The prospect of a comfortable retirement is less certain than it was in years past. With pension plans being less common and the sustainability of the Social Security program uncertain, the burden now falls mostly on individuals to prepare financially for retirement. Without a doubt, it's a daunting task to be sure you have saved enough during your working years to carry you through the rest of your life.
It's certainly not impossible to prepare for the retirement you want, though, if you plan appropriately and follow some important steps to ensure you're doing the most you can to plan and save for retirement. Your retirement years can be some of the most enjoyable of your life if you have adequately prepared for them. Diligently saving and investing while setting realistic expectations for retirement has its rewards. You owe it to yourself to create a reward in the form of a great retirement waiting for you after decades of hard work.
Top Ten Steps to Plan and Save for Retirement
- Start saving early
- Remember that small savings amounts add up
- Take advantage of tax deferral
- Maximize your 401(k)
- Invest aggressively in your early years
- Lock in gains closer to retirement
- Expect a realistic retirement age
- Consider an annuity for lifetime income
- Find ways to make money in retirement doing things you enjoy
- Consider legacy planning
The Steps Explained
No matter how young you are, it is never too early to begin preparing for retirement. After all, the more years you have to save and grow your investment, the larger your retirement nest egg will be once you're ready to use it.
You may not have that much extra cash to contribute while early in your career, but over time, small savings amounts really add up – especially when gains are able to compound in a tax-deferred retirement account such as an individual retirement account (IRA) or 401(k) plan. These types of accounts allow you to make pre-tax contributions, and the gains are not taxed until withdrawn. 401(k) plans are offered by many employers, and many of them offer a feature whereby the employer will match any contribution you make, up to a certain percentage. That's basically free money, so there's no reason not to make the most out of your 401(k) plan if you have access to one.
Once you're set up with a retirement account, it's time to pick your investments. If you're decades away from retirement, you will probably be able to better withstand the short-term volatility of risky investments such as stocks. Historically, the U.S. stock market has been a high-yielding investment over long time horizons, so many investors choose it as a long-term investment. Once you get close to retirement, though, many financial professionals recommend locking in those gains from risky investments and moving assets into something safer and less susceptible to short-term volatility such as a bond fund.
Another thing to consider is at what age you will retire. Nearly everyone wants to retire as soon as possible, but the fact is that the earlier you begin retirement, the longer the period over which you will have to stretch your retirement assets to cover expenses. If you will be relying on Social Security income during retirement, it's a good idea to delay taking income as long as possible. That way, you can maximize the income you will receive.
Once you are retired and ready to tap into that nest egg, one way to plan for steady income is to convert your retirement assets into an annuity. Under this arrangement, a life insurance company will guarantee a stream of income for a period of years, for the rest of your life, or for some combined guarantee. It's a way to make sure you don't outlive your money.
Many people find it rewarding to remain productive during retirement. Keeping active with a part-time job or your own small business can be enjoyable and profitable, too.
Lastly, a retirement plan needs to take into account what happens once you pass away. Do you have a spouse or other loved ones who depend on you financially? Maybe you have a mortgage or other outstanding debt. Having a life insurance policy or another legacy planning arrangement can provide additional peace of mind to you and your loved ones. It's also important to keep your will up to date, ensuring your assets will be distributed according to your wishes once you're no longer here.