Whether retirement is around the corner or decades away, it’s important to be as prepared as possible — especially if you’re planning to spoil yourself in celebration of officially leaving the workforce.
One of the best ways to plan for retirement is to gather information from people who have experience with this stage of life and have experienced all the ups and downs retirement has to offer or advised those who have.
Read through to gain valuable tips and insight from those who are well-versed in what it takes to prepare for retirement, and find out how money can actually buy you happiness in retirement.
1. Plan for the Retirement You Want
Everyone has a different idea of what their ideal retirement looks like, and each retirement goal has a different price tag. General rules for how much you should be saving are a good place to start, but your ideal retirement could be vastly different from someone else’s. For example, if you want to retire early and travel the world, you’ll need to save more than if you plan to keep working as long as possible.
2. Review Employer Matching Contributions
When you work for a company with a 401k plan, you might be eligible for a matching contribution to the plan by your employer. Make sure you know whether your employer has a matching contribution, said professor Jamie Hopkins, co-director of the New York Life Center for Retirement Income. You’re essentially turning down free money if you don’t maximize what your employer offers to contribute on your behalf.
3. Social Security Won't Pay for Everything
Even if you expect Social Security to be around when you retire, it’s only intended to replace about 40 percent of your pre-retirement income if you are a medium earner. According to the Social Security Administration, the average monthly benefit for retired workers in 2018 is $1,404. Look for ways to supplement your income in retirement, so you’re not relying upon Social Security.
4. Pay Off High-Interest Credit Card Debt
One debt you’ll want to get rid of before retirement is high-interest credit card debt because it’s a costly way to blow your budget.
“At the very least, a retiree should enter retirement free of credit card debt,” said Gage Kemsley, vice president at Oxford Wealth Advisors in Rio Rancho, N.M.
If you don’t have the funds to pay off high-interest credit card debt immediately available, consider taking out a personal loan to use towards debt consolidation. Some lenders — like PenFed Credit Union — offer loans with no origination fees and low APRs, so this might be a good option for you. The money you save with a lower APR can be used to pay down your principal balance faster, helping you achieve a debt-free retirement sooner.
5. Don't Put Your Investments on Autopilot
With set-it-and-forget-it investment options and other default investment decisions, it can be tempting to let your retirement savings take care of themselves. The default options, however, might not be best for you.
“Learn what types of investments work best for you, and don’t be afraid to be more aggressive — put nearly 100 percent in equity and the rest in bonds,” said Hopkins. “But perhaps the most important thing to remember — leave it alone. Ride the tide and trust in the market before you run to sell off your stocks.”
6. Costs of Living in Retirement Can Vary Dramatically
Where you retire has a significant impact on how much you need to save. A GOBankingRates study found that you need less than $950,000 to survive retirement in Mississippi, but almost $2.1 million — more than twice as much — to survive retirement in Hawaii. Where you live matters, especially in retirement.
7. Start Saving Early
The earlier you start saving for retirement, the sooner you can put the power of compounding interest to work. At a 4 percent return after inflation, $1 invested at age 20 is worth $5.84 at age 65. That same $1 contributed at age 50 only grows to $1.80.
8. Consider Investment Returns Before Paying Off Debt
Everyone wants to live debt-free. However, rushing to pay off debt might not, in certain circumstances, be the best way to build your net worth. When you have low-interest rates on your debt, it might make sense to use the extra money earn higher returns elsewhere.
“If a vehicle is financed at 1.99% APR and an investment account is earning 3.5 percent, it might make sense to prolong the payment and arbitrage the spread in interest rates,” said Kemsley.
9. Only Borrow From Your 401k as a Last Resort
Your 401k plan might allow you to borrow up to $50,000 or 50 percent of your balance, whichever is less, but that doesn’t mean you should. Should you default on the loan, not only have you damaged your nest egg, but you also face a big tax hit. Even if you do pay it back, you miss out on the market gains on the principal of the loan while it’s still outstanding.
Instead of borrowing from your 401k, consider taking out a personal loan instead. Personal loans can be used for debt consolidation, home improvement, auto repair, travel or any other life experience you need help funding.
