Have you put off planning for retirement? You’re not alone. According the U.S. Department of Labor, the best way to prepare for retirement is to know your retirement needs, and set up a plan.
Tips to start planning for retirement
What does your ideal retirement look like to you? There are practical elements to consider when making your grand plan. If you’re looking forward to spending more time with family and friends, it might make sense to maintain your existing home. However, an avid traveler may want a small house close to an airport or seaport—and a golf enthusiast may want to find a dream home near the 18th hole.
Save early and save often
The sooner you begin saving for retirement, the more time your money has to grow. In fact, thanks to the power of compound interest, starting at age 25 versus 30 allows you to accumulate thousands more, even if you’re putting away only $50 a month. Try to pay yourself a certain amount each month, even if you start small. Because contributions to a 401(k) are made pre-tax, the after-tax impact on your paycheck may be less dramatic than you think.
How much money do you think you’ll need?
Assume this number is between 65 and 85 percent of your current income, if you want to maintain your current standard of living. Assess your 401(k), IRA and retirement savings now to determine how much retirement income you can generate. You may want to take more risk or plan on working longer if the numbers aren’t where they need to be.
Set realistic goals
Saving is more effective when you have a goal in mind, and a realistic goal is the best way to prepare for retirement. Bear in mind that the average U.S. life expectancy is 78.6 years, which means your retirement could last 20 years or more. In addition to a long retirement, you should consider the cost of inflation, which will take a bite out of your money’s buying power. Plan accordingly.
Contribute to a 401(k)
A 401(k) is easy, and one of the best ways to save for retirement. If your workplace offers a 401(k) plan, contributing to it will give you an immediate tax deduction, tax-deferred growth on your savings, and—sometimes—a matching contribution from your company. Set aside as much as you can, and start doing so as early as you can.
Contribute to an IRA
IRAs (Individual Retirement Accounts) are A-OK. There are two types: traditional IRAs and Roth IRAs. A traditional IRA offers tax-deferred growth, meaning you pay taxes on your investment gains only when you take distributions (bear in mind that if you take a distribution before you reach 59½, you may end up paying a 10 percent penalty). If you aren’t covered by a retirement plan at work, your contribution may be tax deductible (though contributions do have limits). Contributions to a Roth IRA aren’t deductible, but you won’t owe tax when you take distributions. Get more information on IRAs so you can maximize your long-term savings.
Set up an estate plan
Have you made an estate plan? Although an unpleasant part of retirement planning, you will want to ensure your assets are set up to be properly transferred to your heirs. Read more about estate planning.
Retirement planning mistakes to avoid
Stock market panic
When you do begin investing for retirement, try to ignore stock market news — good or bad. Remember, you are in this for the long term. If you have selected your investments based on your goals and tolerance for risk, you should be able to leave them alone when the market swings. Otherwise, you may sell at a low and lose out on the upside if the investment recovers. Annual or bi-annual portfolio check-ins to rebalance your asset levels are a smarter move.
Don’t forget to take your 401(k)
Leaving a job? Don’t forget to take your 401(k) with you. Roll it over before your exit interview, or within less than two months after you depart. You can move the assets into a new employer’s plan, if you are happy with the investment choices it offers. You can also get yourself a rollover IRA to hold your 401(k) assets without taking a distribution.
Don’t pull your money out early
Take your savings seriously and resist the urge to pull your money out early. If you take what is known as an early distribution before the minimum retirement age of 59 and a half, you owe taxes on the money, plus you will likely pay a 10% fine. You lose your tax advantage and your long-term accumulation, and you lose valuable time. So when should you start taking distributions? You can try to determine your life expectancy and create a target savings goal to meet your needs for a specific number of years in retirement. The longer you can extend your working years, the better off your retirement will be. If you have an IRA, you are required to start taking distributions around age 70 and a half. But with a 401(k), your account is safe as long as you are working.