A big long-term financial goal for many people is saving enough to retire happily. The good news is that the power of compounding interest is on your side, especially if you start young and stay consistent.
Thinking long-term can be challenging when you’re focused on other, more immediate goals, like starting a family, paying for education, or even making rent. In fact, many Americans save little—or nothing—for retirement. A 2019 report from the Federal Reserve stated, “Older adults are more likely to have retirement savings and to view their savings as on track than younger adults. Nevertheless, even among non-retirees in their 60s, 13% do not have any retirement savings.”1 A Q2 2020 Truist National Financial Confidence Poll found 28% of working Americans have no pension or retirement savings.
We all deserve to enjoy the comfort, confidence, and security of hitting our retirement goals. No matter where you are in your journey, you can jumpstart your retirement savings now by following this easy checklist.
1. Envision your future self
Picture yourself in retirement. Where are you living? What are your hobbies? Look ahead to determine what your actual goal is. At what age do you hope to retire? Is there outstanding debt to tackle? Do you see cruise lines and margaritas?
When setting a retirement savings goal, avoid the mindset that things are too big or out of reach. Plan the life you dream of, set the goal, and make it official. Write it down somewhere prominent so you’ll see it often. Regularly visualizing your retirement goals can work wonders to help you stay on track toward reaching them.
2. Set a savings target
You have a goal; now estimate how much money you’ll need each year of retirement. Tailor your retirement savings goal to your lifestyle by using the 80% rule—a common principle used by financial experts. Expect to spend as much as 80% of your current income each year in your retirement.
Once you retire from the workforce, expenses like payroll tax, commuting, and 401(k) contributions won’t need to be factored into your cost of living (hence the 80% figure), but everyone’s situation is different. It’s also a great idea to think through questions such as “Who else will live off my retirement?” and “What is my life expectancy?”
Generally, it can be beneficial to invest at least 10% of your income for retirement—more if you’re able or need to catch up—in a tax-advantaged account like a 401(k) or IRA.
3. Factor in rising medical costs
It’s not uncommon for medical needs and expenses to rise as we age, which is why some retirees regret not taking better care of their health when they were younger. Medicare premiums for 2021, at a glance, would have you paying up to $458 per month, or $5,496 a year—but don’t forget deductibles, pre-existing conditions, and any long-term care you may need to feel supported and secure. Consider the costs of everyday needs like prescriptions as well.
4. Set up tax-advantaged accounts
There are tools already in place to use to your advantage, like accounts designed specifically for long-term financial growth.
Tap into your employer’s retirement plan if they offer a 401(k), and take advantage of any employer match programs. If a 401(k) isn’t an option, setting up an IRA can be a smart investment for retirement savings, too.
It’s a wise move to automate your contributions to these accounts instead of constantly allocating what’s left at the end of the month. Committing to “pay yourself first” can help with steady progress and accruals.
5. Diversify your retirement investments
Since retirement savings accounts are often tied to the stock market, it can be helpful to have your 401(k) and IRA invested across multiple industries and asset types using mutual funds and exchange-traded funds (ETFs). This may provide a more balanced approach to long-term growth as the market ebbs and flows—and can keep anxiety low if the economy dips.
Keep your cents and interest adding up by avoiding early withdrawals. Cashing out too soon should be avoided, since penalties can be steep and withdrawing may delay your progress toward retirement savings.
Removing money from a 401(k) while you’re still employed is usually done through a “hardship withdrawal.” These can come with certain additional taxes. Similarly, avoid taking loans against your accounts. Think of borrowing against your retirement like eating pizza with a fork: don’t do it if you don’t have to.
6. Set your 65th birthday in your calendar
In fact, mark three weeks before your 65th birthday—that’s when you’ll decide whether to sign up for Medicare. You’ll want to enroll early for these benefits since late sign-ups can trigger delayed coverage, penalties, and possible expenses.
Of course, private or out-of-pocket options are available (refer back to your plan), but Medicare can provide coverage to individuals who wouldn’t otherwise have it, and at a reduced cost.
Knowing the year of your 65th birthday also helps you envision the road ahead and can get you thinking about where you want to be in life by then. Remember, retirement is about living the life you’ve always imagined—this should be fun to plan!
7. Consider finding a financial partner
If you need guidance, shop around for a financial advisor, preferably one with Certified Financial Planner® (CFP) status. Then set up a meeting to review your retirement savings plan. A good advisor will make sure you’ve done the math correctly, help draft a plan to get there, and ensure your plan matches your goals and values.
Having an expert partner in your corner can reduce the anxiety of an unknown future and help you envision (and prepare for) unexpected expenses.
Once established, it’s a good idea to review your retirement plan with your advisor at least once a year.