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How to Plan for Retirement

Do you worry about not putting aside enough money for retirement? If so, you're not alone. According to financial services provider Principal, just 27% of American adults felt good about having enough money saved to live comfortably in retirement.

Fortunately, it's never too late to sock away money for retirement. But to make sure you're saving enough money to be comfortable in your later years, it's wise to develop a retirement plan. To do so, you should consider when you want to retire, what type of lifestyle you want in retirement, and how much income you'll need to take care of living costs, health care expenses, debt and other needs.

To get your retirement plan underway, follow these important steps.

Start Saving Immediately

If you haven't started saving for retirement yet, now is the best time to do it—before the years start slipping away. This applies whether you're in your 30s, 40s or 50s and even if you're nearing the traditional retirement age of 65.

By age 30, it's smart to have an emergency fund with enough to cover three to six months' worth of living expenses. Once you've set aside some money in your emergency fund (even if it's not fully funded), start saving money for retirement, especially if you don't have any retirement savings yet.

Once you hit the 40-year mark, your emergency fund should be well-established, and you should have some savings in a tax-deferred retirement account such as a 401(k) sponsored by your employer or an IRA that you set up on your own.

At age 50, you should have a healthy stockpile of money for retirement and, of course, a fully funded emergency fund.

Regardless of your age, if you have no money saved for retirement, today is the day you should get started. Of course, everyone's circumstances are different, but keep in mind that retirement can last for 30 years or more.

Saving even a small amount of money per month can bring you closer to achieving your retirement goals. Assuming an annual return of 6%, saving just $50 a month will put you at $3,506 in five years. Bump that up to $500 a month at 6%, and you're looking at 10 times that amount—$35,059—over a five-year period. Investment experts usually recommend carving out at least 15% of your gross income to put toward retirement.

Choose Where to Store Your Funds

As we mentioned before, a 401(k) and an IRA are two options for your retirement savings. In fact, they're the two most common types of retirement accounts. Let's dig a little deeper into the 401(k) and IRA.

Sponsored by your employer, a 401(k)—or 403(b) for some nonprofit and other employers—lets you put some of your pretax income in a retirement account. The amount you select is deducted automatically from your paycheck before it hits your bank account. Investment options for a 401(k) include mutual funds and exchange-traded funds (ETFs). In some instances, your employer will match your contributions up to a certain amount, often as a percentage of your salary (like 3%).

Financial experts typically recommend earmarking at least 10% to 15% of your pretax income for your 401(k). But if you're 40 or over, you might want to aim for 20%.

As opposed to a 401(k), an IRA is a retirement account that you open on your own through a bank, credit union, investment firm or a mutual fund company. Two common kinds of IRAs are a traditional IRA and a Roth IRA:

  • A traditional IRA enables you to contribute pre- or after-tax dollars. Your money grows tax-deferred, and withdrawals are taxed after age 59½.
  • A Roth IRA allows you to contribute after-tax dollars. Your money grows tax-free, and you usually can withdraw money after age 59½ without paying taxes or penalties.

Start Reducing Expenses Before Retirement

So, you might be wondering how you can come up with enough money to set aside for retirement. Two ways you can accomplish that are by creating a financial plan and reducing expenses.

How to Create a Financial Plan

A financial plan is essentially a roadmap for spending and saving. It includes items like everyday costs, vacations, retirement and emergencies such as a job loss or emergency car repairs.

You can develop a financial plan tailored to your life by going over your spending, setting goals, establishing a budget and finding ways to reduce expenses. No matter whether you generate one on your own or seek help from a financial advisor, a financial plan can help you feel more financially secure.

How to Reduce Expenses

Look closely enough, and you should be able to unearth a variety of ways to reduce expenses and funnel more money toward your retirement. Here are four of them:

  1. Cut your grocery budget. A typical four-member household can easily spend several hundred dollars each month to put food on the table. To shave some money from your food budget, develop a weekly meal plan to ensure everyone eats what has been purchased. That cuts down your budget and food waste. In addition, you might download a shopping app or clip coupons to save cash.
  2. Examine your communication bills. You might not pay much attention to your cellphone or internet bills. But when you study them carefully, you may discover you're paying more than you thought. If so, you might consider shopping around to see if you can score a better deal. You also may want to resist the temptation to constantly upgrade to the latest (and priciest) version of cellphone.
  3. Refinance your mortgage. Generally, your mortgage and related housing expenses should make up no more than 28% of your gross monthly income. If your monthly housing tab exceeds that amount, you may want to look at refinancing your mortgage. Doing so could lower the interest rate on your mortgage and, therefore, your monthly mortgage payment. If refinancing isn't an option, consider renting out an unused room, finding a roommate or even moving to a lower-cost place.
  4. Reduce your discretionary spending. Housing and food are among life's necessities. Everything other than necessities falls into the category of discretionary spending. Some of the discretionary expenses you might consider cutting back on are gym memberships, restaurant meals, streaming services, high-end clothing, gifts, vacations and holiday goodies (like gifts and decorations).

Monitor Your Credit

Properly planning and managing your finances—including your retirement savings—depends, in part, on monitoring your credit. So, why is it important to keep on top of your credit ahead of retirement? Here are four reasons:

  1. You don't want to carry a heavy load of debt that eats into your retirement income.
  2. If you decide to downsize to a different house, your credit score will impact your approval for a mortgage and the interest rate and terms you're offered. You might want to downsize from a house you own to an apartment you rent. When reviewing your rental application, a landlord likely will review your credit.
  3. You might be leaning toward refinancing a mortgage or auto loan. Healthy credit can help lower monthly payments and interest rates for these loans.
  4. You might need to pay health care expenses with a credit card or loan. A strong credit record can boost your credit score and potentially lead to lower interest rates.

Keep in mind that your retirement won't be reflected on your credit reports. These reports, which are used to calculate your credit scores, don't include information about your employment or income.

Keep Track of Your Social Security Statement

Your Social Security statement offers an estimate of the amount of Social Security benefits you could receive once you retire. It's one of the tools you can use to plot your retirement strategy. For instance, it can give you a better sense of how much money you should be putting into your 401(k) or whether you should open an IRA.

To check your Social Security statement, visit ssa.gov, click Menu at the top of the page and then click Social Security Statement on the left side of the page.

The Bottom Line

Planning for retirement involves a number of steps, such as starting to save money for retirement, picking your retirement savings vehicles, reducing your expenses, monitoring your credit (which Experian enables you to do for free) and checking your Social Security statement. While taking on those tasks might not be simple, it can make it much simpler for you to retire when, where and how you want.

Learn More About Planning for Retirement