10. Execute Powers of Attorney
You should have both financial and medical powers of attorney designating who you want to make decisions for you when you’re not able to do so yourself. Choosing not to execute powers of attorney means that your children could have to go to court to get someone appointed as your conservator — or possibly fight about it in court.
11. Create an Estate Plan
Your powers of attorney allow someone to act for you while you’re alive, but your will or trust determines where your assets go after you die. Although it might be disconcerting to consider your own mortality, putting a plan in place for how your assets will be divided can save substantial family drama that might result if there’s no plan. Talk to an attorney to determine whether a will or trust is right for you.
12. Don't Forget Beneficiary Designations
When you’ve established a will or trust, it might seem that you’re all set from an estate-planning perspective. Your retirement accounts, however, like your 401k or IRA, will pass according to the beneficiary designations — even if your will or trust says something different. So update the designations.
13. Retirees Value People Over Activities
When Merrill Lynch asked retirees whether they cared more about the activities they engaged in or who they did them with, over 60 percent said they were more concerned about who they were doing them with. The percentage was even higher among women.
14. Don't Sacrifice Your Retirement Savings to Pay for College
As parents, you want to make sure your children are taken care of, especially when it comes to making sure they get a good education. Raiding your retirement accounts to pay for college, however, could land you in a desperate situation when you want to retire.
“If you are retiring soon and are currently or will be helping your child or children with higher education expenses, rule No. 1 is don’t sacrifice retirement savings to pay for college,” said Joseph DePaulo, CEO of College Ave Student Loans. “Unlike college, there are no scholarships or unsecured loans designed to cover the entire cost of retirement.”
15. Don't Assume Everything Will Go Right
When deciding how much to save, it can be tempting to assume you’ll have the best-case scenarios so you don’t have to save as much. However, to make sure you’re covered no matter what happens, your plan needs to include contingencies.
“The best thing you can learn from most retirees is that your plans don’t always work out, and you need to make sure that your finances can accommodate for any unexpected twists and turns,” said Lindsay Sakraida, director of content marketing with DealNews.
If you don’t have an emergency fund saved up, you can use a personal loan for emergencies, which has lower APRs than credit cards. Look for a loan with no origination fee — such as a PenFed personal loan — so you can access the full amount of your loan immediately at the lowest cost to you.
16. You Might Not Spend Less in Retirement
You might have heard the rule of thumb that you’re going to need about 70 percent of your pre-retirement income. It’s possible, however, that you could need more money because you have more free time, which could mean you might spend more. According to a Merrill Lynch study, people age 65 and older have about 7.5 hours of leisure time per day.
17. Talk to Your Children About Money
The temptation to help your children out financially isn’t limited to paying for college. It can be rent, spending money or other costs that your children become used to you paying for long after they’ve graduated — or should have graduated — and it can take a toll on your retirement savings.
“Don’t become the bank of mom and dad. Even once you have a plan to pay for school, don’t set the tone that you’re an ATM,” said DePaulo. “Include your child in discussions about the cost of school, decisions about how to pay for college costs and help them create a budget to make sure their spending money covers their expenses.”
18. Live a Healthy Lifestyle
Not only does living a healthier lifestyle make it more likely you’ll be around to enjoy your retirement, but it can also save you money. For example, according to a Merrill Lynch report, stopping smoking can boost your financial bottom line by $12,000 per year. Kicking the habit at 35 could translate into an extra $360,000 at retirement, before interest.
19. Include Roth Accounts in Retirement Planning
You can reduce the amount of income taxes you must pay in retirement by using Roth accounts, such as Roth IRAs and Roth 401ks, to save for retirement. Although you don’t get a tax deduction for your contributions, your qualified withdrawals come out tax-free in retirement. Having at least some of your money in Roth accounts gives you tax flexibility in retirement.
20. Personal Connections Matter More as You Get Older
Almost 80 percent of people age 65 and older agreed that it is important to stay connected with friends, according to a Merrill Lynch study, which was up from 70 percent of people age 55 to 64. When people age 35 to 44 were asked the same questions, only 58 percent agreed.
