Developing your retirement plan requires taking stock of your personal situation, including your goals for when to retire, your plans for your later years, and the different sources of income you'll have available to you.
But while you need to make a plan designed with your own specific needs in mind, there are also a few general rules absolutely everyone should follow if they want to save enough for a successful retirement. Here are three of them.
1. Invest as early as you can
When you start investing, your money goes to work for you. The money you put into your account when you're young will earn returns, which can be reinvested and result in even larger future returns. This is called compound interest.
If you invest early, this pattern repeats over and over, and you'll have to put in far less new money to amass a generous nest egg. But if you wait just a few years to save, you'll have to invest thousands more to make up for the missed opportunity for compounding.
2. Plan for the worst-case scenario
Most people who picture what retirement will look like probably imagine leaving work on their own schedule when they're financially ready and enjoying a nice retirement without major health problems.
Sadly, that's not what retirement looks like for a substantial number of Americans. Many people are forced into retirement when they physically can't work anymore or when job opportunities dry up. Often, this leads to an early Social Security claim and the resulting reduction in benefits that happens if you don't wait until age 70 to start getting checks. And health issues often begin earlier than expected, leading to medical bills that are far larger than most people anticipate.
While optimism pays off in many aspects of life, painting too rosy a picture of your future retirement could leave you without the money you need. Instead of assuming everything will go right, set retirement goals with the assumption of things going wrong. By anticipating early retirement, a Social Security claim at 62, and high healthcare costs, you can set goals that ensure you'll have enough money no matter what life throws at you.
3. Be a smart investor
Unless you have tens of thousands of dollars to put in the bank every year, you're going to have to invest your money to amass enough retirement savings to earn reasonable returns for your wealth to grow.
Investing inherently comes with risk, though -- which means you need to be smart about how you do it to limit that risk while maximizing your potential returns. And there are a few key ways to do that.
First and foremost, you don't want to invest in anything you don't understand. You'll also need to maintain an appropriate asset allocation so you aren't over-invested in equities and taking on too much risk. Building a diversified portfolio is important, too, so you don't put all your eggs in one basket. And investing for the long term, rather than chasing quick profits, can reduce the potential for disastrous losses. Finally, watch the fees you pay, as high investing costs can eat into returns. Aim to keep taxes on investments low by using tax-advantaged accounts and taking advantage of lower long-term capital gains rates.
By investing early, investing wisely, and investing enough that you're prepared for calamities, you can ensure you have the financial security you deserve as a senior.