Not quite at the retirement age just yet? It’s never too early to start thinking about retirement. Here are seven ideas for what to do NOW to plan for retirement LATER.
1. Max out your 401k up to the limit allowed by your employer. But also get advice on proper allocations of your 401k investments. Trying to guess and go it alone is not the most optimal strategy. Outside 401k advice is worth its weight in gold and is very reasonable from a reputable retirement advisor. An advisor can also help you keep your fees in check.Consider a Roth IRA or 401k 10 years from retirement. They can beat the upfront tax savings of a traditional IRA or 401k. You don’t get a deduction now, but the earning are tax-free, even withdrawing them retirement. According to T. Rowe Price, a Roth IRA over a traditional IRA at age 40 will yield 14% more income in retirement if your tax rate stays the same (the study assumes a 25% bracket). If your tax rate drops by 5%, you still get a 7% increase with a Roth. At age 50, choosing a Roth can yield 11% higher income if your tax rate is level, and 4% more if your tax rate falls by 5%.
2. Put retirement saving ahead of college. 69% of parents want to put money toward college first, according to a recent survey by T. Rowe Price, and more than three quarters say they are willing to delay retirement to pay for kids’ schooling. However, you should continue to contribute to 401k and do not take monies from your 401k to pay for college. One common approach is to cover 1/3 of total college bill from savings, 1/3 from cash flow and 1/3 from loans/grants. You can also make other agreements with you child, such as covering the costs for a year or two and then he/she is on their own. Consider a 529 college savings plan to reduce the amount you or your kids may have to borrow.
3. Build up your cash reserves: 3-6 months of income is the traditional advice.
4. Reduce debt. If you have cash saved and larger debt, try to pay it off as soon as possible.
5. Get healthy/stay healthy. A National Bureau of Economic Research studyfound that those who were among the healthiest 20% in their 50s retired with three times the assets of the least healthy. In addition, you’ll pay less for health care each year if you head into retirement healthy. The average annual health care cost for a 65-year-old in excellent health is $4,450, vs. $4,760 for someone in poor health, according to HealthViews, and that gap rises with age.
6. Try to build your skills and your salary. Sometimes, it’s best to move companies to continue moving up the salary ladder, but make sure your building your skills to make yourself more marketable.
7. As your salary typically grows in reaching your 40s, resist the temptation to spend more. Be modest with your housing, car purchases, expensive vacations. Instead, opt to be more frugal (without going without altogether) and stash your extra salary in savings. Your future self will thank you, as well as your adult children. Pay for women peaks at age 39 on average, and age 48 for men, according to PayScale.
To find out more about what can you be doing NOW, to plan for retirement LATER, and how YRA can help you, give us a call at info@herretirement.com.