Retirement planning is a complex process that involves saving and investing money, anticipating post-retirement expenses, and estate planning. Generally, those who begin planning and saving for retirement at an earlier age are more prepared to live a comfortable post-retirement life. However, it's never too late to begin assessing your financial situation and taking the appropriate steps to initiate the retirement planning process. Below are five things you can do right now.
Analyze Your Assets
You don't necessarily need to have a retirement savings account to already have money allocated for post-retirement life. Consider creating a document that lists all of your tangible and intangible assets and adjust as necessary over the years. You may have liquidity tied up in a home that you intend to sell upon retiring. If downsizing, you can use the money received from the sale of property to boost your retirement savings. Alternatively, you can avoid making regular mortgage payments if you pay off and intend to live in the property following retirement.
The asset inventory document should also include any vehicles or other valuable possessions you might own. If applicable, be sure to list all investments, bonds, and stocks. Compare this with expenses such as mortgages, student and personal loans, and credit card debt to determine what you'll need to do to set a realistic and comfortable retirement budget.
The average American age 65 or older spent $48,872 in 2020, according to the Bureau of Labor Statistics. You can use this as a benchmark, but understand that every situation is different and take into account factors such as inflation and health care costs.
Eliminate or Reduce Debt
Interest accrued from credit cards and personal loans can pile up quickly and make it more difficult to set aside money for retirement later in your working career. To avoid this, try to pay down as much as possible on high-interest loans or at least regularly exceed the monthly minimum payment. Target credit cards with higher interest rates instead of those with smaller balances.
Leaving the workforce debt-free is a significant accomplishment and can ease financial stress in retirement, especially considering the Employee Benefit Research Institute's 2021 Retirement Confidence Survey. Almost one-fourth of respondents indicated that they have struggled to live comfortably due to debt. While a mortgage might be your most substantial debt, both Kiplinger and SmartAsset recommend prioritizing other debts as long as interest rates remain historically low. In other words, the most sensible debt to have in retirement, especially while interest rates are historically low, is a mortgage or home equity line of credit.
Establish An Emergency Fund
Creating an emergency fund is crucial not only for retirement planning but also day-to-day life. It's important to have a financial security blanket to cover unexpected expenses such as vehicle repairs or healthcare costs. If you continue to contribute to this fund sporadically throughout your working career, you may even be able to use it to postpone Social Security payments. Delaying payments until 70 years old results in increased monthly payments adjusted for inflation.
At the very least, consider saving until you have enough to cover six months of expenses, including those that are covered by your employer. Keep the money separate from your retirement savings in either a money market or passbook savings account so that it can be easily accessible while also earning interest.
Assess Your Level of Investment Risk
While it can be helpful to meet with a financial advisor or retirement planner to determine the level of risk you're comfortable with in an investment strategy, it's generally advised to take on additional risk at an earlier age as opposed to when you're nearing retirement. Investing in stocks can be a volatile business, but these investment vehicles typically outperform bonds and other securities over periods of at least 10 years. This is advised by many advisors to help younger people generate returns that outpace inflation.
"We've all heard—and want—compound growth on our money," notes Savannah, Tennessee-based financial advisor Chris Hammond. "Well, inflation is like 'compound anti-growth,' as it erodes the value of your money. A seemingly small inflation rate of 3 percent will erode the value of your savings by 50 percent over approximately 24 years, and a 7% annual inflation rate will reduce your purchasing power by roughly 50% in only 10 years! [That] doesn't seem like much each year, but given enough time, it has a huge impact."
Even older workers nearing retirement should include an allocation to growth stocks and/or inflation hedges such as gold and silver, while focusing the bulk of their investment portfolio on capital preservation and income. They still need to worry about the rising cost of living and other issues facing younger workers. Consequently, they should not allocate most of their investments in bonds as opposed to stocks.
Create An Estate Plan
An estate plan isn't something that should be thrown together at the last minute. Instead, it's an important component of an effective retirement plan that should be continually updated as you age. To start, you'll need to create a will and determine to whom you will grant power of attorney, for day-to-day management of your affairs, as well as for a health care power of attorney. You'll then need to think about whether you want to create a family trust and how to best reduce taxes on assets left to family members. Lawyers, accountants, and estate planning specialists can help you craft a suitable estate plan.