Retirement is a time of life that many eagerly anticipate, often with dreams of relaxation, travel and spending quality time with loved ones. However, ensuring that you’ll get to enjoy your golden years is no easy task. The path to a comfortable retirement requires planning, patience and discipline.
Whether you’re just starting your career or are a few years away from retirement, it’s never too early or too late to take charge of your financial future. Here are five critical steps experts say you should take now if you want to retire comfortably.
Define a Comfortable Retirement
The first step on the road to a comfortable retirement is defining what “comfortable” means to you. You can’t achieve a goal without a clear picture of what it looks like. Jim Penna, senior manager of retirement services and investment strategy at VectorVest, notes that this won’t — and shouldn’t — look the same for everyone.
“It doesn’t have to be defined as being able to sail around the world or own a vineyard,” Penna said. “I believe a secure retirement is one in which you have enough income to live the life you desire, where work is optional and retirement is affordable. For me, it is as simple as a round of golf when I please and a cold beer and a good book on the patio when I please.”
Build an Emergency Fund
It’s critical to protect your investing plan by making sure it won’t be derailed when an unexpected expense pops up. It may not sound like a big deal at first. Let’s say your car breaks down — you need it running to get to work but it’s an expensive repair, so you have to put it on a credit card. If you can’t pay off your credit card, interest charges will start racking up, putting you even further behind.
Kim Gattis, wealth advisor at UMB Bank, says building your emergency fund is a critical early step on the path to retirement.
“To start, focus on three to six months of expenses in an account that you don’t touch,” she said. “Getting in the habit of saving is crucial, even if you aren’t putting much away right now.”
Maximize Your 401(k)
According to budgeting expert Andrea Woroch, another critical step to take is to contribute as much of your salary as possible to employer-sponsored retirement plans like a 401(k).
“Take full advantage of your company-sponsored 401(k) plan and max out contributions,” she said. “If you can’t afford to do that, invest up to the amount the company offers to match to take advantage of that free money.”
Contributing as much as you can to your 401(k) has another benefit: Because these plans are tax advantaged, your contributions will also reduce your taxable income, potentially leading to a lower overall income tax burden. This can be especially helpful in states that have their own income taxes on top of federal taxes.
Invest Often and Early
You can save all you want, but if your money isn’t growing over time, inflation will eat away at your purchasing power and put your retirement in jeopardy. The power of compounding interest means that the sooner you start investing, the more your money can grow over time — and that’s true whether you’re close to retirement or decades away.
According to Robert Johnson, CFA and professor of finance at Creighton University’s Heider College of Business, there is a simple recipe to building wealth over time: Invest early and often in a broadly diversified stock portfolio.
“There are two elements for successful retirement planning that there are no substitutes for: time and consistency,” Johnson said. “The sooner one starts saving for retirement, the more successful they will be. If one starts saving for retirement at age 25, one needs to invest substantially less than one needs starting at age 35. Secondly, saving for retirement has to take place consistently — that is, every month. One can’t take a break and time retirement contributions and be successful.”
Take Advantage of Catch-Up Contributions
Investing early on in your life is best, but things aren’t always that simple. If you got a late start to investing toward retirement, it doesn’t mean all is lost. In fact, there is legislation in place that provides older people the chance to accelerate their retirement savings and make up for some of that lost time.
One of these provisions is something called catch-up contributions, which increases the maximum dollar amount you’re able to contribute to certain retirement plans.
Annette Harris, owner of Harris Financial Coaching, explained it: “If you are 50 and above, there is a valuable window of opportunity to boost your 401(k) savings via catch-up contributions. … [Taking] advantage of catch-up contributions for employees who participate in 401(k), 403(b) or 457(b) plans is essential. Proactively capitalizing on this benefit can strengthen your financial security and pave the way for a stable future.”
Take Action Now
No matter where you are in life — whether you’re 25 or 55, whether you have a lot saved or a little — there’s still time to make a secure and comfortable retirement more likely. To paraphrase the old proverb, the best time to start preparing for retirement was 20 years ago. The second best time is right now.
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