Life can be unpredictable and your retirement plan may experience setbacks along the way. To make up lost ground, adapting your lifestyle or working longer may help make up any shortfalls in savings.
Assuming you haven’t already, continue making the maximum contributions to your 401(k) and IRA (and take advantage of federally approved catch-up contributions when you reach 50). In addition, consider cutting expenses while diversifying into safer assets like CDs or blue-chip stocks.
1. Start Early
If you are in your 40s or later, there is still hope of reaching your savings goals by increasing contributions to an employer-sponsored retirement account (e.g. 401(k), 403(b) and investing in a diversified portfolio of stocks and bonds. In addition, delaying Social Security benefits until age 70 could increase monthly income significantly.
Though saving early is ideal, life may throw unexpected curveballs your way. Therefore, it is wise to review your goals periodically with a financial planner in order to stay on the right path.
2. Make Savings a Priority
As much as you may yearn to spend your retirement relaxing by the sea or writing the next great American novel, preparation requires careful planning and savings. Begin by setting aside regular savings goals, creating an emergency fund and keeping digital records of your retirement account statements.
Financial experts advise saving 15% of your income, including company matches for your 401(k) and IRA accounts, to your retirement savings accounts. Negotiate lower insurance premiums or cut unnecessary spending expenses in order to save more.
3. Set Goals
As part of your retirement expenses planning process, it is crucial that your goals be realistic.
Make a list of your fixed expenses, such as home and car payments, utilities costs and insurance premiums. Next, list potential increase in expenses due to inflation or health care needs that might occur after retirement.
Look at what expenses will likely reduce, such as transportation and dry cleaning bills. Subtract the expected retirement income from projected expenses.
4. Create a Budget
Establishing a budget is an essential part of planning for retirement. Start by reviewing your expenses and looking for any costs that will likely decrease, like eliminating mortgage or car payments.
Consider rising expenses such as health care or home repair bills. Compare them with your projected retirement income; your savings must last at least decades, so trade-offs will need to be made such as cutting vacation plans or giving up a luxury car in order to meet this goal.
5. Pay Off Debt
Financial advisors frequently advise retirees to clear away debt before retiring, especially high-rate debt like credit card balances that could drain their budgets.
Not using retirement funds to pay off debt can be risky. Withdrawals from tax-deferred accounts such as IRAs or 401(k) plans could trigger income taxes and cost future investment gains; furthermore, withdrawals could affect Medicare Part B premiums and Social Security benefits – usually not the best solution!
6. Set Up an Emergency Fund
Though most individuals plan to retire at 65, unexpected expenses often force them into early retirement.
Financial experts advise establishing an emergency savings account to cover three to six months’ of expenses, in order to prevent withdrawing money from retirement savings or investments which can have long-term ramifications on investment gains.
Make saving simpler by setting up an automatic deposit into a dedicated savings account every time you get paid, keeping this money separate from other spending accounts.
7. Take Advantage of Tax-Advantaged Accounts
Tax-advantaged accounts such as a Solo or Traditional 401(k), Individual Retirement Account (IRA), or 529 Savings Plan can help you save more money quickly and efficiently. These plans offer higher contribution limits than regular savings accounts and should be utilized where appropriate.
At 50 and 60 respectively, ideally you should aim to save six times your salary in savings in order to avoid having to rely solely on Social Security in retirement. A financial advisor can assist in developing a plan to achieve this.
8. Put Any Cash Windfalls to Good Use
Financial windfalls can be invaluable tools when it comes to saving for retirement. Before using windfalls as additional savings avenues, however, ensure your emergency fund is fully funded before using them to increase savings.
Reducing debt will free up more funds to invest in long-term goals like retirement. Furthermore, consolidating multiple accounts may make management simpler and make sure you get the most from investments.