Retirement is one of the most important life stages a person will go through, and with people living longer (1), the need to properly plan for retirement is critical. This can be a daunting undertaking. Let’s look at some key points that can get you on the right track to planning a successful retirement.
Do Set Goals
When do you want to retire? What type of lifestyle do you want to maintain in retirement? How much will you need to meet your retirement needs? These are just a few of many questions individuals have when they start planning for retirement. Anyone can say they want to save $1 million for retirement, but it takes a lot more work to figure out exactly how much you will really need and how you can get there.
A good place to start is to set definable and attainable retirement goals. Think about the age you would like to stop working. From there, you can work through how much longer you will be working, how much you can save while working, what your planned annual retirement expenses will be, and how long you will need to cover those expenses.
Think about other goals you might have in retirement. It could be a second home, a new vehicle, a boat, an annual vacation or an inheritance left to family or a charity. Once you have an idea of what your retirement goals are, it becomes much easier to estimate how much you should need in retirement.
Don’t forget about inflation! The spending power of $1,000 today will almost certainly not be the same as $1,000 30 years from now. From there, you can begin working out how much you need to be saving now and up until retirement to reach those goals.
Don’t Wait to Start Planning
For many, retirement may seem far off, but time has a way of sneaking up on us. Rather than waiting until retirement is just a few years off, it is prudent to start thinking about retirement now. Whether you are in your 20’s and 30’s and just starting off with your career or in your 40’s and 50’s and getting closer to retirement, having a plan in place can make all the difference for a successful retirement. With a plan in place now, you can work on implementing that plan and adjusting it as needed.
Do Start Saving and Investing Now
The earlier you can start saving for retirement, the better off you will be. The longer you wait, the more you will have to save later in life to catch up. Let’s say you begin saving $2,500 per year at 25 years old. If you assume a 5 percent rate of return over the next 40 years, you would have about $300,000 at 65 years old. If you waited until you were 40 years old, you would need to save approximately $6,300 per year over the next 25 years. At 50 years old, you would need to save approximately $14,000 per year over the next 15 years. The key is to get started as early as possible regardless of the investment vehicle you use.
Don’t Over Rely on Social Security
When available, Social Security benefits are useful tools to help fund retirement. Most American retirees will qualify for Social Security benefits after working at least 10 years (if you’ve never worked, but are married, you may qualify for a spousal benefit). Benefits include retirement and disability income, Medicare and Medicaid and survivor benefits.
Based on when you were born, Social Security benefits generally can be taken as early as 62 years old. The longer you delay activating Social Security benefits (until you reach 70 years old), the higher your monthly payment will be. Most American employers and employees pay into Social Security through payroll deductions, so workers are essentially prepaying for guaranteed lifetime monthly income in retirement. However, as the population ages, there is a concern the program may face solvency issues in the future (2).
With this in mind, a prudent approach to planning for your retirement income needs should include additional savings strategies to help ensure a successful retirement isn’t overly reliant on Social Security income.
Do Prepare for the Unexpected
Life is full of surprises, and everything can change in an instant. While you can’t foresee what life has in store for you, you can prepare for the unexpected and put yourself in a better position to handle unplanned expenses. These expenses could include a medical emergency, loss of income due to the death of a spouse, or a long-term care need. Unexpected expenses, especially medical and long-term care needs, can devastate your financial situation in retirement.
Whether you decide to self-insure with retirement assets or decide to transfer that risk to an insurance policy, preparing for the unexpected can help you keep your retirement on track.