Retiring is an exciting time in your life, but it can also be the scariest. Suddenly you are without an income and must be self-sufficient. Getting yourself to that point is the key to success. You must plan carefully and know what you need before you retire.
Here are the tops dos and don’ts of retirement to help you make the most of your golden years.
Do Save Early
You probably think at a young age that retirement is so far off that you don’t have to think about it yet.
This is wrong.
You must save early and here’s why.
The earlier you save, the less you have to save, yet the more money you’ll have. It all comes down to the beauty of compound earnings. When you invest money and have earnings and those earnings make money, you have compound earnings. In other words, you earn money on money you didn’t even invest yourself.
The difference between investing when you’re in your 20s and waiting until you’re in your 40s or closer to retirement can mean the difference of hundreds of thousands of dollars.
Don’t be Conservative (all the time)
You might think you have to be super conservative with your retirement funds. After all, it’s the money you need to retire, so why take a chance?
Here’s why.
If you invest conservatively, you won’t have the major earnings you want. Instead, you should diversify your portfolio to have aggressive investments and conservative investments. This ensures that you offset major losses from your aggressive investments with conservative investments, but you still have the chance for much higher earnings with riskier investments that have a great rate of return.
Do Set Retirement Goals
Even if you’re closer to new adulthood versus retirement, set retirement goals. This gives you something to work toward rather than just earmarking money for retirement.
Say for example, you know you want to take several trips of a lifetime during retirement. That gives you something to look forward to and a reason to save aggressively. It’s a lot easier to say, ‘I’m saving for my dream trip to Hawaii when I’m 65-years old versus I’m saving just to have money when I’m older.’
Your goals could also be about a specific age you want to retire, where you want to live, or what you want to do (not do) while retired, such as work at all.
Don’t Feel Stuck in your Goals
Your retirement plans can change hundreds of times from the time you start them and when you actually retire. The key is to be flexible with yourself and your funds. As long as you’re saving, you’ll have the money you need to achieve your goals.
Life can throw us curveballs as we all know so sometimes we have to pivot and change our goals, and that’s okay.
Don’t assume if you set a goal that’s what you have to do with the money you set aside.
Do Contribute to an IRA and/or 401K
If you work for an employer and they offer a 401K, look at your options there. 401Ks sometimes have more restrictive investment options or requirements, so know what options you have.
If you don’t like them or your employer doesn’t offer a 401K, don’t overlook the benefits of an IRA. The contribution limits are much lower for an IRA annually, but every penny you save will be worth more when you retire and is worth saving.
Don’t Miss your Employer’s Match
If your employer matches your 401K contributions, don’t skip it! This is like free money. Let’s say for example your employer will match 3% of your income if you contribute that much and you make $75,000 a year.
If you contribute $2,250 a year, that means your employer will contribute $2,250 as well, for a total of $4,500 per year.
Even if you only contribute as much as your employer will match, it’s free money that’s invested tax-free while you save for retirement.
Do Rollover your 401K if you Change Jobs
This is a common mistake people make when they change jobs. Most people don’t stay at the same job for 30+ years like Baby Boomers did, so there’s a lot more work involved in keeping track of your retirement funds.
When you leave your job, make sure you make plans to roll over your 401K from your old employer to your new employer if it’s allowed. If your new employer doesn’t allow it, you can roll it over into your own IRA.
The key is to not leave the funds in your employer’s old 401K. It will sit there without any activity, no new contributions, and possibly even lower returns. Many people even forget about their 401K accounts that they leave behind, so always roll it over.
Don’t Withdraw Funds from your 401K from an Old Job
It can be tempting to just take the cash out of an old employer’s 401K, but there are several reasons not to do this.
- You’ll pay a 10% penalty for early withdrawals unless you are at least 59 ½ years old.
- You’ll pay taxes at your current income tax rate.
- You’ll deplete your retirement savings and have to start from scratch.
If you aren’t sure what to do with the funds right away, leave them in your old 401K, but make plans quickly to roll them over, but not withdraw them. If you accidentally withdraw your funds, deposit them into a verified retirement account within 60 days to avoid the above penalties.
Do Have an Emergency Fund
Just like you have an emergency fund when you’re working, you’ll need one in retirement. Your emergencies may look different in retirement, but having that fund set aside ensures that you don’t have to withdraw more funds from your retirement than you planned, leaving you with less money as you age.
Your emergency fund should be separate from your regular retirement funds and be inaccessible unless you absolutely need it, such as if you suffer a house or medical emergency.
Don’t Think Social Security will Carry you Through
No one should depend on Social Security income. First, there’s no guarantee regarding how much you might get. If reserves run short, Social Security income moving forward could be much lower.
Second, it should be considered a ‘bonus’ and not the income you rely on for your regular income. At best, Social Security is a supplement, but it’s not enough to get anyone through retirement even if they live a frugal lifestyle.
Do Work with a Financial Professional to Allocate your Portfolio
You might think you can manage your retirement funds yourself but it’s always a good idea to have a professional’s opinion. Whether you use your plan sponsor as your resource or you hire a financial consultant, getting a third party to weigh in on your allocation decisions is important.
Don’t Forget to Revisit your Portfolio’s Allocation Annually
When you’re younger, you have a higher risk tolerance and can invest more of your portfolio aggressively. As you get closer to retirement, though, your risk tolerance decreases. You can take fewer chances because there’s less time to make up for a loss.
It’s best to revisit your portfolio allocation annually so you know where you stand and can assess what you should do next, whether it means adjust to invest more or less aggressively.
Do Have a Budget
You might think once you own your house without a mortgage, you have little to no debt, and only basic bills that you don’t have to budget, but you always must.
With life expectancies increasing and people working even later in life, having a budget is important because it ensures you’re always on track. When life throws you curveballs, you’ll be happy that you have a budget to keep you on track.
Don’t Create more Debt
Try to keep yourself out of debt as you near retirement and when you’re in it. Creating more debt only depletes your retirement savings and makes it harder to live the life you want in retirement.
Instead, only buy what you can afford and try to live a minimalist lifestyle so you can best ensure that you have the money you need in retirement.
Key Takeaway
Knowing how to handle your retirement funds is important. Not only will you be able to plan for retirement, but you’ll have peace of mind knowing that you’re set up for future success and can achieve the financial goals you desire.
