Whether it’s two or 20 years away, it’s never too early or too late to start preparing for retirement. While envisioning your life in retirement can be exciting, planning for it can be overwhelming. But when it comes to retirement strategies, the small steps you take now can have a big impact on your future.

 Before you start planning, it’s important to understand some crucial retirement realities.

TIME IS OF THE ESSENCE

People are living longer. The average life expectancy in the U.S., according to National Center for Health Statistics, is a little over 77 years, and with the rapid rate of scientific advancement, that number may continue to rise. Make sure your retirement funds will last your lifetime.

DON’T FORGET TAXES

Even if you have money in IRAs and 401ks, withdrawals are typically taxable and state and federal taxes may be as high as 40%.

YOUR EXPENSES MAY CHANGE IN RETIREMENT

You may not have to spend money on work attire and commuting costs, but hobbies, travel, health care and new living accommodations might change your expenses. Also, don’t forget to factor in inflation – because all these activities and amenities may cost more in the future. Look at all your expenses to get your spending in retirement just right.

HOW MUCH WILL YOU NEED TO RETIRE?

No one-size-fits-all formula works here, but one way you can begin to explore this question is to reverse engineer your retirement. Estimate the annual income you’ll need and then consider the following:

• Money from pensions and Social Security
• Income from part-time work or a second career
• Income from nonretirement savings (consider rate of return, accessibility and your need for cash reserves)
• Income from any inheritance you might receive

The remainder is the amount of income you’ll need. Now, review your income sources and how they could change in the future. Ask yourself:

• When will I stop working completely?
• How long might any inheritance or nonretirement savings last?

This will allow you to anticipate how much income you might need from your retirement assets and to project that over your life expectancy, factoring in inflation. This is a complicated issue, so enlist the advice of a financial planner to help, including how to determine potential income from various nonretirement savings and inheritances.

8 WAYS TO START PREPARING FOR RETIREMENT

1. DREAM BIG, BUT BE REALISTIC.

The first step in preparing for retirement is to envision the life you’ll want. Will you work part time? Travel? Volunteer? Next, take a holistic look at your current financial resources to determine if they’ll support your plan.

Here are a few questions to get you started:

• How much have I saved in retirement accounts and other savings accounts?
• How much will I receive in pension or Social Security benefits?
• Will I work in retirement?
• Will I receive an inheritance?
• Do I want to leave a significant amount to my heirs? What is my own and my family’s medical history?
• Do I want to leave a legacy?
• Will I need to financially support family members in the future (aging parents, children, etc.)?

Don’t think your resources will be enough to reach your retirement goals? Determine what you’ll need and consider what you can do to gain those assets. Alternatively, adjust the view of what your retirement will look like to match your current resources.

2. DRIVE DOWN DEBT.

Now it’s time to pay off credit cards and other high-interest, nondeductible debt. Reducing existing debt and limiting new debt accumulation can minimize the amount of retirement income that would be spent on interest payments.

3. BUILD A CASH RESERVE.

Set aside enough funds to cover at least three to 12 months of your salary in case there is a reduction to your current income.

4. INVEST IN YOUR WORKPLACE RETIREMENT PLAN.

Don’t miss out on free money. If it’s feasible, try to increase the contributions to your workplace retirement plan or 401k to qualify for the maximum matching contribution that might be offered by your employer. Many employers will match employee contributions up to a certain amount, typically 3% of your salary or more. If that percentage isn’t realistic at the moment, slowly increase the amount you contribute. You could do this by adding 1% every six months or increasing contributions by 50% of any future raises or bonuses.

5. TAKE ADVANTAGE OF CATCH-UP CONTRIBUTIONS AND CONSIDER CONSOLIDATING.

If you’re 50 years or older, many rules within these funds allow you to contribute more money than usual to your 401k. You can also consider combining your retirement accounts to potentially simplify your investment strategy and get a clearer view of your total retirement assets.

6. PLAN WHERE YOU’LL LIVE.

In retirement, where you live can significantly impact how you live. For instance, if you sell your home in a state with a high cost of living, and then move to a smaller development in a state with lower taxes, your expenses could decrease – freeing some income to pay for other priorities such as medical care. Alternatively, you might choose to move closer to your family in a state with a higher cost of living and higher taxes. These should be factored into your retirement budget.

7. INVEST THE MONEY YOU’RE SAVING.

Investing is key to help meet your goals, but avoid the temptation to take on more risk than you are truly comfortable with in an effort to play catch-up. The higher potential returns you seek, the greater your risk will be.

First, let’s look at some of the ways you should not invest.

• DON’T: Buy the fund that had the best return last year. Past performance is no indication of future results. The fact that a fund did well last year, the last five years or the last 10 years is no indication of how it will perform tomorrow.
• DON’T: Buy when the market is soaring and sell after the market drops.
• DON’T: Invest in a fixed account to “play it safe.” Although fixed accounts offer low risk, they also offer low returns – and those returns probably won’t get you where you want to go.

The bottom line is that nobody can predict the future, and neither should you. So, what should you do?

• DO: Maintain a long-term focus.
• DO: Diversify across all asset classes.
• DO: Save consistently. Consider using dollar-cost averaging.
• DO: Use strategic rebalancing to maintain your proper allocation.

8. GET THE HELP YOU WANT, THE WAY YOU WANT IT.

These steps might seem overwhelming, but you don’t have to go it alone. An Edelman Financial Engines planner can work with you to create a personalized financial plan and help you achieve your retirement goals.

We can help you prepare for retirement by:

• Taking a holistic view of your overall financial situation
• Assisting with complex tasks, such as:
• Asset allocation
• Estate planning (with the help of legal professionals)
• Tax planning (with the help of tax professionals)
• Keeping up-to-date with developments in financial services and products
• Helping you get and stay on track

Don’t leave your future to chance. Put your strategic plan in place to work toward the retirement of your dreams.