Even in the best of times, it can be common for people to experience a feeling of insecurity about retirement. Do you have enough money saved up? Are you prepared for major life events post-retirement? The answers to these and other related questions depend on how much preparation you’ve engaged in, as well as your unique circumstances. We’ve collected some helpful general advice regarding ways to prepare for retirement and how to know when you’re ready to retire.
How to Prepare for Retirement
One of the key things you can do to prepare for retirement is to start early and be consistent. According to the Washington State Department of Retirement Services, making automatic contributions to your accounts represents one of the most effective methods for ensuring consistency; you’ll set aside a portion of your income regularly without even having to remember it. One trick that you can try is to separate your direct deposit so that a certain amount from each paycheck goes directly into a savings account, minimizing the risk that you’ll overspend or dip into savings.
Another key aspect of retirement preparation is diversifying your assets. Take advantage of all the programs available, such as your IRA, 401(k), and personal investment portfolio. Using a health savings account is another way to build up your assets for retirement while reducing your exposure to taxes. Each of these programs has a unique advantage, and splitting your savings between them takes a bit of management that pays dividends — literally.
Pitfalls to Avoid When Planning for Retirement
As you’re planning for retirement, there are a few things you may want to avoid. The first is to remove the rose-colored glasses when you’re planning ways to save. No matter how robust your investments are, you can’t count on them dramatically increasing in value. Even the most stable companies can encounter difficulties that cause your stocks to lose value. Instead of counting on value growth, focus on consistently adding to your portfolio and diversifying month over month, year over year.
Secondly, the IRS adds significant fees to early withdrawals from your IRA. While it is occasionally a necessity to withdraw money for emergencies, you should avoid doing so in most situations. In certain cases, it may be a wiser decision financially to take out a short-term loan for an acute expenditure rather than paying the penalty tax added to an early withdrawal from a retirement account.
Finally, be aware of “lifestyle creep.” In brief, lifestyle creep takes place when the small expenses — that daily cup of coffee, that Netflix subscription, and that weekly visit to your favorite restaurant — start to stretch the limits of your disposable income. This issue can appear due to inflation, changes to your income, or even an increased reliance on creature comforts without realizing how much they cost. Whenever you’re reviewing your finances, take a look at what you can cut out and where you can trim back some of your expenses.
How to Know When You’re Ready to Retire
Ultimately, if you’ve been taking appropriate steps, the question of when you’re ready to retire depends on the kind of lifestyle that you’d like to maintain post-retirement. There are some arbitrary guidelines, such as having saved 10 times your annual income by age 67, according to Fidelity. But, depending on where you live, you might not need as much — or you could need significantly more. For example, if you own your home outright and live in a rural area with low property taxes, you may be able to make it work by looking at your budgeted annual expenses and multiplying them by 45 (anticipating around 30 years, with an extra 50% to account for inflation).On the other hand, if you’d prefer to retire in a city setting and are subject to higher tax rates, then it may be prudent to have more of a buffer and accumulate 15 times your annual salary.
Furthermore, your extended family may play a role in your decision-making process. If you want to be able to provide added security to adult children or contribute toward your grandchildren’s education, you may want to save even more during your career.
If you’re looking to retire early, then it’s important to have a more dynamic mix of savings and investments, potentially with a substantial amount funding an annuity that could serve to replace your income and cover your retirement expenses. Ultimately, the final determinant about whether or not you’re ready to retire comes down to how comfortable you are with your savings. Consider finding the number that makes you feel comfortable and adding another 50% to it to support your continued security once you exit the workforce.
Resource Links
“How Much Do I Need to Retire?” via Fidelity
“IRA FAQs” via the IRS
“If Your Spending Is Eating Your Savings, You Might Be Experiencing ‘Lifestyle Creep‘” via NPR
“8 Ways to Prepare for Retirement” via Washington State Department of Retirement Services