There are three milestones on your way to retirement that we'd like to address in this post, and some action items you might want to consider that may help you in your preparation of retirement.
How much should you have saved? The answer is different for everyone, but the "rule of thumb" is that you should have roughly seven times your current yearly salary saved. It is important to start to think of what you think you'll need in retirement income on a yearly basis, and start to calculate
Are you on track?
Assuming your retirement is about 10 years away, you want to have roughly seven times your current salary in savings, according to research from Fidelity.
That puts you on the road to having about 10 times your final salary saved by retirement and maintaining your present standard of living.
Plug your current numbers (such as earnings, savings and future pensions) into an online calculator to estimate your retirement income. You’ll most likely need 75 to 80 percent of pre-retirement income to live well. (This isn't a finite number, but it is a good starting point and allows you to start a conversation with your retirement income planning professional).
If the numbers don’t look good, don’t despair, you have 10 years to act, and you are still earning income, so you can work on things like trimming expenses or delaying retirement to help reassess you retirement plan.
Some people ask if they should max out their 401k or 403(b). If you already have healthy savings in a 401(k), 403(b) or IRA, you may want to see if you have ROTH 401k option. Or put money into a regular taxable account. If your company offers a 401(k) match, though, you should almost always put in at least what the company match amount is!
Consider trying to pay down your mortgage
In place of your monthly payments, make half payments every two weeks. Those 26 payments per year are the equivalent of 13 monthly payments, resulting in a faster payoff and lower total interest costs.
Attack debt
Because your income is higher now than it will be in retirement, you’ve got more elbow room to pay off what you’ve borrowed. Use it.
Know what you spend (have a budget) - Create a monthly budget for your current situation, and one for what you think you’ll spend when you stop working. You'll want to factor for inflation (and that EVERY DAY in retirement is a Saturday).
Gather Your Income Sources
Do you have an old pension you forgot about? Check the social security retirement estimator for accuracy each year. Add up all of your sources and see if it will meet your monthly burn rate.
Evaluate Your Asset Allocation
Unsure if you have too much of your assets in stock, or not enough? Does your portfolio allocation look appropriate for someone 5 years away from retirement, or has it been untouched since it was started in your thirties?
Consolidate Your Retirement Accounts
Chances are that your assets are in more than one 401(k) or IRA, it's time to consolidate all of these accounts in to something more manageable. Here are some pointers to help:
1. In-service distribution – many people think they have to wait until they retire to do anything with their 401k, but a lot of people have options once they turn 59 ½. Taking advantage of the in-service distribution/rollover to an IRA will allow you to choose just about anything under the sun for your savings.
2. Simplicity – Once you turn 70 ½ you will have to deal with RMD’s (Required Minimum Distributions). Taking them from one or two source is easier than having to take them from multiple sources and keeping track of which accounts are which.
3. The "Junk Drawer" – Discover an old account that you forgot you had? Take the time to consolidate these accounts and make sure they are working in synergy to get you closer to your retirement plan.
Take A Test Drive
Calculate what your monthly income will be in retirement (the amount after paying expenses such as health care, taxes, and house expenses.) and try to get by on only that amount for a month. Then see if you can do it for longer than a month. You should be able to have enough for entertainment, food, travel expenses, maintenance, and other everyday expenses. If you can't make it for at least a month, you need to reconsider your expectations.
Take Advantage Of Your Current Health Insurance
Get all the tests and procedures done now. Take advantage of dental and vision insurance that you might soon be losing. Medicare doesn't cover dental exams,eye exams, eyeglasses or other related services.
While there is no “best way” to plan for retirement, these tips will help you as you head to a chapter of life that you’ve never been in before. The mistakes you can avoid now can make all the difference between the retirement you deserve, and the one you have to settle for.