Ultimate Guide: How to Prepare for Retirement

How to Prepare for Retirement

When it comes to retirement, most people are either languishing in sorrow over past financial blunders or winning considerable money and on course to live the retirement they’ve always wanted.

Here’s the difference: those who are on schedule to meet their retirement goals have a strategy. They’re deliberate and focused, and they took the time to consider what kind of future they desired. Then, they worked their plan with full speed ahead—they didn’t let anything stand in the way!

Do you have a retirement plan? Listen: Retirement planning is not something just for older people. It’s a clever person thing. It’s never too early to start planning for your retirement. In fact, the earlier you start, the more time you have to build a solid financial foundation for your retirement years.

Key Takeaways

Retirement planning entails determining how much money you need to save for retirement and creating a plan to achieve

that goal.

Invest 15% of your gross salary in retirement plans that offer tax advantages, such as a 401(k) or Roth IRA, to develop a substantial retirement nest egg.

Retirement planning includes determining when to begin receiving Social Security benefits and how to pay for medical expenses in retirement.

Keeping a long-term perspective will help you stay on track and prevent costly blunders as you approach retirement.

What is Retirement Planning?

Retirement planning involves determining how much money you will need to save for retirement and implementing a plan to achieve that goal.

Here are some questions to ask yourself when you begin planning for retirement:

What would I like to do in retirement?

When do I want to retire?

How much money should I save by the time I retire?

How much should I invest each month to meet my retirement goals?

What retirement accounts should I use?

What should I invest in?

What about medical expenses and long-term care during retirement?

Why is having a retirement plan so important? Because it provides a clear road to achievement. A retirement plan takes a significant, sometimes difficult-to-imagine goal. It breaks it down into small, attainable steps you can take right now (and continue to bring) until you accomplish the big-picture goal. It provides a sense of security, knowing that you’re taking the necessary steps to secure your financial future.

So, take some time to sit down with your spouse or meet a skilled investing advisor to address these questions. Remember that the sooner you begin planning for retirement, the quicker you can progress.

How to Plan for Retirement in 9 Steps.

Are you debt-free and have a fully funded emergency fund? If that’s you, amazing! You are ready to begin investing and saving for retirement. Whether you’re currently paying off debt or saving money, we want you to consider retirement—it’s what you’re working for, after all.

It’s okay if the prospect of planning for retirement intimidates you. Take a deep breath and follow these simple steps to start your plan.

Step 1: Determine your retirement goals.

Step 2: Set aside 15% of your income for retirement.

Step 3: Contribute to your 401(k).

Step 4: Fund a Roth IRA.

Step 5: Pay off your mortgage early.

Step 6: Consider your Social Security alternatives, such as delaying your benefits to increase your monthly payout, to make the most of your retirement income.

Step 7: Budget for healthcare expenses in retirement.

Step 8: Maintain a long-term perspective.

Step 9: Consult with a financial adviser.

Step 1: Determine your retirement goals.

What is your retirement dream? Do you wish to travel around the country in an RV? Buy a lakefront home and spend your days fishing. Spend a lot of time with your grandchildren? 

Whatever your hopes and goals are, you need a high-definition mental image of what you want your retirement to look like to keep you motivated when you want to let go of the gas.

It will also provide a starting point for retirement planning and help you answer some critical questions, such as how much money you will require by the time you retire, whether you need to

downsize your home or relocate to a more affordable area, and how close you are to making your dream retirement a reality.

Step 2: Set aside 15% of your income for retirement.

Those who save for retirement have money to spend once they retire. The question is, ‘How much is enough?’ We recommend investing 15% of your gross income in mutual funds that focus on stocks with a history of steady growth, through tax-advantaged retirement savings programs such as your employer’s 401(k) or a Roth IRA.

Why 15%? We discovered that a 15% objective is sufficient to make progress on your retirement goals while providing you with enough leeway to concentrate on other financial goals, such as supporting your children’s college education, paying off your home early, or starting a business. You can increase your retirement savings once you have an empty nest and a paid-for house.

A couple with a $75,000 household income might have around $1.4 million in retirement if they continuously invest 15% of their income for 25 years. In 30 years, they may have $2.6 million—assuming they never receive another increase during their working lives.

You should be able to live off the increase in your retirement funds rather than withdrawing from them. You can use our Retirement Calculator to generate forecasts based on your monthly contributions and the date you plan to retire.

Step 3: Contribute to your 401(k).

According to The National Study of Millionaires, eight out of ten millionaires contributed to their company’s 401(k) plan to increase their net worth. No other investment instrument was more critical in achieving billionaire status than the 401(k)!

If your employer matches your contributions, this is where you should begin investing. Who says no to free money?

Step 4: Fund a Roth IRA.

If you don’t have a 401(k) or are dissatisfied with the investing options available through your employment retirement plan, an individual retirement account (IRA) is your next best friend.

