Retirement can either be a time of freedom, fun, and new experiences, or it can be a time of stress, tightening the belt, and a gradual loss of financial independence. Everyone would prefer the former over the latter, but you don't get there by accident. It takes careful planning and responsible money management over decades. Don't adopt a "wait and see" attitude when it comes to the quality of your retirement. Ensure your success by taking the following three actions right now.
1. Create a personalized retirement plan
Your retirement plan is the road map that will lead you where you want to go. It's always going to be imperfect. You'll always be guessing at your life expectancy and you never know if you'll be forced to retire earlier than expected. But having something to work from can give you the confidence that you're on track for your retirement goals.
There are four key ingredients to creating a retirement plan: the length of your retirement, estimated expenses, estimated investment rate of return, and money from external sources, like Social Security or a 401(k) match. You can estimate the length of your retirement by subtracting your ideal retirement age from your estimated life expectancy. Plan to live to at least 90 if you're reasonably healthy.
You can use your current spending as a baseline when estimating your retirement spending, but understand that some costs, like healthcare, will likely increase while others, like child care, might disappear or decrease. Multiply your estimated monthly costs by 12 to get your estimated annual costs and then multiply this by the number of years of your retirement. You may want to add a cushion to this amount in case your estimates are a little off.
It's possible that your retirement savings could grow as much as 7% or 8% per year, but you can't bank on that. Use a 5% or 6% estimated annual rate of return to be conservative. If your investments end up growing more quickly than this, you might end up with a surplus you can spend or pass onto your heirs, but you don't want to risk being overly optimistic with your investment rate of return and falling short of your savings goal. A retirement calculator can put all these different factors together for you and tell you how much you must save per month in order to hit your goals, based on your estimated expenses, length of retirement, and investment rate of return.
The final step is to subtract money you expect you'll get from other sources like Social Security, a 401(k) match, or a pension, to figure out how much you must save on your own. Your employer should be able to provide you with information on any 401(k) match or pension that you're eligible for and you can estimate your Social Security benefit at various ages by creating a my Social Security account.
2. Boost your retirement savings
Aim to save at least as much as your retirement plan recommends each month and consider saving more if you want an additional cushion or if you'd like to retire even earlier than your initial target if possible. Assuming you have extra money left over from your paychecks every month, boosting your retirement savings might be as simple as increasing the percentage of each paycheck that you divert to retirement. But for others, it might involve more significant budget changes.
Look for ways to cut back your expenses to free up more cash for retirement. This might involve canceling unused subscriptions, dining out less, or even downsizing a home or apartment. Cutting costs can have the dual benefit of boosting your retirement savings now and reducing how much you must save for retirement if you carry this frugal lifestyle into your senior years.
Seeking out opportunities to boost your income can also increase your retirement savings if you're unwilling or unable to pare down your expenses any further. Consider working over time, switching fields or employers, or taking higher education or professional development courses to increase your odds of getting a promotion. A side hustle is another option, but if you go this route, you must remember to set aside some of your earnings for taxes first.
3. Pay down your debt
Debt adds an element of risk that can make your retirement more stressful than it needs to be. If a major medical expense comes up and you're forced to drain your savings faster than anticipated, you might struggle to keep up with your monthly payments. This could ruin your credit and cost you anything you put up as collateral, like your home or your car.
Whenever possible, aim to pay down your debt before you enter retirement. Start with high-interest debt, like credit card debt, if you have any. Consider transferring a balance to a card with a 0% introductory APR or taking out a personal loan to cover the amount. Then avoid running up new charges you can't pay back on your credit card or you'll end up back in the same situation.
For mortgage or car payments, you could apply year-end bonuses or tax refunds toward your debt. You could also make an extra payment per year or an extra half-payment every two weeks. This adds up to 13 full payments per year and can help you pay down your debt more quickly.
You can't control all the variables surrounding your retirement, but by following the steps above, you can give yourself a decent shot at a comfortable life with the freedom to enjoy your senior years how you choose.