Preparing for retirement is easier now than it’s ever been. Calculating your retirement income needs, contributing to your 401k retirement plan, and keeping track of income and expenses while you’re still working are all functions you can manage from your mobile device. Read on to learn more about these and other ways to prepare for your retirement.
1. Figure out your monthly budget
Retirement planning starts with figuring out your monthly budget. Add up all your monthly expenses, separate them into “essential” and non-essential” categories, then subtract the total of both from your monthly income. That’s what you have left for savings and investments. You can increase it by eliminating non-essential expenses.
2. Automate your bill payments
Ensure you have enough money going into your checking account each month to cover your monthly expenses, then automate all your bill payments. This will eliminate missed and late payments. You don’t need to think about your overhead if your paycheck is directly deposited. It will get paid automatically, and you can focus on investing the remainder for retirement.
3. Track income and expenses
Life throws many curveballs at us that could increase expenses or decrease income. Keeping track of these things is important so your retirement plan doesn’t go off track. Look for ways to reduce your expenses and strive to increase your income if you can. You can avoid financial distress in retirement by making and saving more money while working.
4. Calculate your retirement income needs
You can use your total monthly expenses as a reference point to determine how much you’ll need for income in retirement. That number will decrease if you pay off your credit cards and loans. You’ll also want to add some extra funds to the calculation to cover travel and recreation in retirement. Be generous. It’s better to plan for too much than not enough.
5. Maximize 401(k) or pension contributions
The IRS raised the maximum annual contribution limit for 401(k) plans to $22,500 this year, up from $20,500 in 2022. Contribute the maximum if you can. Contributions come out of your paycheck pre-tax, so they’ll reduce your tax liability this year. You’ll also want to take advantage of any employer matches to your 401(k) or pension, which is basically free money.
6. Open an IRA
An individual retirement account (IRA) is a self-managed retirement savings account that the IRS allows you to contribute an additional $6,500 a year into. Traditional IRAs are like 401(k)s because contributions are tax-deferred. Contributions to Roth IRAs are made after taxes, so distributions in retirement are tax-free. That can be an advantage in your later years.
7. Read a book or two about investing
There are several good books about investing your money and saving for retirement. If you’re not an avid reader, you can opt for audiobooks or YouTube videos. Learning about finance can help you make better financial decisions now and in retirement. There are also free online courses you can take to learn about investing.
8. Create an exit plan
If you followed the first seven steps, you know how much you need to retire and how long it will take you to get it. Create an exit plan based on those numbers. Decide when you want to start taking social security and how long to wait before taking distributions from your retirement savings accounts. Required distributions don’t begin until you’re in your 70s.
9. Consult with a financial planner
Financial planners typically charge a flat monthly fee to help you make savings and investment decisions. This is usually cheaper than hiring a financial advisor who charges a percentage of your investment assets to manage them. Either way, it’s best to speak with a professional if you’re worried about retirement planning. They can help you get it right.
The Bottom Line
Retiring with a comfortable income and enough savings to ensure financial security requires careful preparation. Figure out your budget, automate your bill payments, and calculate what you’ll need for retirement income. Build that income with your 401(k), pension, or IRA accounts. Track income and expenses, read a book or take a course on investing, and create an exit plan for retirement. If you need help with any of these, consult with a financial planner.