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8 Essential Steps when Preparing for Retirement
A guide for planning the retirement of your dreams.
Article published: February 18, 2025
Whether retirement is two or 20 years away, it's never too early or too late to start your retirement planning and retirement saving. While envisioning your life in your retirement years can be exciting, navigating the retirement process can be overwhelming. But the small steps you take now can have a big impact on your future retirement benefits and financial goals.
As you plan, it’s important to consider some key retirement realities:
Your Savings Need to Last
Your retirement nest egg needs to sustain you throughout your retirement years. As of 2023, the average life expectancy in the U.S. is 78.4 years. While life expectancy briefly dipped during the COVID-19 pandemic, it has since rebounded, and with the rapid rate of scientific advancement, it may continue to increase. This means your retirement fund needs to support you longer, potentially increasing the importance of long-term care planning and ensuring your retirement strategy is robust.
Taxes Can Have an Impact
Taxes can significantly impact your retirement income. If you have money in traditional pre-tax retirement accounts like IRAs and 401(k)s, withdrawals during your retirement years are typically taxed at ordinary income rates. Understanding how withdrawals affect your tax planning is key to help you maximize your Social Security retirement benefits and overall retirement benefits.
Your Expenses May Change in Retirement
Your expenses may change significantly in retirement. You may not have to spend money on work attire and commuting costs, but hobbies, travel, health care, long-term care and new living accommodations might change your expenses. Additionally, don't forget to factor in inflation and potential increases in Medicare coverage and health insurance premiums. All these activities and amenities may cost more in the future, impacting your retirement fund and retirement budget. Look at all your expenses, including life insurance coverage and health savings account contributions, to do your best to get your spending in retirement just right.
8 Ways to Start Preparing for Retirement
1. Dream Big, but Be Realistic
Will you work part-time in retirement? Travel? Volunteer? Engage in new hobbies? Take a comprehensive look at your financial resources, including your retirement accounts and retirement savings, to determine if they'll support your retirement strategy and financial goals.
Here are a few questions to explore:
- How much have I saved in retirement accounts like 401(k)s, IRAs and other savings accounts?
- How much will I receive in pension or Social Security benefits? You can check with the Social Security Administration to estimate your monthly benefit.
- Will I work in retirement or consider early 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, such as aging parents, children or other dependents? Planning for long-term care costs and potential life insurance coverage can be crucial.
Don't think your resources will be enough to reach your retirement goals? Use a retirement calculator to determine what you'll need and consider how you can make your resources work for you, such as exploring ways to save more or looking for other growth opportunities. Consulting a financial advisor can provide valuable retirement planning resources.
2. Drive Down Debt
Reducing debt is an important step in helping strengthen your retirement fund. Now's the 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 and monthly benefits that would be spent on interest payments, allowing more flexibility in your retirement budget.
3. Build a Cash Reserve
To set your retirement planning on a solid foundation, it’s important to build an emergency cash reserve. Set aside enough funds to cover at least six to 12 months of your salary in case there is a reduction to your current income or unexpected expenses arise. This reserve can help prevent early withdrawals from your retirement accounts, which could affect your retirement eligibility and long-term retirement strategy.
4. Contribute to Your Workplace Retirement Plan
Contributing to your workplace retirement plan, such as a 401k or an Individual Retirement Arrangement, is a fundamental part of your retirement saving. Don’t miss out on free money. Try to increase the contributions to your workplace retirement plan or 401k to qualify for any matching contribution that your employer might offer. If you can’t, contribute as much as you can now and gradually increase the amount over time – for example, 1% every year. You can also consider increasing contributions by 50% of any future raises or bonuses. This savings strategy can help significantly boost your retirement nest egg over the years.
