Lifelong savings can help people feel more prepared for financial transitions, including paying off debt and investing in retirement accounts like 401(k)s and IRAs.
Young adults may not have much money available to them for retirement plans, but time can work in their favor by capitalizing on compound interest.
Determine Your Goals
As part of your retirement preparations, it's essential that you consider the lifestyle that awaits you when the day comes. For instance, if traveling is something you wish to pursue during retirement then that will require an adequate nest egg.
Medical expenses must also be factored into retirement plans. Although it's hard to estimate exactly how much medical care will cost during retirement, since its price depends on factors like your age and medical treatment requirements; actuarial life tables can give an approximate idea, while Medicare or supplemental health insurance will likely help cover some costs associated with longevity-related treatments.
Consider unexpected costs such as sudden job loss or helping a child financially or emotionally, by opening an emergency savings account that will enable you to cover these expenses without drawing upon retirement savings. Also, set up automatic deductions from your checking account into investment or retirement accounts each month.
Create a Budget
Once you've calculated what expenses will arise in retirement, it's time to create a budget and see whether your new lifestyle is both manageable and affordable.
Keep in mind that as you approach retirement, some expenses will increase while others decrease. Examples include housing costs, travel costs and entertainment subscriptions. To combat increased spending, try finding ways to cut costs in these areas such as saving food and traveling costs as well as taking advantage of senior discounts or moving into cheaper parts of the country.
As part of your retirement planning, it is also essential to account for all sources of income such as Social Security, retirement savings distributions and annuity payments. Doing this will allow you to compare expenses against actual income and see whether any adjustments need to be made. A financial planner can assist in helping determine your best options for income sources as well as setting and tracking a budget.
Set Aside Money
Utilise whatever method works for you and automatically set aside part of each paycheck for saving. This takes away any temptation or uncertainty about saving, depositing it directly into your retirement account. If your employer offers matching contributions in your 401(k), this provides another chance to boost savings.
Don't overlook any potential windfalls such as tax refunds or unexpected income that could come your way; use these extra resources to make larger contributions to your IRA or other accounts.
After this step is completed, consider your desired lifestyle in retirement. Certain expenses, like utility bills or mortgage payments, will still need to be met after retiring, so be sure to discuss this matter with your spouse or other family members and reach a consensus that accommodates everyone's preferences and budget.
Invest
Your investment efforts can reduce the amount you need to spend during retirement, yet how much you save and which investments to pursue depends on your retirement goals and needs. For instance, traveling may require more money than staying home would.
Finance experts often suggest setting aside between 80% and 90% of your pre-retirement annual income in savings accounts. You can use online calculators or apps to help get an estimate of this number in relation to your specific circumstances.
Consider taking advantage of 401(k) matching programs and opening an Individual Retirement Account (IRA), either traditional or Roth, depending on your eligibility status. Self-employed people can set up an SEP IRA similar to traditional ones but tailored specifically towards small business owners and freelancers; similarly an annuity contract provides monthly income during retirement.
