Planning for Retirement Today: Five Tips to Get Started
Here you are: 20 years to retirement. That’s close enough to have it become something you’re looking forward to, but still far away enough to make planning possible. Planning for retirement is important because there are a lot of boxes you’ll need to check to live how you want.
For most people, the ultimate goal of retirement is being able to live comfortably without the worry of running out of money. With 20 years before retirement, you still have time to get your financial house in order. Follow these steps to be ready.
Step 1: Create Your Retirement Plan
This really comes down to a few simple questions. When do you want to retire? Where do you want to live when you retire? And what do you want to do in retirement?
The “when” has already been answered for the purposes of this exercise.
The “where” depends on many variables, but the most important is agreeing with your partner. If your first move after retiring is a literal one, know what you’re getting into. Do extensive research on the difference between your retirement destination and your current location. Housing costs, taxes, health care, and the general cost of living for things like gas and food, can vary drastically from place to place.
The “what” answer varies, but traveling, spending time with loved ones and relaxing at home tend to top the list of most retirement hopes. Playing sports, finding a hobby and volunteering are other popular goals. Remember, though, besides making sure you can afford to do what you want, you need to be sure you’re healthy enough to do it. Here are some things to keep in mind:
- Stay active. Aim for two-to-three hours of moderate-intensity aerobic exercise per week or an hour-plus of vigorous intensity. Boosting that over time could bring additional benefits. Concessions for age and poor mobility need to be made, of course, but striving to be active is very important.
- Quit smoking. Smoking is linked to a number of horrible diseases, and it can lead to a poor quality of life.
- Watch the alcohol.You want to have fun in retirement, but a long-term misuse of alcohol can impact the function of important organs, like the liver.
- Eat well. Just like your mother always said: A diet full of fruits and vegetables is good for you. Matching those with lean meats and whole grains can help you lower your risk of obesity and heart disease.
- Stay socially engaged. Work keeps you mentally and socially engaged. In retirement, you can maintain that sensation through hobbies, volunteering or working part-time. It’s all part of staving off depression and cognitive decline and keeping you active.
Step 2: Find Out If You Are On Track
For sure, you’ve asked yourself, “How much money do I need for retirement?” However, when you’re looking at a decision as big as leaving the workforce, it’s important to check, double check and triple check.
When planning for retirement, it’s smart to check out one or more of the retirement planning calculators on the internet. Most of these calculators will ask you for how much money you make every year, how much you put into your retirement accounts, and how much savings for retirement you already have. They also allow you adjust numbers to give you a different view of your retirement needs.
Make changes to the numbers when using retirement calculators. That way you can see how working longer or saving more can change the outcome.
Also, life changes like marriage or a move affect your plans. Even little changes like added expenses can change your situation, so it’s always a good idea to recheck your number.
One way to calculate this number is to base it on 75-80% of your current salary. However, your situation is unique to you.
Some important money questions to ask yourself when planning for retirement include:
- How long will you be retired?
Knowing the number of years you will need to spread your funds over will be crucial. Of course, there’s no definite way to determine how long you’ll live, but you can make a general estimate based on your family history, health and lifestyle.
- Are you prepared for medical costs?
Though your living expenses may decrease in retirement, especially if you’ve paid off your mortgage, your medical expenses could increase over time. Consider whether your family has been prone to costly, long-term illnesses, so you can include medical considerations in your retirement goal amount. This could be saving more in your retirement funds or building up the balance in a Health Savings Account.
- What expenses will you need to pay during retirement?
Take a look at your budget and figure out how it will be different in retirement. Will you spend more on travel or less on commuting for work? Will you have loans or debts paid off by then? Knowing how much you’ll need to spend each month and year will help you calculate your total needs for retirement.
Step 3: Pay Off Debt
It’s always a good idea to get yourself out of debt, but you really don’t want to carry debt with you into retirement because you’re no longer earning money. If you’re carrying multiple sources of debt, like credit card balances, student loans and a mortgage, you’re likely asking yourself, “Which debts should I pay off first?”
It’s advisable to pay off any non-deductible, high-interest debt, like credit card balances first.
Step 4: Increase Your Retirement Savings
As your prepare for retirement, take advantage of the things you can control – accounts and tactics you can choose to build savings, like one or all of the following:
- Annuities – These are reliable parts of a long-term strategy designed to meet retirement goals. You can invest pre-tax dollars or post-tax dollars, and you can choose the level of risk you want.
- Whole Life Insurance – This is a two-pronged planning tool. First, it is life insurance, which provides financial security for your family after you pass on. Second, the certificate’s cash value grows until it’s paid.
- 401k – These employer-offered accounts are a must-have for workers looking to dependably build savings via pre-tax income contributions. With 20 years before retirement, if you aren’t maxing out your contributions to your workplace plan, consider doing so.
- IRAs – These popular tools invest in a variety of products to build value. A traditional IRA offers tax advantages because contributions aren’t taxed, while a Roth IRA’s distributions are tax free.
Step 5: Take Advantage of Catch-up Contributions
Once you reach age 50, catch-up provisions in the tax code allow you to increase your tax-advantaged savings in several types of retirement accounts, but these amounts are subject to change. Look at 2020 figures as an example:
- For a traditional or Roth IRA, the annual catch-up amount is $1,000, which boosts your total contribution potential to $7,000.
- If you participate in a 401(k), Roth 401(k), 403(b), or similar workplace retirement savings plan, the catch-up opportunity is even greater: up to $6,500 a year. That means you could contribute up to $26,000.
- Participants in a SIMPLE IRA or 401(k), designed for self-employed individuals and small businesses, can take advantage of a $3,000 catch-up contribution, which would bring their total contribution potential to $16,500.
Check the IRS website for the most current information about contribution limits.
Step 6: Plan Your Social Security Claiming Strategy
How much Social Security will you get when you retire? To find out, sign up for an online account with the Social Security Administration. You’ll be able to see how much you’re projected to receive. These amounts will vary based on the age you choose to retire.
That’s the key decider: Whether or not to wait beyond age 62 to collect Social Security in order to receive a larger benefit.
Standing here with 20 years until retirement may seem like you have a lot of time to prepare – and you do – but the sooner you start planning for retirement, the closer you’ll be to enjoying the lifestyle you want.