You work your entire life and save diligently in order to enjoy your retirement. It sounds simple, enough, but the realities of preparing for retirement can be much more complicated and overwhelming for some people. In fact, a recent survey found that 80 percent of Americans have expressed anxiety that they have not saved enough to be financially independent in retirement.1
If you’re concerned about your own prospects for retirement, here are six things to start doing differently right now.
Change #1: Better Understand Your Retirement Needs
The average person spends about 20 years in retirement. This is a significant amount of time in which to be financially independent, which means it’s important to plan accordingly. The Department of Labor recommends that retirees prepare to live on 70 to 90 percent of their pre-retirement income in order to maintain their usual standard of living.2 Because of this, it is important to start planning early. If you are living comfortably now, ask yourself if you have saved enough to continue living this way once you have retired.
Change #2: Contribute to a 401(k)
In 2018, almost 30 percent of private industry workers had access to a defined contribution plan at their job but still did not participate.2 If your employer offers a retirement plan, such as a 401(k), seriously consider making monthly contributions. Younger employees find it easier to justify putting this off. But the truth of the matter is, it’s never too early to start.
Compound interest accumulates steadily over time. This means that the earlier you start saving, the more your money will grow toward retirement. Plus, money contributed to a traditional 401(k) or IRA is tax-deferred, which makes it an appealing option for those looking to lower their tax obligation right away.
Change #3: No 401(k)? Utilize an IRA
You can put up to $6,000 a year into an IRA or $7,000 if you are 50 older.3 You’ll want to choose between a traditional IRA or a Roth IRA. The difference will be the tax advantages. A traditional IRA means you’re contributing money tax-deferred to your retirement account. When you withdraw in retirement, you will need to pay taxes on the withdrawals. Because the money is contributed tax-deferred, it lowers your current year’s adjustable gross income.
Alternatively, a Roth IRA means your contributions are made with after-tax dollars. When you make withdrawals in retirement, they will be tax-free (because they were already taxed when deposited into the account).
IRAs offer everyone a simple way to save money. To simplify the process further, consider establishing automatic deductions. Each month, a set amount of money will automatically be deposited into your IRA from your checking or savings account.
Change #4: Do Not Touch Your Retirement Savings
By withdrawing from your retirement savings now, you lose valuable principal and interest that could have been income in retirement. Additionally, you may lose valuable tax benefits and pay a tax penalty for withdrawing early. If you change jobs, make sure that you leave your savings in your current retirement plan. Or you can roll them over to an IRA or your new employer’s retirement plan.
Change #5: Ask Your Employer About Pension Plans
Does your employer offer a traditional pension plan? Even though many companies no longer offer one, check to make sure. If they do, see if you’re covered. Before you change jobs, find out what will happen to your pension benefit. If your spouse has a pension plan, you may be covered through theirs as well.
Change #6: Talk to Your Financial Advisor
One of the most impactful things you can do for your future retirement is work with a financial planner who is familiar with your situation. They can provide you with realistic expectations, savings goals and investment advice based on your tolerance for risk. Be open and honest in your discussions, and express your fears or anxieties regarding your future retirement.
When it comes to your retirement, it’s important that you’re knowledgeable, confident and diligent in your planning efforts. If you are used to living a particular lifestyle and want to continue doing it once you are no longer working, planning ahead is critical. And if you are unsure where to start, speak with a trusted financial professional to find what works best for you and your unique situation.