According to the Department of Labor, only half of all Americans have calculated how much they need to save for retirement. As much as we’re all looking forward to the day of retirement, financial security in this part of our lives won’t happen without planning and commitment. No matter how far off you may be from this stage in your life, here are the best ways that you can prepare for retirement:
Start Saving, Keep Saving and Stick to Your Goals
If you are already saving, whether for retirement or another goal, keep going! You know that saving is a rewarding habit. If you’re not saving, it’s time to get started. Start small if you have to and try to increase the amount you save each month. The sooner you start saving, the more time your money has to grow. Make saving for retirement a priority. Devise a plan, stick to it and set goals. Remember, it’s never too early or too late to start saving.
Know Your Retirement Needs
Income typically decreases for people when they retire. It’s essential for you to know what your expected retirement income will be and compare it to the expenses and debt you think you will have in retirement. Consider what kinds of loans you need to pay, such as auto or credit cards, and take into account health care and long-term care costs you may have, which tend to be higher for older individuals. Make a plan for paying off any debt you don’t want to take into retirement and don’t stray from that goal.
Contribute to Your Employer’s Retirement Savings Plan
If your employer offers a retirement savings plan, such as a 401(k) plan, sign up and contribute all you can. Your taxes will be lower, your company may kick in more and automatic deductions make it easy. Over time, compound interest and tax deferrals make a big difference in the amount you will accumulate. Find out about your plan. For example, how much would you need to contribute to get the full employer contribution and how long would you need to stay in the plan to get that money
If your employer doesn’t offer a retirement plan, suggest that it start one. There are a number of saving plan options available. Your employer may be able to set up a simplified plan that can help both you and your employer.
Learn About Your Employer’s Pension Plan
If your employer has a traditional pension plan, check to see if you are covered by the plan and understand how it works. Ask for an individual benefit statement to see what your benefit is worth. Before you change jobs, find out what will happen to your pension benefit and how you may access it. You should also look into what benefits you may have from a previous employer and if you are entitled to benefits from a spouse’s plan if you are married.
Find Out About Your Social Security Benefits
On average, Social Security retirement benefits replace 40% of pre-retirement income for retirement beneficiaries. You may be able to estimate your benefit by using the retirement estimator on the Social Security Administration’s website. For more information, visit ssa.gov or call 1-800-772-1213.
Consider Basic Investment Principles
How you save can be as important as how much you save. Inflation and the type of investments you make play important roles in how much you’ll have saved at retirement. Know how your savings or pension plan is invested. Learn about your plan’s investment options and ask questions. Put your savings in different types of investments. By diversifying this way, you are more likely to reduce risk and improve return. Your investment mix may change over time depending on a number of factors, such as your age, goals and financial circumstances. Financial security and knowledge go hand in hand.
Don’t Touch Your Retirement Savings
If you withdraw your retirement savings now, you’ll lose principal and interest and you may lose tax benefits or have to pay withdrawal penalties. If you change jobs, leave your savings invested in your current retirement plan, or roll them over to an IRA or your new employer’s plan.
Put Money Into an Individual Retirement Account
You can put up to $6,000 a year into an Individual Retirement Account (IRA); you can contribute even more if you are 50 or older. You can also start with much less. IRAs also provide tax advantages. When you open an IRA, you have two options—a traditional IRA or a Roth IRA. The tax treatment of your contributions and withdrawals will depend on which option you select. Also, the after-tax value of your withdrawal will depend on inflation and the type of IRA you choose. IRAs can provide an easy way to save. You can set it up so that an amount is automatically deducted from your checking or savings account and deposited in the IRA.
Sources: Department of Labor, FDIC