According to a 2021 survey, 42% of retirement-aged Americans say the pandemic has in fact changed their current or planned standard of living through retirement.
Whether you are among those considering a change in your retirement timeline, it’s essential to have a plan for your golden years.
Many people are unsure what they should do to prepare for life in retirement or start planning for it.
The best time to start planning for retirement is as early as possible. No matter how far in the future retirement is for you, starting to invest early and staying consistent are the best things you can do to prepare for retirement.
With the magic of compound interest, planning for retirement as soon as possible considerably reduces the efforts (and funds) you need to contribute in order to get to your desired outcome. In addition to starting as early as possible, here are five habits you can implement today to help retire comfortably.
1. Decide What Retirement Looks Like for You
Regularly investing in your 401(k), 403(b), 457(b), IRA, or any other investment accounts, building passive income streams that you can access at retirement, are significant steps when it comes to retirement planning. But it is equally important to have a clear idea of what your goals are.
Here are some of the questions that you should ask yourself:
- When and where do you want to retire?
- What type of activities do you expect to do during retirement?
- Do you plan to stop working entirely, or do you intend to earn money working part-time?
- Will you have passive sources of income or part-time work?
2. Determine your Retirement Needs
A good starting point to determine your retirement number is to look at your current expenses. Do you live comfortably with your current expenses now? If not, how much more would you want to be able to spend every year to feel comfortable?
Once you have a better idea of that, you can use Personal Capital’s free Retirement Planner to analyze different scenarios and assess how you’re doing regarding retirement planning. This way, you can make adjustments if needed.
You shouldn’t be discouraged if you realize that you’re under-prepared for retirement after this process. Unfortunately, it’s the case for many people, according to PWC’s recent Retirement in America Report.
Now that you have an idea about your retirement needs based on your current expenses, it’s wise to consider other sources of income like social security benefits, or passive income streams. It’s also essential to look at expenses that may increase or decrease during retirement, like healthcare or mortgage expenses.
In addition, having an investment calculator will help you determine how much you need to invest every month to get to the final number you have in mind. You can use a compound interest calculator to help you during this process.
3. Know Your Risk Profile and Create a Plan
It is essential to know your risk profile, which depends on your retirement timeline and how comfortable you are with risk.
You can adjust your investment strategy based on your risk profile. Therefore, it is crucial to pick investments in alignment with your risk tolerance level.
Once you know the number you need to retire comfortably, you can create a plan and work backward from there.
Can you adjust your expenses to reach that, or do you need to earn more money?
If your current income does not allow you to invest as much as you need towards retirement, determine how much additional income you need to reach that goal. You could take steps to get promoted at work, look for a higher-paying job, or earn income outside of your 9-to-5.
4. Use Tax-Advantaged Accounts
Tax-advantaged accounts like 401(k)s, IRAs, and Health Savings Accounts are great tools to assist you on your journey. In addition, many employers have contribution matches or incentives to encourage their employees to invest in tax-advantaged accounts.
Traditional accounts allow you to save money on taxes upfront and defer tax payments until retirement. In contrast, Roth accounts allow you to pay taxes upfront, but contributions and earnings grow tax-free until retirement. If you are able to max out tax-advantaged accounts, consider working with a money manager for additional investing opportunities.
5. Create Systems to Simplify the Process
It can be challenging to save towards a goal far in the future. One way to make it easier is to implement systems.
Consider setting up automatic transfers from your checking account (or paycheck for employer-sponsored retirement accounts) to your savings and investing accounts. This way, you don’t even have to think about it. For example, you can automate monthly or even weekly transfers to your retirement accounts. Automatic investing!
In addition, consider increasing your contributions every six months or year, whether it’s by 1% or more, so that you continue to invest more towards your retirement.
Also, developing the habit of rebalancing your investment portfolio every six months or year helps realign it with your risk profile.
The Bottom Line
To prepare for a happy retirement, take the time to create a vision for your retirement, understand your timeline and what type of investor you are, and implement systems to help you reach your goals.
Retirement planning is part of your overall financial plan. You can take a few actions now to get yourself on the right track.
- Download 65 Ways to Retire Smart, an actionable guide with insights from fiduciary financial advisors. The guide is free.
- Sign up for the Personal Capital Dashboard. Millions of people use these free and secure professional-grade online financial tools. You can use them to see all of your accounts in one place, analyze your investments, and plan for long-term financial goals.
- Consider talking to a fiduciary financial advisor for more detailed guidance on your retirement saving strategies.
Author is not a client of Personal Capital Advisors Corporation and is compensated as a freelance writer.
The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. Compensation not to exceed $500. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.