5 Ways to Prepare for Retirement
By Living Better on January 6, 2021
It’s something many of us never really think about through the course of our careers. Looming far into the distance, the concept of retirement and subsequently planning for it never truly crosses our mind, and planning for it sometimes becomes a last minute effort full of stress and anxiety.
Here are a few reasons why it’s better to prepare for retirement now rather than late:
Reduce stress by planning ahead
Nothing is more stressful than worrying about money. Entirely eliminating those concerns will probably never happen, but planning ahead can reduce some of the stress involved in planning for retirement. Some common fears most people have about retirement are easy to understand. Running out of funds, unreasonable amounts of debt, and the perils of inflation can all become costly potential issues as you grow older. Planning ahead and keeping all of your finances and documentation in a common, secure location (like an app or computer program) will help ease your mind as you prepare for your financial future.
Set financial and retirement goals
The general consensus among most financial advisors is that you should try to have enough funds (in retirement funds, social security, a pension or other sources of income) to replace 80% of your pre-retirement income. Financial planning and goal-setting is always good practice but becomes increasingly important as you near retirement age. The key is to always “pay yourself,” a little bit of each paycheck as savings, and look for investment options that can maximize your savings.
Using retirement planning and saving tools in a convenient app can help take some of the accounting and frustration out of planning by handling some of the finer details for you as you set and evaluate your financial and retirement goals. Sometimes it’s better to have a snapshot of all your financial details in one place—including retirement accounts like a 401K or an IRA—so you can plan ahead without diving through a mountain of paperwork across multiple places just to figure out your finances!
Take advantage of your employer’s 401K plan
Many employers offer a 401K plan with an employer match option. Depending on the employer and how far along you are into your career, you can either start small (by contributing the minimum amount to qualify for the full employer’s match) or start contributing more over time. The biggest advantage of a 401K is the higher contribution limit, which is much larger than an IRA for a single year depending on your age.
Keep in mind that some employers do not offer a match, so plan your investment accordingly.
Consider investing in an IRA
Another viable savings and investment option is an individual retirement account (IRA). Like a 401K account, you need to have some kind of earned income or wages to invest in either a traditional or a Roth IRA. Keep in mind that some IRA’s are subject to required minimum distributions and have a limit of investing only $6,000 per year for the next two years. There are several types of IRA available today:
- Traditional – with a traditional IRA, contributed funds are usually tax deductible. Withdrawals from a traditional IRA during your retirement are treated as a taxable form of income.
- Roth – what differentiates a Roth IRA from a traditional one are that your contribution is made after-tax, meaning you can withdrawal the funds without the tax penalty during your retirement.
- Simple – allows an employer match, just like a 401K. However, this type of plan has a significantly lower contribution limit per year than a 401K.
- SEP – this provision lets employers make contributions into an employee traditional IRA in lieu of contributing to a pension fund.
Choosing an IRA based on your personal financial needs can help bolster and strengthen your own retirement fund. Each plan offers unique benefits and all of them are useful depending on your particular situation. You may wish to try the ROTH IRA calculator, which can help you to choose the right retirement account for you.
Seek other investment options
Retirement planning can be a daunting, difficult task. Other investment options are a viable and useful option if your employer doesn’t match a 401K, you have extra money to invest or you want to branch out a bit on your retirement savings portfolio. Investing in stocks or taking advantage of mutual funds, bonds, and money-market instruments (if your company offers them) can all be useful investment options to maximize your savings and make planning for your retirement a breeze.
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