Retirement is the light at the end of the tunnel for most—if not all—working people. Although some prefer to stay active in the workforce even well into their 70s or 80s, it’s safe to say that finally being able to retire is a major goal for every working person. But planning for retirement is a multistep process that doesn’t occur overnight. One does not simply decide it’s time to retire and then do so the following day; unless, of course, your bank account has so many zeros that any financial concerns for the average person are irrelevant to you.
If you want a comfortable retirement that allows you to take full advantage of that much-deserved free time, you need to build a financial cushion that’s both secure and accessible. Planning for retirement means taking the time to think about your financial goals and how long it will take you to reach them.
If you plan to retire within the next decade, these ten steps to prepare for retirement will help ensure you have the comfortable retirement lifestyle you’ve been dreaming of all these years.
It’s certainly not rare for someone reaching the age of retirement to feel as though working all those years has kept them from specific life experiences. For example, perhaps there is a place in mind you’ve dreamt of visiting your whole life, but raising kids and working full-time kept you from ever being able to consider it seriously. Or, maybe you have grandkids and want to be more present in their lives and even help pay for their college tuition when the time comes. You may want to expand on a hobby or even go back to school and take some classes.
Write out your retirement vision in a journal, and add to it when you think of a new goal you’d like to reach. This practice will keep you focused on your must-haves while you’re planning and saving for the future. After all, your financial planner only knows what you tell them you want from this next chapter of your life. So, having your goals written out and defined can help you develop the best plan together.
Retirement taxes often differ from the taxes you currently pay. They can be a bit complicated as retirement income typically comes from several different accounts, all of which have different tax implications. If Social Security benefits are your only source of retirement income, you may not even have to pay any taxes at all. But, if you have other sources of income, a portion of your Social Security benefits will likely be taxed.
These varying tax rules will apply to each type of income you receive, and you need to know how each income source shows up on your tax return. Doing so will allow you to estimate and minimize your taxes in retirement.
Stocks can be volatile, and many people shy away from investing out of fear that it’s just too risky. But as volatile as they can be, stocks may provide you with significant financial growth. You may want to consider partnering with a stockbroker who can assist you with this process and help you create a diverse portfolio.
A well-balanced portfolio consisting of stocks, bonds, mutual funds, and other assets can potentially generate income not only to cover the usual expenses but to help fund the lifestyle you want.
If you have a 401(k), IRAs, or other retirement plans, now is the time to increase your contributions up to the maximum amount allowed. For people ages 50 or older, a catch-up contribution will allow you to make additional contributions to 401(k) accounts and individual retirement accounts (IRAs). A catch-up contribution is larger than the standard contribution limit.
You can also consider account consolidation with one institution to simplify your investment management. This step reduces the investor’s oversight obligations and makes withdrawals simpler. Having several different accounts spread across several different institutions is cognitively more complicated and confusing.
For many people, it’s simply not a realistic goal to have all debt paid off before retirement. If being debt-free was a requirement for retiring, many Americans would never be able to retire at all. But, you can work on minimizing credit card debt and any other high-interest debts you currently have. Additionally, try your best to limit any new debt by paying with cash when you can. If you are still making mortgage payments, consider accelerating your payments so your loan will be paid in full before retirement.
Reducing the amount of debt you have overall will minimize the amount of retirement income that goes towards interest payments. In short, the less debt you have means having the freedom to spend your money the way you want to during your retirement years.
Most experts agree that retirement income should be about 80% of your pre-retirement salary. This amount varies depending on each person’s unique situation. You can estimate what your retirement income will be from sources such as Social Security and employer pensions. As for your other income sources, such as savings and investment accounts, you can estimate what your income should be based off the Four Percent Rule.
For those unfamiliar with the Four Percent Rule, it is a rule of thumb used to determine how much a retiree should withdraw from their retirement account each year. While it may not apply to everyone, this rule generally helps retirees determine how much they can withdraw while maintaining an account balance that remains steady throughout retirement.
Mortgage payments, general housing expenses, car payments, insurance, gas, groceries, etc. need to be tracked and assessed. If you have monthly medical expenses, you need to count those as well. This should be tracked over a period of several months to a year as expenses can fluctuate each month, and then you can calculate your average. Have a plan in place for unexpected financial setbacks, such as making a costly repair to your home or car.
Preventative care is the number one way to stave off costly future health expenses. Even with Medicare, the cost of healthcare in the U.S. is constantly rising. You’ll want to make sure you’re staying on top of all of your yearly exams, so you can take care of any issues long before they become major (and costly) problems. If you want the most out of your retirement, you’ll need to be as healthy as possible!
Additionally, Medicare can be confusing and complicated. While it can cover the majority of your healthcare costs, Medicare may not cover everything, especially when it comes to long-term care costs. You may want to consider supplemental coverage to help with any non-routine healthcare expenses, and it’s better to research and plan this out now. Your premiums only rise with each passing year.
If you plan on staying in your current home, great! But many retirees have plans to move closer to their kids and grandkids, or to move somewhere deemed “friendly” to retirees such as Florida which is stacked with retirement communities and has considerably lower taxes than other states. You may eventually want to consider selling your home and downsizing, so you can pocket any profit from the sale.
Living situations can change multiple times in retirement. You may lose your spouse down the line or find yourself in situation where you need live-in or long-term care. This all needs to be considered in your retirement plan.
Rules and government policies are always changing and evolving. It’s crucial to stay on top of trends and to stay informed on what’s going on in the financial world. Although it’s recommended to hire a pro to help you with your finances, you need to be doing your own ongoing research as well. Educating yourself before retirement can only help you live your best life. You’ve earned it!