Planning for retirement may seem like planning for the far-off future, but it’ll be here before you know it. Are you financially prepared? Experts suggest saving for retirement as early as possible to ensure you have enough money for your daily life after you’re no longer working. Unfortunately, many people don’t start saving until it’s potentially too late, leaving them to work well past the age of retirement.
Retirement planning ensures you have enough money in your savings to pay for all the activities you want to accomplish when you get older while supporting your financial health. You need a plan if you plan to retire within the next few years or decades.
Reviewing your income and spending habits can help you calculate how much you can put into a retirement account that will accrue interest. But what then? Keep reading for tips to prepare for retirement.
Set Goals
Setting goals for retirement can help you determine how much money you’ll need for daily expenses and activities you want to enjoy. For instance, you’ll need to pay for medical costs, housing, food, and daily necessities. However, you may also want to travel or do something you’ve never done before. In addition, you might need to make changes to your home, ranging from kitchen renovations to repairs.
Estimate Expenses
After setting your goals and determining what you want to do in retirement, you’ll need to estimate your expenses as best you can. Of course, costs change with time, so it’s impossible to be accurate.
However, you can estimate how much things will cost on a monthly basis in retirement. For instance, you’ll have regular costs like your mortgage or rent, groceries, utility bills, and so forth. You may also need to use professional tax software to estimate your taxes, which you’ll continue to pay based on retirement income and the type of retirement accounts you withdraw from.
Consider Downsizing
Downsizing is the process of liquidating your largest asset — your home— and purchasing a less costly home. What you have leftover after the purchase of your home and buying a new home or deciding to rent is cash in your pocket.
Downsizing before retirement essentially leaves you with more to save or spend. However, anything you earn on the sale of the home may be subject to taxes, so it’s crucial to understand how this decision affects your finances. In some cases, it may be worth it to stay in your home. If you do decide to stick with your current home, consider remodels! These projects can add a lot to your home’s value on the market. Consider projects like new flooring, bathroom upgrades, or a kitchen remodel.
Consider When to Retire
You can begin collecting social security benefits at age 62, but the longer you wait, the more money you stand to earn in retirement from these benefits alone. In addition, waiting will help your retirement accounts accrue more interest. If you begin collecting benefits at age 62, your benefits will be much lower than if you collect between the ages of 66 and 67. There are no benefits of collecting after the age of 70, though.
With this age range in mind, it’s worth considering when you’ll begin tapping into your benefits. For most retirement accounts, you can begin withdrawing funds without penalty at the age of 59 ½. Therefore, you can retire around age 60, but that might not be worth it if you’ll rely heavily on social security benefits.
Seek Professional Advice
You should check in on your retirement accounts throughout your life. However, you should be especially vigilant as you get closer to retirement age. In your younger years, you’re more tolerant to risk because you have more time to make up for any mistakes. However, as you get older, there’s less room for risk because you’ll have less time to recover.
Therefore, during the last few years before retirement, it’s worth talking to a professional advisor who can help you decide which investments are best for you based on your specific goals and circumstances.
Eliminate Debt
Having debt can hamper retirement and your goals because it effectively reduces your cash flow. The more your monthly retirement income goes toward paying debt, the less you have to spend overall. In retirement, you’re no longer working; your only income is social security benefits and withdrawals from your retirement savings accounts.
Paying off debt before retirement will reduce stress and prevent financial issues later. Try to pay off all your
car and mortgage loans before you begin collecting social security benefits.
Consider Medical Costs
Once you retire, you’ll no longer have an employer-sponsored health insurance plan. Unfortunately, Medicare coverage begins at age 65 or older, so you may have an insurance gap if you retire before age 66.
During this gap, you’ll need to find your own health insurance and be responsible for 100% of the monthly premium. Then, once you qualify for Medicare, you’ll still need to pay some of your insurance costs out of pocket. Medicare doesn’t cover many long-term medical costs, so you may need supplemental insurance or a savings account dedicated just for health care costs.
Have Emergency Savings
Living off of social security benefits and retirement accounts enables you to live the type of life you want in retirement. However, you should always have an emergency savings account for situations you can’t predict.
For instance, hospital bills if you’re in an accident, home repairs, and other emergencies that can arise can eat into your savings account. An emergency savings fund will reduce some of the stress associated with paying for things you didn’t necessarily plan for. It will also prevent the need to take out loans in retirement.
Starting Preparing for Retirement Now
Preparing for retirement now will make it easier for you to handle your finances and live the type of life you want to live once you reach the age of 62 and can begin collecting social security benefits. While social security can help cover some expenses, it’s not enough to live off of for most people. Therefore, investing in retirement accounts as soon as possible can help you live a higher quality of life in retirement.
Megan Isola
Megan Isola holds a Bachelor of Science in Hospitality and a minor in Business Marketing from Cal State University Chico. She enjoys going to concerts, trying new restaurants, and hanging out with friends.