10 Steps To Prepare for Retirement

If your idea of the perfect retirement is to enjoy leisurely mornings and bucket list trips, then you’ll need to start preparing well ahead of time. Planning for retirement starts while you’re still working. Whether you are just beginning your career or want to make up for lost time, now is the perfect time to create a savings plan that will allow you to retire comfortably.

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What Are the 10 Steps To Prepare for Retirement?

To ease the process of planning for retirement, it’s a good idea to break it down into some basic steps. You’ll start by creating a vision of your retirement lifestyle that you can turn to over the years as you build your savings.

1. Start Saving Now

No matter how old you are, it’s never too early to start saving for retirement — even if you are fresh out of high school or college and just entering the working world. This means taking a look at the different savings plans available. One option is to open a high-yield savings account dedicated strictly to retirement savings, but that’s just a first step. Many Americans rely on company-sponsored 401(k) plans to build retirement savings. Other options include one-participant 401(k)s if you are a business owner with no employees, 403(b)s, traditional individual retirement accounts (IRAs), Roth IRAs and SIMPLE IRAs.

2. Contribute to Your Employer’s Retirement Savings Plan

If your employer offers a 401(k) plan or other retirement plan, sign up and contribute to it. This is the best and easiest way to start building a retirement fund because your employer takes care of the heavy lifting and all you have to do is agree to have money deducted from your paycheck every pay cycle. You get tax advantages, and if your employer matches your contribution, you get free money that goes into your retirement savings. In 2024, employees who contribute to a 401(k), 403(b), 457 plans and the federal government’s Thrift Savings Plan, can put in up to $23,000.

3. Find Out About Your Employer’s Pension Plan

If your employer offers a traditional pension plan rather than a 401(k) plan — as many government employers do — be sure to find out if you are covered by the plan. You can ask for an individual benefit statement to understand the value of your pension and ensure you know what will happen to your benefits before changing jobs.

4. Invest In an IRA

If you don’t have access to a 401(k) or pension plan, you should start investing in an IRA to build your nest egg. IRAs offer tax benefits that bolster your retirement savings over time. Even if you have a company-sponsored plan, it’s still a good idea to invest in an IRA to save at a faster rate. Keep in mind that the maximum you can contribute to an IRA in 2024 is $7,000 a year, though if you are 50 or older you get an additional “catch-up” contribution of $1,000 to bring the total to $8,000.

5. Balance Your Portfolio

Saving money for retirement is only part of your overall strategy. You also need to make sure your investments have the right mix of stocks, bonds, mutual funds, ETFs, real estate and other assets. Spreading your investments across a diverse range of assets can mitigate risk and produce steady returns over time.

6. Don’t Touch Your Retirement Savings

When checking the balance of your retirement savings, it’s important to never dip into these accounts unless you’re facing a financial emergency. Taking loans and early withdrawals from your retirement savings can set your retirement plans back years. For example, if your 401(k) plan allows you to take a loan, you’ll be required to repay it — including interest — according to strict terms. If you don’t adhere to these requirements, any unpaid amounts will become a plan distribution.

In most cases, you’ll have to include any previously untaxed amount of the distribution in your gross income the year the distribution occurred. You might also face an additional 10% tax on the amount of the taxable distribution.

7. Set Retirement Goals

Once you have done the early planning, you should set a target age for retirement, no matter how old you are. Some people choose to continue working well into their 60s and 70s, especially if they enjoy the work they’re doing. Others prefer to step out of the workforce to travel or spend time with loved ones while they are still in good health.

You’ll also need to think about the kind of lifestyle you want in retirement. Things to consider include where you’ll live, how much your lifestyle will cost and whether you need to earn extra money through a part-time job or side gig.

8. Determine How Much Money You’ll Need

A big part of enjoying retirement is having enough money to live the lifestyle you want. If you plan to maintain your current standard of living in retirement, you’ll need 70% to 90% of your pre-retirement income, according to the U.S. Department of Labor. If you’re currently earning $60,000 per year, you’ll likely need $42,000 to $54,000 per year in retirement, or $3,500 to $4,500 per month.

If you think Social Security will cover most of this cost, you’re probably mistaken. As of March 2024, the average Social Security retirement benefit was about $1,774 a month, according to the Social Security Administration. That’s not nearly enough to cover the average living costs in the United States.

