Most financial experts advise starting to save for retirement from a young age. However, if you were unable to do so, it is never too late for you to begin saving. That said, you will have to make up for the lost time and save at an increased rate to build a substantial retirement nest egg. You can do so by creating a budget (and sticking to it), cutting your expenses, increasing your sources of income in retirement, etc. It is advised that you consult with a professional financial advisor who can guide you on how to build your savings and financially secure your retirement.
This article discusses the different ways you can prepare your finances to live comfortably in retirement.
What steps you can take to financially prepare for retirement?
1. Increase your sources of income in retirement
Some of the common sources of retirement income include Social Security benefits, 401ks, pension plans, individual retirement accounts (IRAs), and more. You should aim to maximize your contributions to retirement accounts to accumulate a bigger corpus. In addition, you can save taxes and make tax-free withdrawals in retirement subject to certain conditions. Moreover, you should know how pension plans work and their benefits. Inquire what happens to your pension benefits when switching jobs to ensure you do not miss out on any of the benefits. As per a study, you can replace up to 40% of your pre-retirement income with the help of Social Security benefits on average. Thus, getting a handle on your benefits can help you better manage your finances and plan for retirement.
2. Figure out how much you need to save for retirement and create a budget for your monthly expenses
Before you retire, you need to make a list of all significant expenses that you may incur in retirement. Create a budget, keep a tab on your expenses, and find out where you can cut down your costs. You can start by canceling online subscriptions, reducing the number of times you eat out, travel, etc. Don’t forget to take into account your non-discretionary expenses like rent, gas, utilities, groceries, etc. Social Security and pension can offer a steady income source post-retirement and replace a chunk of your regular paycheck. You can also adopt the 4% rule in retirement wherein as per the rule, you only withdraw 4% of your retirement savings the first year and adjust the withdrawals in the subsequent years for inflation. For example, if a retiree needs $40,000 per year to meet their expenses, they must have at least $1,000,000 in their retirement account when they retire. You can also boost your income by working part-time till the time you can start taking out your Social Security benefits. Doing so can help meet any shortfalls in your expenses without you having to overdraw from your retirement savings.
3. Find out your risk tolerance and readjust it if necessary
As you near retirement, assess if your portfolio is overexposed to market risk. Consult a professional who can help reduce your risk exposure and protect your retirement savings. This is important because as you grow older, you may not have enough time nor the risk tolerance to recoup losses caused by market ups and downs.
Aim for portfolio diversification that can help protect your investment income. If your portfolio is already diversified, you can invest in other investments such as real estate and gold to boost your returns. Gold especially can be an effective hedge against inflation, devaluation of the currency, and any political upheavals. Take care not to over-invest in precious metals. As per experts, gold investments should not comprise more than 5-10% of your portfolio.
Reach out to a professional financial advisor who can help lower your risks as you approach retirement and protect your retirement savings. The advisor can also help diversify your portfolio, pick the best investments, and advise what percentage of each investment should comprise your portfolio based on your financial needs and goals.
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4. Assess how much you need to spend on healthcare
As you grow older, there is an increased chance that you may develop health issues. This would likely result in you having to spend significantly more on healthcare. To offset the cost, you can open a Health Savings Account (HSA). An HSA is a tax-advantaged account that offers you multiple benefits - you can make tax-free distributions from your HSA (provided the proceeds are used for qualified health expenses), tax-free earnings, and tax-deductible contributions. For 2023, the total contribution limit for an individual is capped at $3,850 and $7,750 for a family. This limit is applicable to contributions made by both the employer and the employee. Also, folks aged 55 and up can make an additional catch-up contribution of $1,000.
5. Make sure that you are adequately insured
Due to the rising cost of healthcare, it is imperative that you buy the right insurance to secure your retirement. Insurance can help cover any expenses you may incur due to an accident or illness. Take care to carefully assess your policy, insured sum, and premiums payments at the time of buying insurance. Doing so would help ensure that your needs are adequately covered and you are neither under nor over-insured. Analyze and compare different policies from different providers and choose the one that best fits your needs and budget.
6. Clear any debt before you retire
It is critical that you clear your debt before you retire as it can pose a serious risk to your financial well-being if you are still paying off your debt after retirement. Consult with a financial advisor who can help come up with a plan to clear your high-interest debt such as mortgages, credit card debt, etc., either by reducing or restructuring your debt. Doing so would allow you to live your retirement years stress-free without having to worry about debt.
7. Consult with a professional financial advisor
Coming up with an effective plan for retirement is not an easy task, especially if you are new to the world of financial planning. Seeking counsel from a professional would not only help ensure your money is managed effectively but may also help avoid making expensive mistakes. The advisor can assess your retirement income goals and the steps you need to take to attain those goals. In addition, the advisor can help save taxes, cut down expenses, boost returns, identify different income sources in retirement, and manage your assets and risk to secure your financial future.
To summarize
There is no shortcut to saving for retirement. If you wish to have a comfortable retirement, it is essential to have a customized plan that can help you attain your retirement goals. There are certain steps you can take to make the process smoother, such as saving for retirement from a young age, creating a budget and sticking to it, curbing your expenses, investing in the right investments, and eliminating debt before you hang up your boots for good. You can also consult with an advisor who can help manage your finances and create a foolproof plan based on your risk tolerance and future goals.
Use the free advisor match service to match with vetted financial advisors who can guide you effectively on how to build a substantial retirement corpus and secure your golden years. Answer a few questions about yourself and get matched with 1-3 financial advisors that can help you with your unique financial needs and goals.