It sounds simple enough, work hard and save diligently so that you will be able to retire comfortably. Unfortunately, the realities of preparing for retirement can be much more complicated and feel overwhelming for a lot of people. In fact, a recent survey found that 80 percent of Americans have expressed some anxiety that they have not saved enough to be financially independent in retirement.1
If you happen to be concerned about your own prospects for living comfortably in 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. It can feel daunting to know that you need to remain financially independent for such a significant amount of time. This is why it’s so important to plan accordingly. For people to maintain their usual standard of living once in retirement, the Department of Labor recommends that retirees prepare to live on 70 to 90 percent of their pre-retirement income.2 Because of this, it is important to start planning as early as possible. If you are able to live 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 in the plan.2 If your employer offers a 401(k) or other retirement plan, you should seriously consider making monthly contributions. Younger employees tend to find it easier to justify putting off this important move. The truth of the matter is, it’s never too early to start saving for your retirement.
Compound interest accumulates steadily over time. This means that the earlier you start saving, the more opportunity your money has to grow before you reach 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 will need to choose between contributing to a traditional or a Roth IRA. The difference between the two is the tax advantages. Choosing a traditional IRA means you’ll be contributing money tax-deferred to your retirement account. When you withdraw funds 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, the choice of a Roth IRA means your contributions are made with after-tax dollars. When you make withdrawals in retirement, they will be tax-free (because the money was taxed when it was deposited into the account).
IRAs give everyone the opportunity to save for retirement very easily. To simplify the process even further, consider establishing automatic deductions from your bank account. Each month, a set amount of money can be automatically deposited into your IRA from your checking or savings account. It is a hands-off process that will get you closer to the comfortable retirement you deserve.
Change #4: Do Not Touch Your Retirement Savings
While it can be tempting, withdrawing from your retirement savings now causes you to lose valuable principal and interest that could have been income in retirement. Additionally, you may lose tax benefits and pay a tax penalty for withdrawing early. If you change jobs, don’t liquidate your current retirement plan. Typically, you can leave your savings in that plan, or you can roll the funds over to an IRA or into 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, it never hurts to ask. If your employer does offer one, 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 to help your future retirement is to work with a financial planner who is familiar with your situation. Your advisor can provide you with realistic expectations, savings goals and investment advice based on your tolerance for risk. Always be open and honest in your discussions and express your fears or anxieties regarding your future retirement plans. Your advisor has likely seen lots of people in a similar situation as yours and their advice and guidance can be invaluable.
When it comes to your retirement, there are no second chances. It’s important that you’re knowledgeable, confident and diligent in your planning efforts. If you are accustomed to a particular lifestyle and expect to continue living it once you are no longer working, planning ahead is critical. If you are unsure whether you’re on the right path, speak with a trusted financial professional. They will help you find what works best for you and your unique situation.