s important to simultaneously save an emergency fund; that way when a financial obstacle arises you won’t be tempted to place it all on your credit card, starting the cycle of debt all over again.  In other words, with a part of your financial life, cash can be king.

When we contribute to this rainy-day fund, no matter how small the amount, we are practicing changing our spending habits to saving, and changing our mindset from spenders to savers. This behavioral shift is necessary to achieve your financial goals on the timetable you desire. It also encourages us to choose delayed gratification over instant pleasures, a required skill for planning retirement. 

2. Determine Your Retirement Timeline

After you determine the accurate cost estimates of retirement, you can evaluate how much time you will need to meet each financial goal and set a target date(s). Some key questions to address when forming your timeline are: 

  • What age do you want to retire at?
  • When will you take out your social security benefits? 
  • Will your spouse also receive benefits? 

Certain variables including age, gender, and life expectancy will also impact your retirement timeline. For example, women typically live longer than men, but more often fill the role of caretaker for children, grandchildren, or elderly relatives. This factor can impact the amount of time you have to dedicate to building your career, accumulating wealth, and investing it to grow. 

3. Selecting the Best Retirement Accounts

Step three is to determine where you will place your retirement savings with the best potential for growth. The most common and accessible options are to sign up for an employer-sponsored 401(k) or begin funding a traditional or Roth IRA.

While each type of retirement account has its pros and cons, if your employer offers a 401(k) program, take it. Most modern companies offer to match your contributions up to a certain percentage, essentially providing free money for your future retirement goals.  Ergo, if possible, max out the amount you contribute to that takes full advantage of this free money.

Throughout your investment timeline, however, certain retirement savings accounts will provide more tax benefits than others, so you may find yourself converting to different accounts as you age or as your tax bracket changes. These conversions are best completed under the guidance of a certified financial analyst. 

4. Invest to Grow and Avert Risk

Before choosing which savings account to place your retirement savings into, assess your tolerance to loss and gains in the market. Risk tolerance can be gauged by assessing your ability to withstand the variability of investment returns and your relationship to uncertainty. Several factors impact your risk tolerance, and these variables – age, net worth, and experience – can fluctuate over time.

For example, a young investor with plenty of years ahead to recover from a loss may have a higher risk tolerance than an investor approaching their 60s who would typically favor more conservative investment options.  Be careful here though!  In some situations, being too risk averse, especially at the start of taking distributions, can create the risk of not getting enough growth throughout your retirement years, creating a potential of running out of money in your final years of life.

An investor with a higher net worth or more liquid assets can afford to take more risk in the market, however, the same individual has more to lose should their one risky investment fail. Individuals with a lower net worth often fall prey to “get rich quick” short-term investment “opportunities” and assume too much risk with too little capital, creating a potentially catastrophic financial event should the investment outcome not go as planned.  Talking through the potential outcomes of an investment strategy with a trusted professional can help identify and avoid these catastrophic events from wreaking havoc on your life.

Experience is another variable; if you’re just starting out with building or diversifying your portfolio, you may not have a high or even moderate risk tolerance yet. A diverse portfolio with a balance of short-term and long-term investments with low to moderate risk levels is the ultimate goal. This may look like a mixture of stocks, bonds, real estate, or shares in several companies. 

5. Trust Taxation and Estate Planning

As you plan for retirement, tax considerations are a main factor of building, investing, and retiring with your accumulated wealth. In order to manage and protect your assets from the costs that come with wealth transfer, there are several options to consider, but for the sake of this article we’ll focus on trusts.

According to Fidelity, “the assets the trust owns represent its principal (e.g., stocks, bonds, or real estate) and what those assets earn or produce represent its income (e.g., dividends, interest, or rent).”

In regards to taxation, trusts are classified as either grantor or non-grantor. Grantor trusts rule that the individual who created the trust is responsible for reporting the trust’s income and associated deductions on their yearly filed income tax. Non-grantor trusts treat this income as a separate taxable entity, filed as Form 1041. Non-grantor trusts are then classified as simple or complex, with a complex trust typically referred to as a discretionary or accumulation trust and require mandatory distributions of income.

Depending on how you structure your affairs and your location (different countries and states have varying tax rules), your assets – both private and business-related – can be protected from divorce, lawsuits, or other potential financial disasters.

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