In the prevailing environment of market uncertainties, there are no guarantees that you will be financially independent when you stop working in your 60s.
Though things are a lot better for Americans than they were in 2010, 2013, and 2015, for instance when America was in a recession and health care costs were going through the roof.
It is important to plan ahead and start making active investments and savings to build a fairly secure retirement nest egg. Individual retirement accounts, 401(k) plans and other similar saving vehicles should be carefully considered. However, unplanned saving every month may not get you too far.
The foundation of preparing financially for your retirement lies in creating a substantial investment portfolio. You need to make sure it is large enough for you to enjoy the returns in your remaining years when you stop working.
You need to factor in your lifestyle expenses, health care and other expenditures to build an appropriate financial plan. Follow these 7 vital tips to boost your financial security after retirement.
Tip 1: Downsize Your Living Expenses Right Now
This strategy is important on three different fronts. You can reduce your debt, start saving more and get used to living mindfully when you are not earning as much as right now. This does not mean that you completely stop enjoying the luxuries of life.
You just need to make sure that you do not attain debt in form of credit card bills or personal loans to pay for your extravaganzas. You also need to make sure that every big ticket item is paid after you meet your savings goals for the month.
Judicious spenders manage to save extra money every month by consciously finding less expensive ways of paying for entertainment and groceries. These might seem like minor expenses when seen individually. However, the dollars add up.
You can closely review your lifestyle by keeping a handbook of all your expenses to identify areas where you are splurging unnecessarily. You should also evaluate your insurance policies to see if you can cut back on the premiums.
Tip 2: Pay Off Your Debts
This might seem difficult at the outset. However, once you start cutting back on expenses you will be surprised to see how much you can accumulate in terms of spare cash. Consider using these funds towards getting off your costly debt merry-go-round once and for all.
An average American pays more in terms of financial penalties, late fees, and interest charges than on the principal loan amount or credit card purchases.
You will need less income at retirement if you can pay off maximum debt right now. Living a debt free life is the single best strategy if you want to be financially preparedat retirement.
Tip 3: Build Equity in Your Residential Property
Your monthly mortgage payments are probably the biggest drain on your income. The best way to ensure a sufficiently large retirement fund is to save more. You need to find ways of cutting back on the expenditure if you cannot increase your income. By paying for your single largest expense you can cut back on retirement expenses by almost half.
You need to make sure the mortgage is paid off if you plan on retiring in the same house you are currently living in.
It is better if you have equity in your home. You could also relocate to an area that has lower priced housing. You would have enough money to make a full down payment on the new property with 50% equity in your current house.
Tip 4: Prepare for Increasing Health Care
Healthcare is not an area where you can be taken by surprise. Your employer subsidy on the monthly healthcare premium will disappear once you retire. You need to pay a premium when you qualify for Medicare.
Even with Medicare you would have to obtain a Medicare supplemental policy called Medigap. If you retire before 65, you would have to obtain state’s health insurance coverage which could be expensive.
Tip 5: Prepare for Emergencies
Many people make a rookie mistake of not anticipating emergencies. In fact, you need to maintain a larger emergency fund for retirement than you do while working.
You need to be covered for unprecedented events. A large part of this is to compensate for variable healthcare costs. You also need to save ahead to buy a car or renovate your home.
You may also need to help your adult children when they are going through a difficult time. A reasonable and realistic estimate is necessary that covers all these costs and any other cost that is unique to your lifestyle and spending habits. You need to factor in 10% extra while funding for your emergency fund to cover costs you did not think of.
Tip 6: Invest in Tax-Savvy Alternatives
There are many other tax savvy ways to save for retirement than the ones available at your workplace.
A Roth IRA will allow tax free withdrawals and after tax savings on meeting certain conditions. This can help you with post retirement taxes as it will essentially hedge against the possibility of future tax increase.
IRAs provide multiple investment options such as commodities, real estate, municipal bonds and emerging market funds. You can broaden your retirement savings plan and acquire more control over your investment selection with a traditional IRA.
Tip 7: Diversify Your Portfolio
Determine the best possible investment route that does not throw your portfolio out of whack with a downward market turn. Your portfolio should include a financially healthy combination of cash, stocks and bonds.
You can decrease your worries and soften the effects of market fluctuations by investing across various asset types and sectors.
You can considerably increase your savings by putting a fixed amount into investments regardless of market conditions. Market tends to right itself in the long term which ensures that you do not lose money. Consider re-balancing to always stay on top of market fluctuations.
You should lower your exposure to investments that have recently outperformed the market while increasing those that have potential and may be ready to grow. This involves speculation work. It is recommended that you hire a financial advisor for help.
Clarify Your Goals
The best approach is to start preparing for retirement early. Once you figure out how much you would need to ensure a comfortable retirement, you should take steps towards saving that amount.