13 Steps to Do Now to Prepare for Retirement

Whether retirement for you is five years away or 35 years away, the time to plan for it is right now. Positioning yourself financially for the retirement you want takes time. And, it's more involved than maxing out your employer-matching contributions in your 401(k) -- although that is a great starting point. You may also need to update how you save, how you spend, and how you invest. There is good news, though. No matter where you are financially today or how quickly you plan on retiring, you can always improve your retirement prospects. Here are 13 steps to guide you.

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It's hard to set a retirement savings goal without a clear picture of the retirement lifestyle you want. Are you dreaming of traveling the world after you leave the workforce, living modestly on a quiet beach in the Caribbean, or moving back to your hometown and finally writing that novel? Jot down what you envision, including where you want to live and how you'll spend your free time. You'll use those notes to project your living expenses in retirement. You can also refer back to your lifestyle notes when you need a little motivation boost to stick to your savings plan.

ALSO READ: 5 Lifestyle Changes to Consider if Money Is Tight in Retirement

On average, Social Security replaces about 40% of your working income in retirement. But it can also be less than that, particularly if you claim your benefits before what's called "Full Retirement Age" (FRA). Create an account at my Social Security to see when you'll reach your FRA, along with current estimates of your monthly benefit at different claiming ages. You can also project how your benefit will change from its current level using estimates of your future income.

While you're logged into my Social Security, also review your earnings record for accuracy. Social Security calculates your benefit by averaging your income in your highest-paid 35 years of working. An incomplete or inaccurate earnings record could reduce your benefit from what you're entitled to.

Don't plan on Medicare covering all of your healthcare expenses. There is no premium for Medicare's hospital coverage, but most people will pay a premium for the outpatient coverage -- known as Medicare Part B. You'll additionally have copayments, coinsurance, and deductibles.

By some estimates, the average retiree will spend about $5,000 annually on these out-of-pocket healthcare expenses. That's $150,000 cumulatively for one person over the course of a 30-year retirement.

At a minimum, make sure you add $5,000 a year to your retirement budget for your healthcare expenses. Even better, start making tax-deductible contributions to a health savings account (HSA) today if you have access to one. You can invest within your HSA and the earnings will grow on a tax-deferred basis. Notably, HSA withdrawals are also tax-free as long as you use the money to pay for healthcare costs.

With your targeted lifestyle in mind, estimate your living expenses in retirement. Start by listing out your current expenses. Then, adjust for any expenses that will go away when you retire. For example, you won't need to make retirement contributions and you won't have to pay for office parking, lunch with coworkers, or dry-cleaning for your work suits. And if your retirement plan involves downsizing or moving to a cheaper locale, estimate those savings as well.

Next, list any new expenses, such as travel and healthcare. Don't forget to account for income taxes. 401(k) and traditional IRA distributions are always taxable, and you'll probably pay taxes on your Social Security too.

Roll up those budget changes to estimate the monthly and annual income you'll need in retirement.

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Setting a goal for your target retirement savings balance helps you stay focused on saving. You can estimate your targeted savings balance as long as you know roughly what your living expenses in retirement will be and have a sense of your expected Social Security benefit. Start by subtracting your annual estimated Social Security benefit from your projected annual living expenses. The result is the amount of income you'll need from your savings.

Multiply that number by 25 to estimate the savings needed to support you in retirement. The answer is your new savings goal. A nest egg of that size should last 30 years, assuming your money is invested and you limit withdrawals in retirement to 4% annually.

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Saving money is hard. Having a solid household budget makes it easier. The first line item on that budget should be your retirement contributions. Start by allocating at least 15% of your income to your retirement savings. Then list out your living expenses and see if you can cover them with the remaining income. You'll likely have to trim back some of your discretionary spending.

If a 15% contribution rate isn't workable today, set a goal to get there over time. You can do it by downsizing your lifestyle and raising your contribution rate with every pay increase.

