Making a retirement plan involves taking many different factors into account. If you fail to consider some of these key issues, you could end up undermining your efforts to build financial security in your later years.
To make sure you're thinking about all the important stuff, be sure to ask yourself these seven big questions.
1. What age will you retire?
Your age when you retire is a key consideration when setting savings goals. After all, if you plan to retire at 55, you have a lot less time to invest and you'll have to rely on your savings for a lot longer than if you anticipate working until 70. Your planned age of retirement also affects the amount of Social Security benefits you'll receive.
When considering your preferred retirement age, it's best to be realistic and err on the side of anticipating you'll retire a little before you'd like to. Many people are forced into early retirement by circumstances. If you've built your retirement goals around the assumption you'll work well into your 60s, you could find yourself facing a serious financial shortfall if you have to leave the workforce ahead of schedule.
2. Will your spouse retire at the same time?
If you're married, consider your partner's plans as well.
If your spouse wants to keep working after you retire, this could mean you don't need to rely on savings as much since you'll still have income coming into the household. On the other hand, if you're worried your spouse could face a financial shortfall if you die first, you may decide it makes sense to delay claiming Social Security until 70 to maximize survivor benefits. That could mean you need to work a little longer.
These issues need to be discussed early on so you can get on the same page and set realistic retirement goals that work for both of you.
3. Do you have access to a workplace retirement plan?
If you have a workplace retirement plan, this can make saving for retirement easier.
If you have a defined contribution plan such as a 401(k), there's a good chance your employer will match some of your contributions. Or if you have a defined benefit plan that provides guaranteed retirement income, this makes a big difference in the amount you must invest.
If your company provides a plan, find out how it works and make sure you're taking full advantage of it. If it doesn't, look for opportunities to invest in tax-advantaged retirement accounts on your own, such as by opening an IRA and/or an HSA.
4. Where will you live?
Your choice of location in retirement has a big impact on your financial goals as well.
If you plan to live in a high-cost-of-living area, it makes sense to take that into account and save more to build a nest egg that can support you there. Some locations also have more favorable tax rules for retirees than others. Find out the tax policy for your preferred retirement home and take the impact of taxes into account.
5. Do you think you'll work in retirement?
If you're anticipating working in retirement, this may mean you don't need to save as much money since you'll have supplementary income.
Just don't be overconfident in your job prospects, as many future retirees plan to work but few actually do because of a lack of opportunity, family needs, or health issues.
6. What will you do about insurance?
Healthcare is a major expense for retirees, and you need a plan for it. That's especially true if you anticipate retiring before age 65 when you become eligible for Medicare.
Consider opening a dedicated savings or investment account earmarked for insurance premiums and out-of-pocket care costs as a retiree.
7. Do you plan to travel or pursue other expensive hobbies?
Finally, think about how you want to spend your days as a retiree. If you anticipate spending a lot of money to see the world or do other activities you enjoy, you don't want to be thwarted by a lack of funds.
Take your grand plans into account when deciding how much to invest for your future, and remind yourself that any sacrifices you're making now will be worth it when you're a jet-setting senior who gets to enjoy a life free of financial worry.