The way to go is the Roth IRA (which also allows for tax-free growth and withdrawals during retirement). One of the many advantages of IRAs is that you can select from hundreds of mutual funds on the open market rather than the limited menu of alternatives supplied by a 401(k), and you have more freedom and control over your account.

However, bear in mind that IRAs have lower contribution limitations than 401(k)s, so you may be able to invest up to the match in your 401(k), max out your Roth IRA, and yet fall short of the 15% retirement investment target we propose. If so, return to your 401(k) and invest the balance there!

Step 5: Pay off your mortgage early.

We’ve discussed how to invest your way to a comfortable retirement. However, you should also set a goal of retiring entirely debt-free. That implies you must have a paid-for residence before inviting your friends, family, and coworkers to your retirement party! Debt means risk, and we want to remove risk from your retirement plans.

Most Baby Steps Millionaires have two-thirds of their net worth in retirement savings and one-third in paid-off homes. The average millionaire takes 10.2 years to pay off their mortgage, while nearly seven out of ten (67%) live in paid-for homes with no mortgage.

As your job progresses and your income rises, invest part of that extra money in your mortgage rather than allowing lifestyle creep to set in. You can use a Mortgage Payoff Calculator to see how adding a few extra monthly payments each year will reduce your mortgage term.

Step 6: Consider your Social Security alternatives.

Consider Social Security benefits the icing on the retirement cake rather than the cake itself. Because by the time you retire, there may be little frosting left!

If Congress does not act by 2033, the Social Security Administration will exhaust its excess reserves and can pay only a part of the total payments to retirees.2 Translation? You cannot rely on Social Security to support you.

Here’s another essential conclusion concerning Social Security benefits: While you can apply for benefits between 62 and 70 (the average full retirement age is 66 or 67), postponing your payments rewards you.

According to the Social Security Administration, the following are the monthly benefits for our country’s highest earnings in 20243:

Age 62 (early retirement age): $2,710.

Age 66 (standard or full retirement age): $3,652.

Age 70 (delayed or late retirement age): $4,873.

Deciding when to start receiving Social Security payments might take time. In most circumstances, it makes sense to reap those benefits early and often, but you should consult with your investing advisor before pulling the trigger. Because once you start receiving Social Security, there is no turning back!

Step 7: Budget for healthcare expenses in retirement.

When planning your long-term retirement savings goals, pay attention to one critical component: medical bills. A couple retiring at 65 will need around $338,000 in savings to pay their healthcare bills in retirement.4

If you want to spend your hard-earned money on something other than medical expenditures, here’s how you can budget for them.

Open an HSA.

A health savings account (HSA) is an excellent way to fund medical expenses in retirement. Essentially, it’s a medical savings account combined with a high-deductible health plan (HDHP) with a triple tax break: You make pretax contributions, invest money that grows tax-free, and take tax-free withdrawals for eligible healthcare expenses. It’s a tax win-win situation!

And, yes, you can invest with an HSA! Some providers will allow you to invest your HSA funds if you reach a certain amount (typically $500 or $1,000), allowing you to build your retirement medical savings.

This is a tool you should utilize sooner rather than later because once you’ve registered in Medicare, you won’t be able to open or contribute to an HSA.

And speaking of Medicare…

Sign up for Medicare even if you’re still working.

Medicare is a government-sponsored health insurance program that pays for medical care for persons aged 65 and up. If you are qualified for Social Security payments, you are also eligible for Medicare coverage beginning at age 65.

After you retire, you have eight months to enroll in Medicare without penalty.5 If you sign up for Medicare while still working (which is a possibility), it will become your primary or secondary insurance, depending on the size of your employment.6

Get long-term care insurance.

Long-term care insurance covers the costs of nursing homes, assisted living, and in-home care. And the essential truth is that most retirees will eventually require long-term care. If you are unprepared, the cost might crush your retirement savings—adding to your family’s financial burden. That’s why you should buy long-term care (LTC) insurance when you turn 60. Period.

Step 8: Maintain a long-term perspective.

Fear, anxiety, and impulsiveness are the three most significant obstacles you’ll face when investing and planning for retirement. Not only will they drive you to worry and make poor decisions—such as withdrawing all of your money from your 401(k) when the stock market is down—but they will also prevent you from investing

It would help if you had a lot of patience to acquire riches and invest successfully. Slow and steady wins the race every time. There are no shortcuts.

Remember that investing is a marathon, not a sprint. And it is not for the faint of heart. The stock market is a roller coaster that will go up and down, but you must be strong enough to stay on board through all the twists and turns.

Step 9: Consult with a financial adviser.

You need someone who can assist you in developing a retirement investing strategy tailored to your lifestyle and goals. This involves working with a trusted financial advisor or investment specialist.

Retirement preparation is too essential to handle on your own! According to the National Study of Billionaires, 68% of billionaires used a financial counselor to increase their net worth! They understand the importance of someone there to guide them through their finances.

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