“Failing to plan is planning to fail,” which couldn’t be truer when preparing for retirement. With life expectancies on the rise and the future of social safety nets uncertain, taking the reins on your retirement planning is more important than ever. Here’s what you should do to ensure your golden years are secure and enjoyable.
Start Early and Save Consistently
You should begin saving for retirement as soon as possible. Thanks to the power of compound interest, even small amounts saved in your 20s can grow significantly by the time you retire. Per the U.S. Department of Labor, every ten years you delay starting to save for retirement could require you to save three times as much each month to catch up.
Consider contributing to employer-sponsored retirement plans, like 401(k)s, where contributions are often matched up to a certain percentage — it’s essentially free money. The IRS reports that as of early 2023, Americans have accumulated over $6.2 trillion in 401(k) plans.
Understand Your Retirement Needs
Retirement is expensive. It is estimated by experts that to maintain your standard of living once you retire, between 70 and 90 percent of your pre-retirement income is required. The average life expectancy is around 78.9 years in the U.S. You may find yourself in retirement for 20 years or more. Thus, it is important to plan accordingly for your post-retirement life.
Use retirement calculators and seek financial advice for a personalized plan.
Diversify Your Investments
Diversification is key to a balanced portfolio. The stock market has historically provided returns of around 10% annually before inflation, but it’s not without its ups and downs. By diversifying, you can protect yourself against significant losses.
It is important to diversify your investments across various asset classes to avoid putting all your eggs in one basket.
Plan for Health Care Costs
In retirement, health care is a major expense. Among 65-year-old couples retiring in 2023, Fidelity Investments estimates that they can expect to spend an average of $300,000 on health care and medical expenses throughout retirement. Medicare will cover some costs, but it’s far from all-inclusive.
Try taking advantage of Health Savings Accounts (HSAs) if you’re eligible, and look into long-term care insurance to cover costs that Medicare does not.
Don’t Forget About Inflation
Over time, inflation can erode your purchasing power. If we consider a 3% annual inflation rate, the purchasing power of $1 million would drop to about $412,000 over 30 years.
Consider including investments such as stocks or Treasury Inflation-Protected Securities (TIPS) to outpace inflation.
Review Your Plan Regularly
Life changes — and so should your retirement plan. Whether it’s a change in income, an unexpected expense, or a shift in the economy, staying on top of your plan is crucial.
Review and adjust your retirement plan at least once a year or after significant life events.
Entering retirement with a load of debt can significantly strain your finances. Per the Consumer Financial Protection Bureau, mortgage debt among seniors rose from 22% in 2001 to 30% in 2011. In 2016, the Survey of Consumer Finances found that 29.2% of households headed by someone 65 years or older had outstanding mortgages or home equity loans. The median amount owed was $68,500.
Debt among Americans 75 and older has risen sharply over the past few decades, with over half now carrying debt as compared to just a fifth in 1989, according to the federal Survey of Consumer Finances released last month. Avoid retiring with high-interest debt by prioritizing its repayment.
Preparing for retirement is a long-term process that requires focus, discipline, and a proactive mindset. By starting early, understanding your needs, diversifying your investments, planning for health care costs, accounting for inflation, reviewing your plan regularly, and minimizing debt, you can make sure that you retire comfortably and with security. Remember, the decisions you make today will shape the lifestyle you have tomorrow.