To help you come up with a good savings goal, take a look at the retirement calculator from GOBankingRates. You can use it to determine how much you might need to save for retirement. It will use factors such as retirement age, savings and income and other details to figure out the amount.

9. Familiarize Yourself With Social Security Benefits

You can start claiming Social Security benefits as early as age 62, but delaying your claim can increase your monthly payments. Full retirement age, which is either 66 or 67 depending on when you were born, is when you qualify for full benefits. After age 70, there’s no financial benefit to delaying further. To be eligible for Social Security retirement benefits, you need a minimum of 10 years of work, equivalent to 40 credits. Your benefit amount is calculated based on your 35 highest-earning years.

10. Hire a Professional

Planning for retirement is not just about setting aside money for the future. You also need to develop an investment strategy that maximizes your returns and helps build an adequate nest egg for your golden years. This involves understanding different investments, managing risk and planning for a long retirement to ensure you don’t run out of money. Beyond that, you need to learn the tax laws and how best to navigate them.

If you have the resources to do so, you should hire a financial advisor to help put together the best plan for your personal financial situation and retirement goals.

What Should I Do 5 Years Before Retirement?

If you’re planning for retirement in the next five years, you’re probably getting excited for this new chapter. Many of the decisions you make now can have a lasting impact on your retirement lifestyle, which is why this period and the first five years after retirement are known as the fragile decade.

You want to make sure you’re taking the right steps now to ensure a smooth financial transition into your golden years. Some actions to take include the following:

• Maximize all of your retirement accounts if you have the ability to do so.

• Take a close look at your current budget. Pay down as much debt as possible.

• Consider purchasing supplemental coverage to assist with medical costs.

• If you haven’t already, reach out to a fee-only financial planner to make sure your investment plan is on track.

• Decide exactly where you’ll live and use this to determine your estimated cost of living.

• Take a closer look at your estimated Social Security monthly benefit.

• If you don’t already, make sure you have an emergency fund in place, so you don’t have to take extra money out of a taxable retirement fund or get a job if you’re faced with an unexpected major expense.

Final Take

It’s never too early or too late to start planning for retirement. The more time you spend thinking about the kind of life you want and taking steps to prepare for it now, the more likely you are to enjoy your golden years truly.

Even if retirement is a long way away, the actions you take today will hugely impact your future. Opening a retirement savings account and contributing a portion of each paycheck might mean you have to sacrifice a bit now, but that’s nothing compared to the amount you’ll have to stretch your budget in retirement without proper savings.

FAQ

Here are the answers to some of the most frequently asked questions about building a retirement game plan.

• What is the 25 times rule for retirement?

  • The 25 times rule is one method for determining how much money you'll need to save for retirement. It's derived from a study about retirement savings withdrawal rates that found retirees typically can withdraw 4% from their portfolio each year to safely cover expenses for the rest of their lives.

  • Say you estimate you'll need $100,000 per year to fund your retirement and expect Social Security to provide $35,000 per year. That leaves $65,000 per year you need to fund through your savings. Multiply that number by 25 to get $1.63 million, which is now your target savings goal.

• What is the 3% rule in retirement planning?

  • Retirees may use the 3% rule to determine how much money they can safely withdraw from their retirement accounts. A retiree following this rule would withdraw no more than 3% of the total balance during the first year of retirement, increasing the percentage each year to account for inflation.

  • Think of these rules a guide. Factors like your age, investment portfolio and health care costs can affect how much you can safely withdraw each year and have enough money to cover your expenses for the rest of your life.

• What is the $ 1,000-a-month rule for retirement?

  • The $1,000-a-month rule for retirement capitalizes on the power of compound interest to boost your savings. If you deposit $1,000 per month in an account earning 3% interest, the balance can grow to more than $141,000 in 10 years. Do this for 20 years, and the balance more than doubles. If you can keep up the savings pace for 30 years, you can have a comfortable nest egg with more than $585,000 to fund your retirement.

Allison Hache and Jennifer Taylor contributed to the reporting for this article.

This article originally appeared on GOBankingRates.com: 10 Steps To Prepare for Retirement