Retirement is a major life milestone that takes a lifetime to prepare for. Whether you're retiring in a year or in a few decades, you need to understand what it takes to achieve financial security in your later years.
These five tips for 2020 and beyond can help you be more prepared for life after work, so check them out and start putting some of them into practice ASAP.
1. Catch up on your savings with catch-up contributions
Many Americans are woefully behind on retirement savings, and recent downturns in the market haven't exactly helped boost account balances.
The good news is, if you're 50 or over, you have a chance to supercharge your savings. That's because you're eligible to make catch-up contributions to a 401(k) as well as to an IRA if your income isn't too high.
Catch-up contributions increase the amount of tax-advantaged retirement investments you can make. For 2020, a $6,500 catch-up contribution takes the maximum investment in your 401(k) from $19,500 up to $26,000. And for those eligible to make deductible IRA contributions, a $1,000 catch-up contribution boosts the maximum from $6,000 to $7,000.
Maxing out your contributions to these accounts -- including making your catch-up contributions -- should leave you with plenty of money when you hit retirement age.
2. Build a diversified portfolio
Recent stock market volatility has many Americans nervous about investing -- but putting your money into the market is key to earning a generous return.
The good news is, you can reduce your risk by investing in a wide range of different stocks. If you spread your money around, chances are good some investments will perform well even as others perform poorly.
Picking individual stocks can often enable you to outperform the market if you're smart and strategic about your strategy and only make investments you understand. But if you don't know how to pick stocks, you can do pretty well by buying exchange-traded funds that give you exposure to different asset classes.
3. Pay attention to investment fees
Whether you're picking a brokerage firm or choosing a fund to invest in, it's important to pay attention to the fees you'll be charged.
Fees can make a huge difference in the total size of your account balance, so it's a good idea to keep them as low as possible. Otherwise, you could lose hundreds of thousands of dollars when you're investing over a long timeline.
4. Don't forget about taxes and inflation
When you estimate the amount of your retirement account balance decades into the future, the balance may look pretty hefty.
But it can paint a misleading picture when you see a high number if you don't consider both the effects of inflation and the fact that you'll be taxed on withdrawals (unless you've invested in a Roth account).
If your retirement account balance is expected to grow to $1 million in 30 years, that $1 million account adjusted for inflation will be worth about $402,032 in today's dollars, assuming a 3% inflation rate.
If you follow the 4% rule, this would provide an income equivalent to around $16,000 per year. And you'll have to pay taxes at whatever your future rate, is so that reduces your spending power even further.
You'll want to take both taxes and inflation into account when setting retirement savings goals -- which means you probably need to save more than you expect.
5. Consider your cost of living
Where you live in retirement is going to make a huge impact on how far your money stretches.
If you plan to reside in a high-cost area such as Washington, D.C., Maryland, or Massachusetts, you need to be prepared to build a much larger retirement nest egg than if you opt for a cheaper home base.
While you have the option to relocate, you may not want to be forced into moving away from your family or community because of finances. So always take your future residence into account when setting retirement savings goals.
These five tips can make a big difference in your financial security
By taking advantage of catch-up contributions, watching your investment fees, and considering taxes, inflation, and local living costs, you can be smart about setting retirement goals and making investments.
Start following these tips today so you can amass the nest egg you need, and you won't be left short of funds when the time comes for you to leave work for good.