3 ways to prepare for retirement
Editorial staff, J.P. Morgan Wealth Management
- Knowing what your retirement needs will be is important to determine how you should prepare for retirement.
- You may be able to establish contributions from your paycheck so that money goes into your employer’s retirement plan regularly.
- Start saving early: the longer your money can stay invested and benefit from compounding, the more your payoff may be.
Unless you’re already retired, you’re likely preparing for retirement in some way. Whether you’re diligently saving, contributing to retirement accounts, or following your budget, you’re doing something which helps impact your future retirement.
Since each person’s situation is different, you’ll need to save and prepare for a retirement that makes the most sense for your lifestyle.
Here are some things to keep in mind when preparing for retirement.
Thinking about retirement?
No matter what life stage you’re at, it's always the right time to plan for retirement.
Know what your retirement needs are (and how to figure them out)
Knowing your retirement needs is important to determine how you should prepare for retirement. But how do you know what your life will look like in the future? The truth is, you don’t, and it may be easier to get a grasp on the problem if you reframe it. Ask yourself the following questions:
- What will your expenses be in retirement? Knowing how much money you’ll need each year for expenses is important. This number is different for everyone, and a lot depends on how much debt you have, what you will need to pay for the basics and what type of lifestyle you want. If you are paying off your mortgage or you are renting, those costs need to be deducted from your monthly retirement income. If you own your home outright, and you don’t plan on changing your lifestyle, you may have more discretionary income. A good rule of thumb to go by is to save enough money so that you can spend 80% of whatever your pre-retirement salary was. This means that if you made $100,000 a year, you’d need enough money saved for retirement so that you can spend $80,000 per year. This number will change depending on how your salary changes over time, so be sure to check in on your savings and see whether you’re on track to maintain your lifestyle.
- Will your housing situation change? Think about where you will live in retirement and how that might change during retirement. Will you stay in your current home, will you downsize, will you eventually move into an independent living center? Knowing what your plan is and preparing for it while you save is an important step in determining your retirement needs.
- Think about any health challenges you’re likely to encounter. Dealing with health issues is a reality for many and preparing for this possibility is essential to manage your retirement budget. If you’re eligible, contributing to a health savings account is one way to save for unforeseen medical expenses and save on taxes. Investing in long-term care insurance may help prevent you from having to spend your savings.
Contributing to retirement accounts, like an IRA or 401(k)
Retirement accounts might seem overwhelming and confusing, but with a little research you’ll learn more about which accounts and investments are available to you. Many online brokers offer free investment education through their apps that explain topics including current market conditions and investment options. Plus, you can work with an advisor to help you plan for retirement.
If your company offers a 401(k) plan, you should consider contributing to it, potentially up to the limit. These contributions are often pre-tax, which means they lower your taxable income. Your employer may also offer a Roth 401(k), which would allow for after-tax contributions. If your employer matches a certain percent, you should consider contributing at least that amount. For example, if your employer’s 401(k) contribution matches 50% of your contributions for up to 6% of your salary (a common formula for 401(k) match programs), and you contribute $4,800 from a $80,000 salary, your company is giving you an extra $2,400.
Whether or not your company offers a 401(k), you can open a traditional or Roth individual retirement account (IRA). Traditional and Roth IRAs are tax-advantaged retirement accounts you may be able to contribute to (potentially in addition to your 401(k)).
Start saving as early as possible
Most of us may have heard this advice before, but that’s because saving money for retirement as early as possible can make a difference. Here’s how:
- Say you want to retire at age 65 and contribute $1,000 every year into an IRA starting at age 20 for 11 years and then stop contributing.
- That means you contributed $11,000 over 11 years.
- If the account earns 7% annually, the balance will be $168,514 by age 65.
Even if you stop contributing for 34 years after contributing for 11 years, your money may continue to grow while it sits in your IRA. To really drive this concept home, let’s look at the same example, but with different parameters.
- Say you contribute $1,000 every year into an IRA starting at age 30 until age 65.
- That means you contributed $35,000 over 35 years.
- If the account earns 7% annually, the balance will be $147,913 at age 65.
So, starting to save as early as possible may really pay off. If you wait 10 years to start saving, you can save for 35 years and still end up with less money in your IRA than if you had started saving earlier for only 11 years.
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Editorial staff, J.P. Morgan Wealth Management
