How to Prepare for Retirement: A 5 Step Guide
After decades of working and saving, you might be nearing retirement. Learning how to prepare for retirement can make reaching retirement age a breeze if you play your cards right.
Learn how to prepare for retirement with the steps below. They can help you have everything you need to enjoy a comfortable retirement lifestyle. However, what’s comfortable for you might not work for someone else. So, part of planning to retire is understanding your lifestyle.
Understand Your Lifestyle to Learn How to Prepare for Retirement
Imagining your ideal retirement is the first step in learning how to prepare. How will you spend your retirement? Do you plan to volunteer or travel? How much money do you need per year to live comfortably when you’re retired?
The next step is to determine if your existing savings will be sufficient to support your plan based on a realistic picture of what you may need. You may be able to eliminate or reduce non-essential items by analyzing your current expenses. This can be things like recreation and entertainment.
In addition, some expenses may increase as we age. Healthcare is an example. However, some expenses go down as you stop working. You can cut down the cost of things like commuting and clothing as you get older. Depending on your lifestyle during retirement, you may spend more or less. As an example, if you plan to travel extensively, your projected costs might even be higher than your current costs. So, the sooner you learn how to prepare for retirement, your retirement savings will have that much more time to grow.
Here are five steps to help you learn how to prepare for retirement…
How to Prepare for Retirement in 5 Steps
Diversify your Portfolio and Invest for Growth
At certain stages of your life, you may assume that it is better to keep your investments low risk to protect yourself. However, higher risk stocks can provide you with higher returns over the long run. Although, you should consider a balanced portfolio to fit your risk tolerance, time horizon and liquidity needs.
Make sure to diversify your portfolio. If you have a well-balanced portfolio, you might be able to withstand downturns and generate the kind of income you’ll need during retirement. Your golden years may also last for more than 30 years so plan accordingly. And when it comes to investing, please remember to do your research. There are always risks with investing and diversification doesn’t guarantee you won’t see big swings in your portfolio.
Increase Your Retirement Contribution
In most cases, contribute as much as you can to your 401(k), IRAs and other retirement plans. Moreover, if you are 50 or older, you can set aside more to your 401(k) than normal limits. The 2022 401(k) contribution limit is $20,500. However, those 50 or older can contribute up to $27,000.
Furthermore, if your employer offers a maximum matching contribution, consider contributing enough to qualify for that contribution. For example, your employer might match 50% of employee contributions up to 5% of your salary. So, let’s say you make $75,000 a year and contribute $3,750 to your 401(k). As a result, your employer will match half your contribution and put in $1,875. Who doesn’t want money that’s essentially free?
Downsize Your debt
This one goes for credit card debt, student loans, car loans and paying off your mortgage. Aim to pay off your debts before retirement by accelerating your payments. The CPA and chairman of Debt.com, Howard Dvorkin, warned of carrying credit card debt into retirement…
Right now, [credit card] interest rates are hovering around 20%. That means you’re paying a dollar for every five you borrowed.
Furthermore, student loans might seem like a problem for the younger generation. However, In 2017, the Consumer Financial Protection Bureau (CFPB) found that “consumers age 60 and older are the fastest growing age-segment of the student loan market.” At the time, around 2.8 million people over 60 had an average debt of $23,500.
Car loans may seem easy to brush over due to their low-interest rates and simple interest costs. However, these loans can be dangerous because they tend to creep up. And before you know it, you could be under water in debt.
Finally, paying off your mortgage is another way to reduce debt. However, this is less strategic than the other debts. Some people argue that instead of paying off a mortgage early, investing can lead to better returns. After all, mortgages are generally low-interest and tax-advantaged. So, it can be more impactful to put your money into larger dividend investments than to pay off your mortgage if you’re not debt-averse.
When making purchases, consider paying cash to avoid racking up new debt. Managing existing debt and limiting new borrowing will help you reduce the amount of retirement income that you’d end up spending on interest.
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Calculate Your Likely Retirement Income
How much income do you think you’ll get in retirement? Figuring out your income from sources such as Social Security and employer pensions can help you prepare for retirement. Other sources of retirement income will likely come from your wages, savings and investments. To make this last, there’s a general 4% rule of thumb for retirees to find out how much to withdraw from their retirement funds annually.
Here’s an example — say you have $1 million in retirement assets. Based on this figure, you can generally afford to spend $40,000 a year. Is this fund strong enough to support a comfortable retirement for your lifestyle?
4% can be a good starting point. However, this is a general recommendation and doesn’t work for everyone. Take the time to find what rate of withdrawal works for you based on your age, lifestyle, needs and risk tolerance.
Consider Future Medical Costs
Most of your routine healthcare costs might be covered by Medicare if you retire at 65 or older. However, you may want to prepare for retirement by considering added coverage for non-routine expenses. This is important because your health expenses will generally increase as you get older. Moreover, failing to plan for unexpected health issues can severely impact your retirement plans.
In 2021, an average retired couple age 65 will need approximately $300,000 in savings (after taxes) to cover health care expenses in retirement, according to the Fidelity Retiree Health Care Cost Estimate.
To consider your future medical costs, consider buying long-term care insurance. This can help you with long-term care, including at-home help. Furthermore, investing in long-term care insurance sooner than later can score you a much lower premium and you’re less likely to get rejected.
Moreover, consider maxing out your health savings account contribution if you have one. This is tax-advantaged money; however, it must go to qualified medical expenses to avoid being subject to income tax and potential penalties. Most importantly, this money can grow over time with tax-free compounding for when you may need it during retirement.
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The Final Line on How to Prepare for Retirement
It’s never too late to get started. However, the earlier you start learning how to prepare for retirement, the more smooth sailing it will be to stop working. Many people wait to plan to retire until later in their career. However, the age of retirement comes sooner than you think. And if you plan carefully and set goals ahead of time, you can save to have the means for the retirement that you’ve always dreamed of.
If you’re feeling behind on learning how to prepare for retirement, know that you’re not alone. It’s never too late to get started. However, the decisions you make now can make a big impact on what retirement looks like for you.
