For most of their lives, many people view retirement more like a distant dream than a near-certain reality. These people may even talk of taking an early retirement or traveling extensively during their senior years, but they may not prepare for their chosen retirement lifestyle.
If you have a retirement dream, it is never too early to begin preparations.
Things to Consider:
Assessing your current financial situation—You can't prepare adequately for the future if you don't fully understand your current financial picture. Take inventory—what assets do you have, what retirement benefits are you entitled to? Remember, depending on your age, Social Security benefits may not be available until much later than you expect. Eligibility dates have already been increased, and other changes might well be made during your working lifetime. The most secure retirement benefits may be those you build yourself. The best place to begin assessing your future retirement benefits is with your employer's human resources department. There you can find information about the plans you will be eligible for through your job.
You will also need to review your personal assets. If you have a substantial investment portfolio, rental property, or other assets, you can leverage those assets to help build the retirement lifestyle you want.
Determining your retirement lifestyle—Whether you plan to retire early or you expect to keep working well past age 65, you will probably need a substantial nest egg to maintain a comfortable lifestyle. It makes sense to determine when you might like to retire, even if you are currently very young. You can always modify your decisions later in life, but you might not reach your goal if you wait too long to start saving. The earlier you plan to retire, the more money you will need to accumulate. You will also need to determine the lifestyle you hope to lead. Many retirement estimators and calculators assume your expenses will drop after retirement by about 20%. You may not agree, however, and you will need to make personalized adjustments to this assumption. If you plan to travel extensively, for example, you may need more money than you are currently spending. Understanding your personal situation can help you make this determination.
Making retirement savings your top priority—No matter what your current age, retirement savings should be a top budget priority. If you are young, in your 20's for example, saving early will mean you can make smaller contributions and let the money grow for a longer period. Compounding is a powerful tool with one requirement—time. The longer you allow your nest egg to grow, the more you will have when you decide to retire. Of course, if you're already in your 30's, 40's, or 50's, it is not too late. You will simply need to make larger contributions to catch up.
Contributing to your 401(k) plan—Even if you already have a retirement plan or you are very close to retirement, consider investing in your employer's 401(k) plan. Because you can invest in these plans with pretax money, you will cut your current tax liability. You will also benefit because these funds grow tax deferred until you begin withdrawals, which must be after age 59-1/2 if you want to avoid paying a 10% penalty, with some exceptions.