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8 Tips to Plan for a Successful Retirement
About 10,000 people retire every day in the U.S. but the majority of them have far less in retirement savings than they need to live comfortably. In fact, the average 65-year-old has less than $200,000 in retirement savings.
If you’re not where you want to be financially as you approach retirement, it’s never too late to take steps to put yourself in a better position. Here are some tips to keep in mind as you prepare for life as a retiree.
Max out your 401(k), especially if you get a company match
When your employer matches your retirement contributions up to a certain percentage of your salary, do whatever you need to do in your budget to take full advantage of that free money. You’re making 100% on your contributions right off the bat; it will take years to get that kind of return from the stock market or bond funds. Ideally, you should max out your contributions up to the annual limit, but if you’re not there yet financially, make sure you’re getting 100% of your company match money.
Review your 401(k) fund options
Depending on who manages your retirement plan, you may have many mutual and index fund options, or just a few, but it pays to do your homework and learn about each one. Index funds are much cheaper to own than traditional mutual funds; a difference of just 1% can add up to tens or even hundreds of thousands of dollars if you have 20 or 30 years of compounding before you retire. An inexpensive S&P 500 index fund is a great all-purpose option for growth and managed risk.
Plan for health care expenses
A health savings account is another tax advantaged vehicle for building up cash for retirement. In 2019, you can contribute $3,500 pre-tax for a single or $7,000 for a family to an HSA if you have high-deductible health insurance. Unspent contributions roll over year after year; when you turn 65, you can withdraw money for any reason, not just health expenses.
Pay down debt
The shift from salary to fixed income takes some getting used to; don’t make it harder by starting retirement with monthly debt payments. When you’re five to ten years from retirement, focus on cleaning up your balance sheet and getting rid of debt. Get in the habit of paying your credit cards in full each month.
Re-evaluate your home as a retirement asset
If your home is paid off and its value is a small percentage of your retirement wealth, it may make sense to keep it after you retire. If your home value represents more than half your retirement wealth, weigh the pros and cons of selling it and investing the profits. You can either downsize to a smaller, less expensive home or rent something suitable. Remember, a paid-off home isn’t a “free” place to live; you still have taxes, insurance, maintenance and repairs, HOA or condo fees—most people spend between 2% and 4% of their home value each year just keeping the house in good repair.
Prioritize your retirement over your kids’ college
If you have children, paying for college may be one of your top priorities. If you’ve fully funded your retirement by maxing out your 401(k) and IRA each year, go ahead and put money in a college fund. Remember, however, your kids can always get education loans—there’s no such thing as a retirement loan. And if you ask your children if they’d rather have 5-10 years of student loan payments or help you out in retirement for 20-30 years, they’ll pick student loans every time. If they do have to take out student loans, you can always help with the payments if you have the cash flow.
Get smart about Medicare
Medicare isn’t free and it doesn’t cover 100% of your health expenses. Learn about Original Medicare, Medicare Supplement Plans, Medicare Advantage, and Part D prescription drug coverage. Find out what typical costs might be for each type of coverage and how much protection you want against unexpected health care costs. Know your enrollment dates so you don’t get penalized in your monthly premiums and get the coverage you need.
Be conservative about Social Security planning
Social Security probably won’t ever go away completely, but it’s highly likely it will continue to evolve over the next 30 to 50 years. Benefits calculations may change, the retirement age may be raised again, FICA taxes could go up—it’s impossible to predict what you’ll get if you’re more than 15 or 20 years from retirement. Request and review your Social Security statement each year to correct any errors, and build your retirement savings plan around the lowest benefits estimate. It’s better to be pleasantly surprised than financially devastated.
Retirement planning doesn’t have to be complicated, but if you’re not sure you’re on the right track, get a check-up from a financial advisor. Look for fee-only professionals that charge by the hour or the service so you’re not locked into an expensive relationship. Talk to a Medicare broker to learn more about HSAs and Medicare options so you’re equipped to make good decisions.