Close your eyes and imagine retirement. What does it look like? Maybe you’re sitting on a beach, traveling the country in an RV, or playing with your grandkids. Maybe you have a part-time job doing something you love.
It’s never too early to get ready for retirement, and more importantly, to plan how you’ll get there financially. If you’re quickly approaching retirement, this article is for you, too. You’ll learn about steps you can take to help save enough money to cover future expenses and keep up with your current lifestyle. Remember, it’s important to get started as soon as possible.
Fortunately, retirement planning doesn’t have to be complicated. We’ll break it down into six steps to help ensure you’re prepared for the years ahead.
Step 1: Figure out how much money you’ll need
First, you’ll want to ask, “How much do I need to save for retirement?”
Only about half of Americans1 have calculated how much they will need in retirement. Fortunately, this is where a financial representative can help. Either on your own, or with a professional, you should:
- Estimate your retirement expenses. Figure out how much you anticipate spending on housing, utilities, food, health care, travel and leisure for every year you’re retired. Of course, this depends on your desired retirement age and expected life span. Keep in mind, the average American spends about 20 years in retirement,1 so you’ll want to cover at least two decades of expenses.
- Consider your anticipated retirement income. When retired, many rely on Social Security and possibly a pension, although they are not very common these days. Social Security benefits can start as early as age 62 but are reduced unless you wait until age 66 or 67 to retire.2
- Take inflation into account: The cost of living will change over the years. Consider adding a standard inflation rate of 2 to 3% into your expenses to estimate your future cost of living.
Remember, this is just a starting point, and it’s always best to talk to a professional.
Step 2: Start saving as early as possible
Start now and reap the benefits of saving for retirement early.
When it comes to saving for retirement, the earlier the better. When you start saving, you can take advantage of the power of compound interest. This means that the longer your money is invested, the more it will grow over time. Even if you don’t start out saving much, the amount you do save will grow over time.
Saving for retirement early also lessens the pressure. It means you can save smaller amounts monthly and potentially still reach your retirement goals. If you start late in the game, however, you’ll need to save much more every month to reach the same goal.
There are many ways to approach saving for retirement. When you start early and have more time before retirement age, you may be able to tolerate more risk to achieve higher potential returns. Ultimately, a Modern Woodmen representative can help you assess the approach that’s best for your unique situation, including determining your risk tolerance.
Step 3: Open the right accounts
Ask a financial professional, “How should I save for retirement?” Then pursue the right options for you.
There isn’t a one-size-fits-all approach for retirement. The good news is there’s a range of savings plans and products you can explore, and some may even offer tax advantages. Here are a few.
- 401(k) plans. Offered by employers, a 401(k) lets you contribute part of your pre-tax salary, thereby reducing your taxable income for the year. Many employers will match your contributions, so it’s a great way to get free money added to your savings. Best of all, your 401(k) will grow tax-deferred until you’re ready to take the money out at retirement age. Many plans also offer a Roth option as well, which allows for after-tax contributions.
- Individual Retirement Accounts (IRAs). If you open your own IRA, you can choose from a traditional or Roth IRA. Your contributions to a traditional IRA may be tax-deductible, and your savings can grow tax-deferred until retirement. With a Roth IRA, your contributions are made with after-tax money. But the money you invest will also grow tax-deferred, and you may be able to withdraw funds income tax-free after you reach the age of 59½ and after the Roth IRA has been open for at least five tax years.
- Annuities. This is a type of insurance product that can help offer a guaranteed source of income when you retire. First, you buy an annuity with a lump sum or through regular payments over time. Then, when you’re ready to retire, your annuity will pay out a regular income for a period of time – or for the rest of your life.
Step 4: Maximize your savings
Here are important things to consider when saving for retirement
There are many strategies for growing your retirement savings, and a Modern Woodmen financial representative can help guide you. Here are a few ideas:
- Make the most of employer contributions. If you have a 401(k) and your employer matches your contributions, take advantage of it. Save as much as you possibly can and maximize contributions from your employer.
