Want to retire someday? Yeah, I think most people would answer that questions with a resounding “yes!” However, what you may not know is that most of those same people are woefully unprepared to retire. Most Americans haven’t saved enough to replace their working income and while they may not eat the proverbial cat food, they will see a change in their lifestyle. Although we all fantasize about a “dream retirement“, making that dream a reality definitely takes planning and perseverance.
Here, we lay out 8 steps you can take in order to be better prepared for the next phase of your life – one in which you don’t work and what most people call retirement.
How Much Money Will You Need In Retirement?
My guess is that you don’t know the answer to that question. However, this should be step one in a financial plan that budgets for a bright future. Most experts would say that you need between 75 and 95 percent of your preretirement income in order to live a similar lifestyle as if you were working. Surprised? Most people are. To use an example, if you currently earn $4,000 a month on an after tax basis, you will need between $3,000 and $3,800 a month during retirement. This of course can be accomplished many different ways but minimally you should have Social Security benefits. Then, you will need to make up the difference with your 401k, pension, or other savings.
Start Saving For Retirement Right Away
Are you a young millennial? Or, are you a fast-approaching-50 generation X’er? Either one, perhaps one of the single most important lessons you can learn is to start saving NOW. You really are never too young or too old to start saving for retirement. Most 20-somethings live like retirement is a far too distant dream and they will worry about it tomorrow. However, and this has been said time and time again, the advantage that younger people have is a great one. For younger savers, compounding interest and asset appreciation will do most of the saving work for you. If you aren’t a young buck any more, then it is even more important to start saving today. If you are already putting aside some money for retirement, you likely need to put away even more. The point to all of this is that no matter where you are in your life, retirement should be one of your saving goals.
Contribute To Your Employer’s Retirement Plan (If They Have One)
If you are an employee your employer likely has a 401k program, or maybe even a Roth 401k program that you can invest in. The beauty of employer sponsored plans is that they are so easy to get started. You sign up through work, pick your investment amount and options, and they will take the money directly from your check and deposit it into your account. You never see the money so you likely won’t miss it. In addition to that, the money will be tax free (really tax-deferred) so it will be even less of a financial hit during payday.
Don’t Touch Your IRA’s or 401k’s
This should go without saying. However, at some point in their lives many people tap into their pre-tax retirement savings for one reason or another. In our opinion, there really is no good reason to touch your retirement savings before you retire. Yes, you might be able to place a down payment on a house, or pay for some unexpected expense, however, at what price? Between the tax implications, penalties, and reduced ability to earn interest and appreciation, taking money out of your retirement accounts prematurely really hurts your chances of having enough money when you retire. So, if at all possible, just don’t do it.
Enter Retirement With Little Or No Debt
As we have discussed before, debt is really a chain around your financial future. When you have debt, you need to service that debt. Meaning, that you have to make monthly payments on those loans or revolving credit lines. This of course takes away from money that can be used to live on during retirement. For this reason, it is crucial that before you retire to a fixed income, that you pay down as much of your debt as possible. Ideally, during retirement your only bills will be related to food, utilities, and possibly a house payment (although that is debatable). For a best case scenario your home would already be paid for so you would be left with just food and utilities. How nice would that be?! If paying off your home isn’t possible, you should at least consider refinancing it before your retire. Your ability to retire, or be comfortable during retirement, will depend on how much income you have. To put a finer point on that statement, it will depend on how much disposable income you have which means as few bills as possible.
Don’t Be Too Conservative With Your Retirement Investments
Younger people sometimes make the mistake of being too conservative in their investments. The reason that this is a mistake is that young people have a longer time to be able to recoup any market losses they might incur. Along that same vein, they should be able to ride out the market cycles and get a somewhat averaged rate of return over the long term. In our opinion, a millennial should not have 100% of their investments in a money market as that will not even beat the rate of inflation. The key here is to not put all your eggs in one basket, and not be too conservative. The ideal balance is somewhere in the middle. Make no mistake, we are advocating putting all your retirement funds in the “next great stock.” Instead, we recommend what most financial experts recommend and that is to have an age appropriate and diversified portfolio all the while keeping your retirement date in mind. Of course as you inch closer to retirement you can start to rebalance your portfolio into more conservative investments like Treasury Bills or bonds.
Self-Employed? Consider Specific Retirement Plans Just For You
Work for yourself and not a big company that has a 401k or other retirement plan? That’s OK all is not lost! If you own your own business you should definitely look into a SEP-IRA, which is short for Simplified Employee Pension Plan. Other options might be a Keough or Simple-IRA. These operate much like the standard employer plans with tax savings and other benefits. You will definitely want to talk with your business accountant to find out the tax implications, benefits, and pitfalls to see if one of these plans is right for you.
How Far Can You Delay Retirement and Continue Working?
While not a popular option, the fact is that if you work longer it will have a double benefit. First, you can continue to save for your ultimate retirement and second, you can delay taking money from your nest egg. Most people ponder retirement at 62 or 65. Do you think you can continue to work until you are 67 or even 70? The benefits you will receive due to increased Social Security benefits alone are worth considering. The longer you can delay your retirement the better in most cases.
Hopefully these tips will help you in your own retirement journey. No two situations are the same so even if you can take one or two of the above items and apply it to your own financial life it will be a success. Retirement is a goal for everyone but it is definitely a long road and one that you will need to plan for.
What are some additional steps YOU are taking in your plan for retirement?
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