By Jennifer Hunter, Ph.D., Assistant Extension Professor, Family Finance, University of Kentucky Cooperative Extension
We all have different ideas about how we want to retire, but there are a couple of things that many of us have in common: first, we want to save enough to retire when we want; and second, we need to ensure our money lasts throughout retirement.
Try these three strategies to build your nest egg, save more money, invest better, and ultimately set up a retirement plan that works for you:
Identify your retirement goals.
Identifying your retirement goals will help you determine how much you will need to support the retirement lifestyle that you have in mind. Make a list of all your retirement income sources; include income from social security, any 401(k) and 403b accounts, IRAs, and other investments. You should be receiving regular statements regarding the performance of your investment accounts. You can determine your estimated Social Security retirement benefits by reviewing your Social Security statement online through your free and easy my Social Security account. Putting together an accurate estimate of your retirement income will be helpful in planning.
Make a list of your current expenses. Look at each expense and determine if you think it will go up or down in retirement. Develop a retirement spending plan based on your anticipated income and expenses. Typically, retirees need 70-80% of their current income to cover their retirement expenses. Once you have estimated your retirement income and expenses, you will be able to determine how close you are to reaching your goal.
Automate and grow your retirement savings.
Deducting a certain portion of your paycheck to go directly into a retirement savings or investment account is an easy start to building your savings. Automating your savings takes less time on your part and will be consistent every month. You may also consider adding extra hours at work or picking up a second job, where the extra income can be applied directly to your retirement investment accounts. Remember that deducting your contribution from your paycheck before your tax payments are calculated will lower your taxable income.
As you are building your retirement savings, it is important that you make wise investment choices. Many employers will often match a portion of employee contributions to the employer retirement plan. If this is the case, be certain to maximize your contribution to this account first, up to the amount the employer will match. The employer match is essentially “free money” that you receive if you are participating in the retirement plan. Remember: if you don’t participate, you are missing out on free money!
Other types of retirement investment options may include Individual Retirement Accounts (IRAs), stocks, fixed-income investments, mutual funds, and cash savings. Prior to selecting your retirement investments, be certain to do your research. For individuals approaching retirement age, it is recommended to maintain more conservative investments, since you are anticipating needing the money in the near future. Be certain to diversify your investments; placing your retirement savings into several different types of investments will also help reduce your risk.
Consider supplementary income.
Some individuals may need to consider working longer to meet their retirement needs. You may choose to work longer at your current profession or you may decide to retire and then seek a part-time retirement job. Often, with your retirement income from your current employer in addition to your other retirement investments, you may find that you are able to work fewer hours for lower wages, and will still be able to provide adequate income during retirement.
No matter how you want to spend your time in retirement, these are three steps you can take now to help make sure you can reach and sustain your targeted retirement goals.