Preparing for Retirement
January 4, 2023
Preparing for retirement may seem like a daunting task, but there are small steps you can take that will pay dividends when the time comes to retire. It is best to start saving for retirement as early in life as possible. If you failed to start saving in your 20s, the best time to start is now. According to Fidelity, most retirees find they need about 55%-80% of their normal annual income after retirement. Based on this reality, there are a few things to consider.
How do you expect your situation to change after retirement?
If you have worked full-time for most of your adult life, the retirement lifestyle will likely be a big adjustment at first. You will no longer be working 40+ hours per week and receiving weekly or bi-weekly paychecks. Instead, your income will likely come from retirement savings and monthly Social Security checks. Will that be enough to cover your expenses, or will you need to take on a part-time job for additional income? Even if you do have enough to cover your expenses, a part-time job could help you remain active, connected to a community, and could provide a smoother transition for those who crave a daily routine.
In which areas will your expenses increase or decrease?
Many expenses decrease around the time of retirement. For example, if your house is paid off or close to being paid off, that is a large expense you will no longer have to pay. However, there are a few expenses that may increase after retirement. For the average retiree, healthcare costs increase by 15%. This percentage can be even higher for those with pre-existing conditions. Additionally, with more free time, comes more time to plan and take trips. If you plan to travel more after you retire, you will want to make sure you have the resources needed to take those trips.
Will you remain in your current home?
Have you considered whether your home will fit your needs as you age? The Federal Deposit Insurance Corporation (FDIC) recommends considering the following:
- Home maintenance, repairs, taxes, and other costs
- Location in relation to family, friends, medical appointments, etc.
- If the home has stairs that will become increasingly difficult to climb as you age
Sometimes the costs of staying in a home outweigh the benefits. Accessibility and convenience are very important factors to consider in the decision. If you are worried about maneuvering stairs or other obstacles in the home, or if you rely on the help of family or friends, but live in an inconvenient location, moving may be a better option than staying in place.
Are you contributing toward an investment account, such as a 401(k) or IRA?
Contributing to a 401(k) or IRA offers the benefit of compound interest, which means you can earn interest on the interest you have already earned. This is incredibly valuable over time, as the longer you have an investment account, the greater the potential to accumulate interest and for that interest to continue to compound. Many companies offer matching contributions on retirement accounts, which is a great way to grow your balance if you are willing to contribute the monthly percentage required.
Do you know your net worth?
The basic formula for net worth is Assets minus Liabilities, but the more difficult part is determining what is considered an asset and what is a liability. Using a net worth calculator takes out a lot of the guesswork in the process. It is helpful to know your net worth, especially as you get closer to retirement, because it can significantly impact your plans. For example, if you have paid off your mortgage or have accumulated a large amount of equity, you would likely find yourself in a more favorable position financially than if you owed a considerable amount on a mortgage.
Retirement takes a lot of planning. It might feel like it is too far in the future to think about for some, but there is rarely an instance in which there is too much time when it comes to saving money. Take the time to prepare now and you will thank your younger self when the time comes.