21. Don't Ignore Investment Fees
Pay attention to the fees you’re paying for both financial planning advice and your investments. Although a 2 percent investment fee might not sound like a lot, it can really add up over multiple decades of saving.
22. Take Advantage of Catch-Up Contributions
You shouldn’t wait until you’re 50 to start saving for retirement, but the IRS lets you make extra catch-up contributions starting when you turn the big 5-0. Each year, you can contribute up to $1,000 extra to your IRA and up to $6,000 more to your 401k. You can also use the higher contribution benefits to shift income from years when you’re at peak earning capacity to your retirement years if you expect to pay a lower tax rate.
23. Gray Divorce Is Increasing
Divorce among people age 50 and older increased by over 100 percent between 1990 and 2015, according to the Pew Research Center. Although no one ever expects to get divorced, if it happens to you, you need to be aware of how you might be eligible to claim Social Security benefits based on the earnings records of your ex-spouse if you were married for over 10 years.
24. Consider Long-Term Care Policies
Depending on your retirement outlook, a long-term care policy might be a worthwhile investment. Medicare does pay for many healthcare costs after you turn 65, but it usually won’t pay for help with daily tasks. Medicaid does cover those costs, but you won’t qualify until you have spent down your assets.
25. Social Security Benefits Might Be Taxable
You might have to pay federal income taxes on up to 85 percent of your Social Security benefits depending on your total income. Different states tax your retirement benefits differently. Some states, like Arkansas, don’t tax your Social Security benefits at all. Other states, like Kansas, might tax your benefits if your income is high enough.
26. Keep Your Home in Good Condition
Your home is likely your largest asset, so it’s important to keep it in good condition — or make the home improvements necessary to return it to good condition — so that you will be able to sell it if you end up needing the funds to support your retirement, or if you know you will want to relocate or downsize. Remodeling your home before you retire can help to increase its value, and often times the renovations pay for themselves — and then some. If you don’t have the funds to take on a home improvement project, consider taking out a personal loan to cover the expenses.
27. Your Ability to Borrow Is Based on Income
When you apply for a loan, lenders look at your income, not your assets, to determine your ability to pay back the loan. After you’ve retired, your income typically drops dramatically, making it much harder to get a loan. Consider taking out a loan while you’re still working if you know you’re going to need to borrow during retirement.
28. Health Savings Accounts Have Multiple Uses
When you’re covered under a high-deductible health insurance plan, you can contribute to a health savings account each year and receive a triple tax benefit: Contributions are excluded from your income, the investments grow tax-free and qualified distributions for medical expenses come out tax-free. You can also take penalty-free distributions after you turn 65, however, essentially allowing you to use your HSA as a second traditional IRA.
29. Don't Try to Time the Market
Investors tend not to do well when it comes to buying low and selling high. Often, individual investors allow emotion to crowd their judgment, causing them to buy more when stocks are at a high and to sell after prices have crashed. Invest for the long term to maximize your returns.
30. People Will Ask You for Money
As you get older, you will likely be asked by various people to lend them money. According to Merrill Lynch, over 60 percent of people have provided monetary support to family members in the last five years — at an average of $6,500. And, it’s not just children — siblings, parents and grandchildren also ask. Have a plan for how you’ll handle these situations to make sure you’re not hurting your own retirement savings.
31. You Might Still Have Student Loan Debt
Even if you resolve to pay off debt from your own education, you could find yourself owing money used to finance college for your children or grandkids. According to the Consumer Finance Protection Bureau, as of 2015, older borrowers owed almost $67 billion in student loans. Failing to have a plan in place to pay it off could cause you to have to pay it back during retirement.
32. Be Prepared for Changes
Flexibility is vital when it comes to preparing for retirement. Even the best-laid plans can go awry, often for reasons outside of your control. For example, you might plan to work until you’re 70 so you can take advantage of a larger Social Security benefit. But if you get injured or laid off, you might have to retire much earlier.
Read more about the cheapest places to retire.
Gabrielle Olya contributed to the reporting for this article.
By Michael Keenan for GOBankingRates.com.