Your initial reaction may be: Retirement? I’m YEARS away from retirement. I don’t have to think about that now.
If you’re more than a decade away from retirement, now is the best time to begin preparing. Younger workers, of course, can use the power of compound interest to ensure a smooth financial picture in retirement.
With compound interest, the earlier you start saving, the greater the accumulated interest on your original investment. The important thing is to start saving your money. The best time to start saving is now—period.
But as you get within that 10-year window, it’s time to start thinking more seriously about what you need to do to prepare for retirement.
Here are some steps to consider:
1. Assess your retirement finances. How much income will you have after you retire? Factor in pensions, Social Security benefits, 401(k)s, IRAs, along with other retirement plans and savings other than pensions, plus any inheritance. Experts differ, but a general rule of thumb is that you’ll need up to 75 percent of your current income after you retire. Determine whether you have a gap.
2. Establish a budget. Pay off debt. If you project a gap in your retirement income, increase the amount of money you are saving and investing.
3. Adjust your investment plan. The general rule is, the closer you get to retirement, the more conservative your portfolio needs to be. After all, at this stage of life, your investing emphasis shifts from growth-oriented equities to preservation of capital. But don’t over-correct: You still want your money to keep growing after you retire. While you may scale back the amount you’re investing in stock funds in favor of “safer” investments, you still need the means to outpace inflation.
4. Estimate future health-care costs. Take into consideration family health history. Research insurance programs, including Medicare, that will meet your needs after your company’s health plan is out of the picture.
5. Determine whether you’ll be transferring any of your assets to family or other beneficiaries. If so, will it be during your lifetime or after? Consider setting up trusts for children, grandchildren, charities or others, if appropriate.
6. Determine life insurance needs and put your important legal paperwork in order. This includes wills, a living will, trusts, power of attorney and medical power of attorney. Also assemble information on key contacts in your life: your attorney, accountant, financial professional, doctors and dentist. Compile a list of account numbers you hold. Tell a trusted family member or friend where to find this information.
Assuming you’ve started with the steps we just outlined, let’s go a little deeper.
As retirement approaches, you’d do well to further define your lifestyle goals. Ask yourself: Are you really going to be happy staying at home or traveling for fun?
As Americans’ average lifespan increases, many find that the most important factor in how they spend their retirement can’t be defined solely by leisure activities. Studies show that retirees who engage in volunteer or part-time work that they find meaningful are actually happier than those who spend their days at home.
Consider volunteering at a nearby nursing home, school or child-care center. Or, if you will require some extra income in retirement, look for a part-time job as a substitute teacher or tutor—something that allows you to share your life’s wisdom with a new generation. The fact is, if you are at typical retirement age, you still have lots to offer.
As you get closer to retirement, it’s also important to bear down on your financial planning. Even if you’ve already projected your income needs, keep several factors in mind:
* A longer lifespan requires savings to last longer.
* Inflation will erode the future purchasing power of today’s dollars.
* An overly conservative asset allocation may put you at risk for not being able to outpace inflation.
* Rising health-care expenses could force you to withdraw more from savings or investment accounts than you expect.
Consider these risks when planning your retirement portfolio. And whatever other adjustments you make, be sure you’re investing the maximum into your 401(k) before leaving the workplace.
Most workers age 50 or older may contribute a maximum of $22,000 per year to a 401(k). Check with your financial adviser to ensure you’re doing that.