Preparing for Retirement Now So You’re Ready to Retire Later

Right now, many Americans are not feeling ready for retirement. In fact, according to recent Gallup polls, close to half of all non-retired Americans believe they won’t have enough money to be financially comfortable once they’ve left the workforce.¹

Unfortunately, Americans are right to worry — data from the Federal Reserve consistently shows major retirement savings shortfalls among pre-retirees close to retirement age.²

The good news is, if you haven’t yet left the workforce, there’s still time to change course. You can start today to adopt habits that will allow you to enjoy your retirement without worrying about running out of cash. If you’re not sure where to begin, taking these four steps now can help you be ready to retire when the time arrives.

1. Contribute at least 15% of your income to a retirement savings account.³

How much should I save for retirement? Traditionally, experts advised saving around 10% of income for retirement. But people are living longer and some costs, such as healthcare^CR1 and housing,^CR2 have been rising faster than inflation.4 It’s best to err on the side of caution and save more than 10% if you can.⁵

Saving at least 15% of your income should allow you to build a nest egg big enough to allow you to live comfortably in retirement. How much would this leave you to live on? That depends what your income is and when you start saving.

In 2019, the Bureau of Labor Statistics reported median weekly earnings for a worker between the ages of 25 and 34 was $815. This would amount to an annual income of around $42,380. If you earn this median income and start saving 15% of it at the age of 30, with 2% raises each year, you’d end up with around $1,019,337 in retirement savings at the time of retirement, assuming a 7% annual return on investment before you retire.

If you required 90% of your pre-retirement salary to live on during retirement and you earned a 4% return on investments post retirement (when you move investments to a more conservative portfolio), your retirement savings would last until you were 91.^CR3

But if you’d saved just 10% of income, retirement savings would run out at age 81. This could create difficulty if you live past that age, which becomes more likely as our population’s overall life expectancy increases.

2. Invest in a mix of diversified investments.⁶

Earning a reasonable return on investments is important so your money will grow and help to support you in old age. Select investments with the promise or possibility of high returns where you can, but don’t take unreasonable risks to achieve this goal. Diversifying your investments can help you balance risk with potential reward, so you’ll be more likely to earn returns without facing undesirable losses.

Everyone needs to assess their own investment risk tolerance level when determining what to invest in. But many experts advise that you should put a certain percentage of your portfolio into the stock market, depending on your age. There’s an easy formula to figure out the percentage of your portfolio that should be invested stocks: Just subtract your age from 110.^CR4 A person who is 30 would therefore invest around 80% of his or her portfolio in the market.^7,8

These are rough estimates that will not work for everyone. If you’re not sure how to allocate your investment dollars, speaking with a qualified fee-only financial advisor could help you make this important decision.

3. Make plans to cover senior health insurance costs during retirement.

Healthcare is one of the top retirement expenses many seniors face, with some estimates suggesting seniors will need hundreds of thousands of dollars in savings to pay for senior healthcare. ^CR5,9

Medicare provides senior health insurance coverage for some of your care, but there are premiums, deductibles, and coinsurance costs. Unfortunately, Medicare doesn’t cover many common senior healthcare services, such as dental care, hearing aids, or long-term care if you need help with daily living.^10,11

It’s important to set aside dedicated money to cover senior care costs in retirement so you’re prepared for these expenses. This could be in a health savings account (HSA) ^CR6 , which is a special account you can contribute to if you have a qualifying high-deductible health plan. An HSA allows you to take a tax deduction for funds contributed to cover healthcare costs and allows tax-free withdrawals, provided the funds are used for qualifying health expenses.¹²

If you don’t have access to an HSA, you could also allocate a portion of your 401(k) or IRA funds to healthcare — but plan to put extra money in for these specific retirement expenses.

4. Get aggressive about paying off debt.

Seniors today are retiring with more debt than seniors of past generations.^CR7 In fact, many older Americans go into retirement with mortgages, credit card debt, and even lingering student loan debt taken out for themselves or their children.¹³

Carrying debt into retirement means you’ll be stuck with interest payments on a fixed income. Some of your nest egg will go toward paying creditors, leaving you less to live on and leading you to deplete financial accounts sooner. If you still owe on your home or your credit cards, you also won’t be able to tap into equity or borrow as easily if an emergency arises and you need extra funds.

If you aggressively pay back what you owe by making extra payments, the hope is that you can enter into retirement debt-free — or close to it. This would give you much more financial security and help ensure that your retirement income is used for living expenses and enjoying life.