Last Updated: June 28, 2021
Retirement planning does not include merely wishful thinking; you need to know how to prepare for retirement. This article addresses common misconceptions about retirement and aims to help you develop a retirement strategy.
How to Prepare for Retirement
Long before considering the idea of retirement, first note eight considerations:
Calculate How Much You Plan to Spend on Everyday Expenses (e.g. Medical Bills, Traveling)
Carefully consider all your retirement needs. A recent survey showed that 80% of Americans expressed anxiety that they hasn’t saved enough money to cover their needs. They weren’t living as comfortably as in their pre-retirement years.
Calculate How Much Money You’ll Need
In preparation for retirement, the U.S. Department of Labor estimates that you’ll need 70 to 90% of your pre-retirement income to cover all incidental and regular expenditures.
Speak With Your Employer About a 401k
A 401k is a tax-free, defined-contribution retirement account set up by your employer. This means that the employer makes matching contributions to your account. Employees can either reduce their income taxes for the previous year or withdraw their money (tax-free) because of the post-tax deductions when choosing between a traditional or Roth 401(k).
Invest Into an IRA Account
An individual retirement account (IRA) is another way to develop a qualified retirement plan and secure your retirement. Anyone can set up an IRA. If you acquire an IRA through a broker or Robo-advisor, you’ll have the opportunity to procure risk-free investments. Be sure to look into our recommendations for the best Robo-advisor.
Pay off Debts
You need to be two steps ahead of each debt. Pay mortgage rents in advance to reduce your loan amount; pay your bills on time; and form a habit of avoiding credit cards. In this way, you’ll downsize your existing debt.
Pick Up a Retirement Side-Job
According to a study of the Federal Reserve Board, roughly 30% of Americans in all income brackets continue working after retirement. The motivation behind this partly depends on how thorough their preparation for retirement was. But some just needed to recover from burnout and enjoy feeling useful.
Don’t Spend Your Retirement Money
The law allows for withdrawals from retirement savings accounts without the usual 10% tax penalty to mitigate the consequences of the COVID-19 pandemic. But in ordinary circumstances, try to refrain from spending your contributed money. Otherwise, you risk losing interest and principal or tax benefits.
Gain More Knowledge About Retirement
The more info you have, the closer you’ll be to an idyllic retirement. Mindfully weigh all tips and advice and put them in the broader context of your manner of living.
NOTE: According to the U.S. Department of Labor, the average American spends approximately 20 years in retirement. At the same time, only 40% of retirees had calculated in advance how much money they needed to save.
What Is a Qualified Retirement Plan?
A qualified retirement plan is a plan envisaged by your employer that meets standards stated in Section 401(a) of the Internal Revenue Code and the Employee Retirement Income Security Act (ERISA) of 1974. Such a plan should serve to increase your savings.
Besides the traditional and Roth 401(k) plans, other popular defined benefit and defined-contribution plans for retirement include:
These plans are suitable for the self-employed or for those working for unincorporated businesses since they have higher contribution limits. But the upkeep costs for this plan are sky-high, and the load of administrative paperwork suggests you’ll probably need professional assistance.
This retirement plan is similar to the 401(k), but the target population is different—403(b) is intended for teachers, school administrators, librarians, nurses, doctors, and government personnel. You can make additional catch-up contributions to this retirement plan, but your investment portfolio will be less sufficient than with a 401(k). If an employer offers you both 403(b) and 401(k), don’t hesitate to take them.
Such plans allow employees to acquire shares from their company’s profits based on how much they earn per year.
In contrast, a non-qualified retirement plan is not required to follow guidelines specified by the ERISA. But these plans are usually designed for executives. And non-qualified retirement plans do not include any tax benefits.
NOTE: According to the 2019 Survey of Consumer Finances, 65% of middle-aged white families have at least one retirement account, compared to 44% of Black families and 28% of Hispanic families. This presumably stems from the devastating disparities in wealth across different ethnicities. We aim to offer tips about retirement that could help bridge this statistical gap.
