Everyone has different needs and goals when it comes to retirement. However, there are a few things that most people will want to consider as they approach this significant milestone. Pay off debt, especially high-interest credit card debt. This will give you more financial flexibility in retirement. Estimate your retirement expenses, including housing, food, healthcare, and leisure activities.
1. Start Early
The earlier you start saving for retirement, the more time your investments have to grow. Compound interest is the magic that makes this happen, so starting early gives you a significant advantage over those who don’t. If you can, take full advantage of employer-sponsored plans like 401(k) s and 403(b) s. These are easy to set up, give you a tax break on your contributions and allow you to invest in low-cost funds. Professionals such as https://www.adp.com/what-we-offer/benefits/retirement.aspx may be able to help you. If your employer doesn’t offer a retirement plan, consider opening an individual retirement account (IRA) or Roth IRA, which are also tax-deferred.
As you get closer to retirement, you should invest more conservatively. Typically, this means putting more money into bonds and other fixed-income instruments that provide regular income. Consider taking out long-term care insurance, which can help cover medical expenses that may deplete your savings. Inflation is another important consideration, as it will eat into your spending power over time. Try using an inflation calculator to see how rising prices will affect your budget throughout your retirement.
2. Set a Budget
A big challenge for many retirees is making their savings last. It is possible to run out of money in retirement if you plan well and manage your spending carefully. One of the best ways to manage your spending in retirement is to create a budget. This will help you ensure that you are saving enough and that your retirement savings will last as long as possible. Start by creating a list of your essential expenses.
This should include your mortgage or rent, utilities, insurance premiums, and other necessities. Next, add any other income streams you expect to receive in retirement, such as pension payments, Social Security payments, and 401(k) or IRA withdrawals. Now that you have a list of your essential expenses take another look at them and see if there are any areas where you can cut costs. For example, you can save on food by cooking at home instead of eating out and reduce housing expenses by downsizing or getting a roommate.
3. Cut Your Spending
The more you save, the more your savings can grow. But sometimes, even with good money management skills and a solid nest egg, it can be not easy to eke out enough to save the recommended percentage of your income. One solution is reducing current spending by reducing non-essential expenses, like magazine subscriptions or dining out. Similarly, if you receive an inheritance, bonus, or income tax refund, resist spending it. Instead, move that money from your checking into an investment or retirement account.
It’s also a good idea to consider moving from an expensive to a less-expensive housing option or downsizing your vehicle and cutting transportation costs. If you haven’t already, consider signing up for Medicare during the months leading up to your 65th birthday. This will help delay the time at which you start receiving benefits and can help reduce premiums. In addition, it may help you avoid costly late-enrollment penalties. The longer you can continue contributing to your retirement accounts, the more you’ll benefit from a steady stream of indexed dollars.
4. Save More
When you’re nearing retirement, it’s important to prioritize saving as much as possible. You can do this by maxing out your contribution percentage to your 401(k) and IRA accounts and taking advantage of any available “catch-up” contributions if you’re over 50. Calculating how much money you will need in retirement is also helpful by examining your current budget, including projected future income (e.g., pension income, Social Security payments, rental income from property) and estimated day-to-day living expenses.
Remember that prices are expected to rise over time due to inflation, so be sure to factor that into your calculations. Once you’ve determined how much you need to save each month, try to make it a habit by setting up automatic transfers from your checking account to your retirement savings accounts on the same day every month that you receive your paycheck. Over time, this will help you develop momentum and build your nest egg. If you struggle to save more, consider working with a financial advisor to find ways to cut your spending or increase your earnings.
5. Diversify Your Investments
You’ve probably heard the old saying, “Don’t put all your eggs in one basket.” Diversification is an essential principle of investing. It helps ensure that your savings can withstand significant market fluctuations, which is especially important when saving for retirement. The easiest way to diversify your investments is by investing in index funds, which offer low fees and track the performance of the markets. A good rule of thumb is to subtract your age from 100 and use that as a guide for how much of your portfolio should be in stocks and how much in bonds. In addition, consider investing in companies and assets outside the United States. This is another way to diversify your portfolio and reduce risk, particularly during political instability or a health crisis (such as the coronavirus). In addition to these investment strategies, you’ll want to plan for rising prices.
Inflation can affect your retirement savings, so consider it when budgeting for the future. A financial professional can help you create a strategy that protects your nest egg from inflation.