A successful retirement depends on more than just crunching numbers. It also requires letting go of relationships, a schedule, and even an identity.
Those challenges can contribute to the anxiety many workers and retirees feel about their financial future. But by focusing on what’s controllable, you can make purposeful choices and build confidence.
Know Your Options
Whether you want to take advantage of financial advice or handle your retirement plan independently, running the numbers is essential. This means figuring out when you might have enough money to retire and where your income will come from. It would help to consider what you will do with your home and other assets, including whether you’ll downsize or turn your property into an income-generating rental.
It’s also worth knowing about the different tax-advantaged retirement accounts available. For example, some people choose an IRA vs 401k, while others may use a SEP IRA if self-employed. These accounts allow you to contribute pre-tax dollars and let your money grow tax-deferred until you withdraw it in retirement.
The key is to be prepared for life’s unforeseen challenges, like job loss, health care costs, or market crashes. This is why creating a comprehensive plan and revisiting it regularly is helpful. Using a retirement calculator, working with an advisor, or making minor adjustments can help ensure your project is on track to reach your goals.
Know What You Want
Most people dream about the lifestyle they want in retirement, but knowing how much to save isn’t always easy. The amount of money you’ll need in retirement isn’t one-size-fits-all, and it can vary depending on your desired lifestyle, annual salary, expected yearly raises, inflation, investment portfolio performance, and healthcare expenses.
It’s a good idea to list your top retirement goals and determine their approximate costs. This helps you create a budget that ensures you don’t overspend in retirement and that your savings will last.
Consider how much you’ll travel during retirement, who you’ll spend time with, and any activities you would like to start or resume. Also, consider how much your day-to-day expenses (such as food and housing) will increase with age. An emergency savings account is a good idea to cover any unexpected events during retirement. An excellent way to set up this emergency fund is to automatically transfer funds from your checking into your investments on the same day you get paid.
Know What You Can Afford
The more you save, the less you may rely on Social Security and other retirement income streams. However, it would help if you also considered the unexpected expenses that can pop up in retirement. You could lose your job, the stock market crash, or you might need to pay for healthcare costs.
Many finance experts recommend saving 80% to 90% of your pre-retirement salary to have enough money in retirement. But this is just a general rule of thumb, and everyone’s situation differs.
Considerations include your age when you plan to retire, expected annual raises, inflation rates, spending habits, and travel plans. You might also have other sources of income in retirement, such as a part-time job, consulting work, or rental or passive income from your home.
You should also consider your debt, which can add up fast and consume a significant portion of your income. If you are carrying substantial debt, it is an excellent idea to prioritize paying it off to free up additional funds for saving and other retirement-related expenses.
Know What You Can’t Afford
Many people assume that being able to retire is simply a matter of investing wisely. But that’s a mistake. The real problem is spending too much and not saving enough.
To get a good idea of what you can afford, try tracking your expenses for 30 or 60 days. Then, look at ways to reduce those costs. This means eating out less or shifting money from luxuries to savings.
Generally, it’s recommended that you save enough to replace 70 percent of your pre-retirement income in retirement. That’s because some costs will be lower (like commuting), while others may increase (like travel). You must also factor in any expected Social Security or pension income.
In addition, try to pay off large debts as quickly as possible. This will improve your cash flow and help you feel more confident about retirement because you won’t have debt over your head. A few extra dollars a month can go a long way to reducing your debt load.
Know Your Risks
While retirement can be exciting, it also comes with several risks. These risks can include inflation, market volatility, and healthcare costs.
It’s important to understand these risks to make plans accordingly. One way to minimize these risks is by creating an emergency fund. This can help cover unexpected expenses without dipping into your retirement savings.
Another risk retirees face is the potential for their savings and investments not to last as long as they do. This can be caused by various factors, including the possibility that they will live longer than expected or that their investments will produce below-average returns over an extended period.
This is known as the sequence of return risk. It’s a severe problem for retirees because they have less time to recover from negative investment returns. To minimize this risk, it’s best to have a plan that balances guaranteed income sources (such as Social Security, pension payments, annuities, and an appropriate amount of bond coupon payments) with growth assets that can potentially provide higher returns.