- Look for tax advantages. When you open a 401(k) or IRA, you usually get tax benefits. If you start saving in one of these accounts early, your money will grow for years tax-deferred. If you contribute to a Roth 401(k) or Roth IRA, you will pay taxes on the amount at your current income but grow tax-deferred over time and can be withdrawn potentially income tax-free. Varying accounts can add additional flexibility to your future income strategy.
- Diversify your investments. One important strategy is diversification. This involves buying various types of assets, like stocks, bonds and mutual funds. When you diversify your investments, you can spread your risk and enjoy less volatility in the long run. While diversification is a consideration, it is important to know that it does not assure a profit or guarantee against loss in a declining market. As you do this, it’s always best to first talk to your representative about your tolerance for risk.
Step 5: Plan for health care and unexpected life costs
How else should I save for retirement?
Retirement planning is about more than just securing income. It’s about planning for all of your future needs. This can include paying for medical bills and long-term care, as well as setting up wills, trusts, and other legal documents to prepare for end-of-life care.
When you work with a financial representative, we recommend discussing:
- Health-care costs. Did you know health care can be one of the biggest expenses in retirement? Make sure you plan for additional medical expenses not covered by Medicare. You may also want to plan for long-term care, whether it’s a facility or visiting nurse. It’s hard to tell what aging will be like, and it’s best to be prepared.
- Life insurance. Planning for retirement is also a good time to ensure you have enough life insurance for your family. If you unexpectedly pass away, it’s important that you have enough funds to care for everyone, make sure your spouse is still able to retire, and leave a legacy.
- Estate planning. If you haven’t already considered estate planning, now is the time. A financial representative may ask if you’ve worked with a legal expert to create a will, trust and/or power of attorney. Remember, it’s always better to be prepared. If something happens to you, it’s imperative that your family has a plan for the road ahead.
Step 6: Closer to retirement, check in again on your finances
As you near retirement, review your savings plans, standard of living and income once again. Over the years, life can change, thereby impacting your finances. When you’re less than five years away from retirement, it’s wise to:
Review and protect your retirement savings
Talk to a financial representative about your retirement account options. You’ll want to determine if your risk tolerance has changed and what accounts are best suited for your new goals. A financial representative can help you decide how to best allocate your investments based on your comfort with risk.
Check your employer benefits
If you have a 401(k), understand your benefits, including when and how you can receive the funds. This is also a good time to ask your Human Resources professional when your employer-sponsored health plan ends and how to transition to Medicare.
Look closely at your retirement income
Make sure you understand how Social Security works and figure out how much money you will receive. Add up other income sources, such as your 401(k), IRAs, and annuities. You can also evaluate rental income, part-time work and other sources of income. Some people still have pensions, but they’re less common nowadays, which means it’s critical to save on your own.
Reevaluate your cost of living
Document all of your daily expenses, including housing, utilities, health-care bills, and travel and leisure expenses. Create a realistic budget that fits within your expected retirement income. Keep in mind, you may need to adjust your expenses for a new standard of living.
Try to pay off debt
If you’re still a couple of years away from retirement, it’s a good time to try to pay off outstanding debt. Perhaps it’s a credit card bill. Do what you can to get ahead of your debt while you still have income from your job. Remember, your preretirement income won’t last much longer, so now’s the time to get ahead financially.
Don’t go it alone
Now that you know how to plan for retirement, it’s time to roll up your sleeves and start working with a financial representative.
Retirement planning isn’t as overwhelming as some people may think. In fact, the sooner you get started, the easier it is to reach your goals. Talk to a Modern Woodmen financial representative today to secure your retirement financial needs.
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1https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/top-10-ways-to-prepare-for-retirement.pdf
2https://www.ssa.gov/benefits/retirement/planner/agereduction.html