4 Things You Need to Know about Preparing for Retirement
The simple rule of planning for retirement is the earlier you start, the easier things will be. Unfortunately, that is a lesson that all-too-often people don't realize until later in life. The good news is that you can save for retirement even if you start late, but it does require more financial discipline. No matter whether you are in your 20s and you want to get a jump-start on preparing for retirement, or you are starting in your 50s, here are some tips that will help you make the best of your situation and make transitioning to a fixed income easier.
Pay off Debt
According to creditloan.com, the average person spends approximately $2,600 per month on consumer goods and services and has more than $8,000 in consumer debt. That said, it seems like taking on debt is a part of life. One could even make a reasonable argument that, while you're working and paying off the debt that you acquire, it is nice to be able to life a comfortable life. However, you need to have some balance, especially when it comes to entertainment spending. Don't spend as if tomorrow is never coming, otherwise you will find yourself in a bad spot when retirement time comes. You don't want to live beyond your means for years and years racking up debt and then be stuck paying it all off when you're supposed to be enjoying your retirement.
Set a time frame for when you are going to get out of debt that includes paying off all your credit cards, car loans, mortgage, and other debts. If you have high-interest credit card debts, you might want to think about getting a personal loan so that you can roll the balances into a lower interest rate loan and pay them off faster. The goal of getting out of debt before you retire is to reduce your monthly bills as much as possible. Having fewer monthly bills to pay will made adjusting to life on a fixed income significantly easier.
Have a Retirement Fund
Many people are fans of employer-sponsored 401(k) plans. There's nothing wrong with this approach. You receive tax-deductions and tax-deferred growth on the amount you set aside. Additionally, many employers offer matching contributions and profit sharing via 401(k) deposit that sweetens the pot. The most important thing to keep in mind is that if you leave a company with a 401(k) plan; roll it over into another 401(k) or some type of IRA so that you keep that nest egg growing throughout the rest of your career.
Traditional and/or Roth IRAs are also great retirement investment vehicles. Roth IRAs have become particularly popular in recent years because they allow for tax-free withdrawals. This is especially attractive for retirement planners who would rather pay their taxes by foregoing the annual deduction and know that their money is free and clear when they start to withdrawal it. In either case, it is important to know the withdrawals rules for your plan and avoid making any early withdrawals so that you don't get socked with penalties and fees.
Diversify Your Holdings
One key to a comfortable retirement is to build as many different income streams as possible. Some people like to make investments in stocks and/or mutual funds that offer long-term growth potential while others prefer safer, but lower return investments like bonds. Everyone's level of knowledge and risk-tolerance is different, so finding the best strategy for your situation may be difficult. If you have any doubts about the best ways to build wealth for your retirement, you should speak with a reputable financial advisor as soon as possible to create an investment plan.
Real estate can be a good investment if you can comfortably pay off the mortgages before you retire. The downside though is that real estate investment typically involves a lot of work. Being a landlord can be very time consuming and cuts into the amount of time you can spend enjoying your retirement. A better option, if you have the time and skills for it, may be to "flip" real estate by buying "fixer-upper" properties at a discount, restoring them, and selling them for a profit. Although, this also requires quite a bit of work and isn't for the faint of heart.
Plan Your Budget
By the time most people get within a few years of retirement, they have a good idea of what their post-retirement income is going to look like. Factor in all your different sources of income such as social security, retirement accounts, pensions, investments, etc. Find a reasonable amount of income that you can life on without depleting your accounts too quickly. Don't make the mistake of planning on living only ten years after you retire, because these days people tend to live longer after retirement than ever before, so don't blow through money as if you plan on dying quickly.
After you come up with a feasible number to live on each month, start looking at how you can cut your expenses. For example, perhaps you can go down to one vehicle instead of two or three. You also might want to consider selling your family-size home and moving to a smaller condo or townhouse. Some people even go so far as to relocate to a less expensive area once they are no longer tethered to commuting to work. Obviously, you don't want to deprive yourself of everything, but cutting back on non-essentials will help you stretch out your monthly income.
It may sound a bit cliché, but don’t look at preparing for retirement as planning for the end of your life. Consider your financial preparations as the reward you get to enjoy once you've reached a stage in life where you no longer have to work. Put yourself in a financially comfortable position so that you can spend more time with your family and friends, pursue your favorite hobby, or start ticking items off that lifetime "to-do" list you've been holding onto. If you plan ahead well, you will be able to enjoy life after retirement to the fullest extent possible.