The less you spend today, the more you can save for your retirement tomorrow. Even if you have a household budget in place, there's no reason you can't take steps to outdo your budget by spending less than what you've allocated. You might even enjoy the challenge.

As a starting point, make it a habit to review your spending transactions several times a week. Taking note of when you spend and why often reveals some easy savings opportunities. If you splurge at the supermarket, for example, try ordering your groceries online and picking them up, so you don't have to walk into the store. If you are making a lot of online purchases, hold yourself to a 48-hour waiting period before buying anything online.

High-rate debt balances undermine your efforts to achieve financial freedom. The average interest rate on a credit card is 16.61%, which translates to about $170 in annual interest for every $1,000 you owe. Pay off those balances and you free up cash to fund your retirement savings and you lower your cost of living at the same time.

Lean on your budget to help you pay down debt balances. Allocate 5% of your income to debt repayments, even if it means you have to lower your retirement contributions temporarily. Commit to sending every cash windfall to your debts. Common cash windfalls are bonuses from work and tax refunds from the IRS.

Your workplace 401(k) and traditional IRA offer tax-deferred earnings, which can help you grow your nest egg faster. Your 401(k) may additionally offer employer-matching contributions -- which is essentially free money.

Your goal should be to contribute 15% of your income cumulatively to these accounts, or more if you're close to retirement and behind on your savings. In 2020, you can contribute up to $19,500 to your 401(k) or $26,000 if you're 50 or older, not including employer match. The 2020 IRA contribution limit is $6,000, or $7,000 if you're 50 or older. Note that your IRA contributions may not be tax-deductible if you are also participating in a 401(k).

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You could pick a few funds in your 401(k) that sound interesting and call it a day. But you'll have better results and fewer ugly surprises if you learn a bit about market cycles, how different investment types work, and how you can manage your risk. For example, a look back at the historic movements of the market can show you that, despite any short-term volatility, the long-term trend is always up. That bit of knowledge can help you stay patient enough to ride out market downturns, rather than panicking and selling out. Other concepts to review include how stocks behave differently from bonds, along with diversification and asset allocation.

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The simplest way to grow your nest egg is to invest in assets you can hold for long periods of time. This isn't as exciting as trading often to turn quick profits, but it's far less risky. The more often you trade, the more you're exposed to timing mistakes that can cost you money. When you buy quality assets and hold onto them, though, you are taking advantage of the stock market's long-term growth trends.

In your 401(k), choose broad-based mutual funds with portfolios that include large, established companies, known as large caps. An S&P 500 index fund is an example. If you're investing directly in stocks in your IRA or another brokerage account, lean towards big companies that have weathered various economic cycles, like Walmart (NYSE: WMT) or Costco (Nasdaq: COST).

An emergency fund helps you stay on track with your retirement plan, even when life throws you curveballs. If you lose your job unexpectedly and you don't have ample cash savings, you may have to borrow on credit cards or from your retirement account to get by. It can take years to recover from those actions.

Commit to building up a cash savings balance that's enough to cover at least three months of your living expenses. When a crisis hits, pull from those cash savings first and replenish the balance as soon as you're back on your feet.

Your retirement plan is built on the type of lifestyle you want after you leave the workforce. If that lifestyle is totally different from how you live today, it's wise to do some test-runs before you get too locked into your plan. Whether you dream of downsizing to an RV, living in a simple condo with your favorite books as entertainment, or playing golf at the country club three times a week, use your vacations while you're still working to rehearse your retirement lifestyle. You may learn that you need something more, or less, from retirement than you'd thought.

ALSO READ: 7 Unexpected Sources of Retirement Income

The plan you make for retirement today may evolve over time as your needs and tastes changes. One thing that won't change, though, is the importance of saving early and often. Even if you're not sure what you envision for your retirement, saving and investing now gives you more financial flexibility to create the lifestyle you want later. Don't put it off.

Catherine Brock has no position in any of the stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.