|Retirement Plans||There are two broad types of retirement plans that employers set, namely qualified [e.g., 401(k) & 403(b) retirement plan] and non-qualified. Employee contributions can also be added to such plans. IRA is a retirement plan that anyone can set up. You can have multiple retirement accounts, but you cannot max out the contribution amount on any of them.|
|Retirement Time Horizon||Intentions to retire early or delay retirement heavily affects your retirement strategy. The former option presumes that you started investing the moment you had landed a job with regular monthly payment. The latter option comes with more retirement money but results in health and life satisfaction decline.|
|Types of Investments||The retirement time horizon dictates the way of diversifying an investment portfolio. The later you start contributing to retirement accounts, the less conservative your investments can be. Investment interests are nontaxable.|
|Tax Benefits and Penalties||A tax return for IRA and retirement plan tax savings are important factors for assessing the advantages of preparing for retirement. An IRA account and a traditional 401 (k) are tax-deferred accounts that reduce your current taxable income. A Roth 401(k) is a tax-exempt account, meaning that withdrawals are tax-free after retiring. Early withdrawals are penalized with 10%—although this policy is temporarily suspended due to the COVID-19 pandemic.|
When to Retire
The critical consideration that should orchestrate your retirement income planning is the interplay between your current age and the expected retirement age. This time horizon will impact the investment horizon—the younger you are in starting to develop a retirement strategy, the riskier investments are laid on the table. Moreover, contributions to retirement plans will stretch across several decades, securing a substantial post-retirement income. But specific retirement ages come with different perks. Consider four ‘how-tos’ of retirement ages:
How to Prepare for Retirement in Your 40s
By the age of 40, you should’ve already had at least one retirement savings account. Your investment portfolio can include stocks, bonds, or mutual funds. Try writing down some of your expenditure patterns and save some money here and there, especially if you’re aiming for early retirement.
How to Prepare for Retirement in Your 50s
The closer you are to retirement, the more conservative you should be when it comes to investments. Resist any withdrawals from your 401(k) before reaching 59.5 years of age since you’ll be charged a 10% penalty fee. If you insist on retiring in your 50s, prepare yourself for the ascetic life…unless you’re well-off.
How to Prepare for Retirement in Your 60s
At age 62, you’re eligible for Social Security, but this doesn’t mean you’ll enjoy all the benefits since these depend on your full retirement age. If you’ve made catch-up contributions to IRA accounts and a 401(k) in your 50s, you’re on the golden path after the age of 65.
How to Prepare for Retirement After 60
The typical (realistic) age range for retirement is between 66 and 70. At the age of 70, your Social Security benefits amount to 132% of your total amount. After 70, the increase of monthly benefits stops. It seems, then, that working at least by the age of 70 is a lucrative option. But working in your 70s can be quite difficult for some. These fears make sense given the research stating that retirement impacts health and life satisfaction in a positive manner.
Our retirement planning advice is to consider the time of retirement matching your needs and financial situation. If you feel like it’s the right time to stop working, and you’re confident that you’ve saved enough money to seize the remaining days, then wait no longer.
NOTE: The average retirement age in the U.S. is 66.85. This is not so bad when compared to Japan, where the average retirement age is 69.25. But few Americans have the same privilege as the French: retirement at around 60.
The Importance of Retirement Planning
Consider the following benefits that come with a developed retirement strategy:
- The whole point of retirement is to reap what you sow. Developing a retirement strategy will serve the purpose of leading a stress-free, post-retirement life.
- All good things come in threes—retirement planning comes with tax deferral and tax exemption. Not only will you be securing yourself in old age, but you’ll also be minimizing tax liability.
- It’s natural to be anxious when thinking if you’ll be financially independent after retirement. A deferred retirement option plan can help—you can continue working, but your employer will place lump sums on your interest-bearing account for each year.
- Savings in your bank account cannot generate significant returns to the same extent as retirement investments. With a developed retirement strategy, you’ll earn inflation-beating returns.
Retirement comes with many perks but also with major challenges to your budgetary stability. With a good tactic, however, challenges can develop into opportunities for realizing retirement dreams.
NOTE: More than 43% of women have no retirement strategy and generally score low in financial literacy. Informing oneself about essential retirement planning steps is crucial for women to shelter themselves from financial hardships.
This article has provided you with eight key steps that could help make your retirement financially stable. We’ve addressed key terminologies—such as the difference between qualified and non-qualified plans—as well as retirement planning tips regarding retirement advantages and disadvantages. As you see, a well-designed retirement strategy is important.
Before retiring, thoroughly analyze how much you’ll need for basic needs, including medical care. Is your investment portfolio well-balanced? Find the middle ground between idealistic expectations about retirement and realistic financial situations.
The question of how much money is needed pops up when considering how to prepare for retirement. Some rough calculations revolve around the range of 70 to 90% of your pre-retirement income. Another popular formula to consider is the Four Percent Rule—divide your best possible annual retirement income by four and you have your answer.
Retirement requires not only financial discretion but also emotional planning. According to sociologist and gerontologist, Robert Atchley, even if your investment growth has landed you in a comfortable life, each person goes through five stages of retirement: retirement, contentment, disenchantment, reorientation, and routine.