5. Take Advantage of Catch-Up Contributions and Consider Consolidating
Take advantage of catch-up contributions and consider consolidating your retirement accounts. If you're 50 years or older, you're eligible to contribute additional money to your 401k or IRA. This can accelerate your retirement saving as you near retirement age. You can also consider combining your retirement accounts to potentially simplify your investment strategy and get a clearer view of your total retirement assets. Consolidation can make managing your retirement planning resources more straightforward and potentially optimize your retirement investment strategy.
6. Plan Where You’ll Live
Plan where you'll live during your retirement years. In retirement, where you live can significantly impact how you live and may affect your retirement budget and retirement eligibility for certain state benefits. For instance, if you 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, long-term care or increased Medicare coverage. Alternatively, you might choose to move closer to your family in a state with a higher cost of living and higher taxes. Factor your location into your retirement budget and consider how it aligns with your retirement goals and financial planning.
7. Invest the Money You’re Saving
Invest the money you’re saving for the opportunity to grow your retirement nest egg and help strengthen your wealth management strategy. Investing is key to helping meet your financial goals, but avoid the temptation to take on more risk than you're truly comfortable with in an effort to play catch-up. The higher potential returns you seek, the greater your risk will be.
Let’s look at some important investment tips:
DON’T: Buy the fund that had the best return last year. Past performance is no indication of future results.
DON’T: Buy when the market is soaring and sell after the market drops. Trying to time the market can jeopardize your retirement fund in the long term.
DON’T: Invest only in a fixed account to "play it safe." Although fixed accounts offer low risk, they also offer low returns – which may not get you where you want to go in terms of your retirement income and retirement benefits.
DO: Maintain a long-term focus consistent with your retirement strategy.
DO: Diversify across asset classes to help reduce risk.
DO: Save consistently and consider using dollar-cost averaging to help build your retirement savings steadily over time.
DO: Use strategic rebalancing to maintain your proper allocation and ensure your investment strategy continually aligns with your financial goals.
8. Get Help from an Advisor
Get help from a financial advisor or financial professional. You don’t have to go it alone. An Edelman Financial Engines advisor can work with you to create a personalized approach to your financial planning that can help you achieve your retirement goals. Professional guidance can be invaluable in navigating the complexities of the retirement system and ensuring your retirement planning is on track.
We can help you prepare for retirement by:
- Taking a holistic view of your overall financial situation, including your retirement accounts, retirement savings and personal information.
- Assisting with complex tasks, such as:
- Asset allocation to help optimize your investment strategy and stay aligned with your retirement goals
- Providing education on estate planning issues, life insurance coverage and the importance of long-term care planning
- Guidance on tax planning strategies to help maximize your retirement income and Social Security retirement benefits
- Keeping up-to-date with developments in financial services and products, including changes from the Social Security Administration and Medicare coverage options
- Helping you get and stay on track with your retirement strategy and financial goals
Utilizing retirement planning resources and expert advice can make a significant difference in achieving the retirement age and lifestyle you desire. So, don’t leave your future to chance. Put your strategic plan in place to help work toward the retirement of your dreams.
This material was prepared for educational purposes only. Although the information has been gathered from sources believed to be reliable, we do not guarantee its accuracy or completeness.
Dollar Cost Averaging does not assure a profit or protect against a loss in a declining market. For the strategy to be effective, you must continue to purchase shares in both up and down markets. As such, an investor needs to consider his/her financial ability to continuously invest through periods of low price levels.
Investing strategies, such as asset allocation, diversification or rebalancing, do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. All investments have inherent risks, including loss of principal. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies.
Past performance does not guarantee future results.
Neither Edelman Financial Engines nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from your qualified tax and/or legal professionals to help determine the best options for your particular circumstances.
Neither Financial Engines Advisors L.L.C. nor any of its advisors sell insurance products. Edelman Financial Engines affiliates may receive insurance-related compensation for the referral of insurance opportunities to third parties if individuals elect to purchase insurance through those third parties. You are encouraged to review this information with your insurance agent or broker to determine the best options for your particular circumstances.
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