Planning for retirement can be a daunting task for most people, but this is especially true if you’re starting in your 40's instead of your 20's. However, with an intelligent approach and a healthy dose of discipline, starting a plan for your retirement later in life isn’t as tough as you might think. If you’ve gotten off to a late start, follow these six steps to planning a successful retirement:
1. Maximize Contributions to Your 401(k) Plan
Most employers offer a voluntary 401(k) retirement savings plan that makes it easy to save. The deductions can be made pre-tax from your paycheck, eliminating the effort on your part to put the money away. To quickly figure out how much your account would be worth in the future, try this tool from Bloomberg.
If your employer matches the contribution you make, you should at least contribute the matching percentage, if not more. Otherwise you are leaving money on the table, so to speak. Also, if you’re age 50 or older you may also be able to save an additional $5,500 as a catch-up contribution. Ask your plan administrator for complete details.
2. Track and Cut Back on Your Spending – Now
We’d all like to live the good life today, but we need to have an eye toward the future as well. Saving a little more now can make a big difference in retirement. I recommend using a software program or creating a spreadsheet of your own to track your living expenses.
In addition, examine your monthly expenditures to determine if you’re spending too much in categories where you could be saving more. Think about how much that trip to the coffee shop costs each morning versus making it yourself at home. Consider bringing your lunch to work a few times a week instead of going out to lunch every day. Each of those dollars you save could be redirected into your retirement account.
3. Pay Off or Pay Down Debt
I always like to say that no debt is good debt, and I encourage my clients to think that way as well. Interest on things like credit cards, business loans, student loans, or mortgages can quickly eat into your retirement savings and weigh you down.
The longer it takes you to repay your debt and the more money you owe, the more you’ll end up paying in interest. I urge you to make it part of your personal financial plan to start retiring all of your high interest loans as quickly as possible. By making debt elimination a priority, you’ll free up additional money for your retirement savings.
4. Monitor Your Progress Using a Retirement Calculator
It’s reassuring to see how well you’re making progress towards your goal, so charting your path to retirement makes a lot of sense. Using a retirement calculator is an entertaining way to map out how far you’ve come and will allow you to envision the lifestyle you’ll have once retirement finally arrives.
There are plenty of free calculators you can use online, as well as several apps you can download to your smartphone or table. CNN Money has an easy-to-use online calculator. It’s simple to learn and it’s free.
5. Build a Well Balanced Portfolio
Saving into a retirement account is the first piece of the puzzle, but you also need to ensure that it’s invested wisely. Do your homework so that your portfolio is well-balanced and diversified. A balanced portfolio is one where your assets are distributed across several different asset classes to limit your exposure. Diversification reduces risk by including assets that are uncorrelated, so they don't move in the same direction at the same time. The stock market is notorious for going through cycles, some more painful than others, so your allocation should be well-aligned with your financial plan and risk tolerance.
6. Adjust Your Retirement Goals
We often hear of people retiring in their 50's or early 60's. For someone who started saving for retirement when they were 30, this might be a realistic goal. Those who started saving later in life will most likely need to work a few extra years to make up the difference.
At this stage of life it’s important to be realistic with your retirement date and to revisit your financial plan to make sure you are on track. If you keep current with monitoring your expenses and are regularly monitoring progress toward your goal, you’ll be less likely to suffer any nasty surprises.
By following these six steps, you’ll be well on your way to building a retirement fund that will see you into your golden years. If you’re like most people, you might have some setbacks along the way, but try to keep a positive outlook and be flexible. Life rarely goes as expected, and your retirement plan isn’t something you draw up and forget about. Being flexible will help keep your stress level down and allow you to take things as they come.
Maloon, Powers, Pitre & Higgins, LLC is a Registered Investment Advisor. Securities offered through Financial Telesis Inc. (Member FINRA/SIPC). Financial Telesis Inc. and California Financial Advisors are not affiliated companies.