If you wish you had started saving for retirement earlier, you are in good company. But don’t be discouraged. Start where you are right now and make a plan to prepare for a comfortable future. To get you started, here are three things you can start working on right now.
1. Claim your 401 (k) match for the year
Anyone who qualifies for a 401 (k) match should attempt to claim it if they can afford it. This money is a bonus that could be worth hundreds or thousands of dollars this year, and potentially tens of thousands after investing a few decades in your retirement account. But you only get it if you contribute to your 401 (k) first.
Check with your company’s human resources department if you are unsure how your company’s correspondence formula works or how much of your correspondence you have already claimed for the year. If you haven’t claimed everything, see if you can increase your pension contributions for the remainder of 2021. You may need to cut back on spending in other areas to make this possible.
2. Pay off your high interest debt
Paying off a high interest credit card or payday loan debt may seem unrelated to retirement planning, but it actually helps your preparation for retirement. High interest debt can swell quickly, making it harder and harder to pay off. If you extend it into retirement, you risk draining your savings prematurely. Paying it off before retirement avoids this problem. It also frees up more money than you can spend on your future once you’re out of debt.
There are several ways to do this. You can open a balance transfer card if you are sure you can pay off your credit card debt within the 0% launch time. Or you can try a personal loan. This gives you a predictable monthly payment and does not require collateral like other types of loans, so it is a good choice for those with a high amount of debt.
Once you’re out of debt, set a new budget to make sure you don’t fall back into the same patterns and instead spend the money you put in paying down debt when you retire.
3. Develop a safe exit strategy
Saving money for retirement is only half the job. You also need to figure out how much you can safely withdraw from your accounts each year to ensure that your money will last until you fully retire. What constitutes a safe withdrawal rate varies from person to person.
You may have heard of the 4% rule, where you can safely withdraw 4% of your retirement savings in the first year and then adjust that amount for inflation each year by the following. But this is not a good strategy for everyone. This ignores the fact that some people spend more money earlier in retirement when they are more active and less as they age. It could also cause some people to run out of money prematurely.
Some people choose to withdraw 3% of their savings in the first year of retirement to play it safe, while others choose to offer a personalized withdrawal strategy that better matches their spending habits. There is no right answer. Think about how your spending habits will change in retirement and explore different options until you find an exit strategy that’s right for you.
Remember to take into account the money you will receive from Social Security, a pension, or other sources. And if you can’t find an approach that seems to provide you with enough money to cover all of your retirement expenses, you may need to consider delaying your retirement and working longer. It’s not ideal, but it’s better than running out of money too soon.
Once you’ve built a solid retirement plan, be sure to check in with yourself at least once a year. Make sure you’re on track to meet your goals, and think about additional steps you can take, like the ones described above, to improve your financial preparedness. Doing this will increase your confidence and keep you in the direction you want to go.