Often “someday” feels like it is way far out ahead of us. It can be all too easy to get wrapped up in the day to day and set our future on the back burner. After all, we have jobs that need us and children to raise and college expenses to plan for. We tend to put ourselves and our own futures last.
Many of today’s seniors would tell you that’s a mistake. Failure to plan is what gets people into trouble, and if you do plan, you need to make your own future as much of a priority as the futures of your loved ones.
CNBC reported last year that 78% of Americans are concerned they will outlive their retirement savings and 21% have nothing saved at all. Considering that experts often recommend having a cool $1 million set aside for retirement, they have a right to be concerned.
So, what can you do to escape the same fate, even if you haven’t begun to save a dime?
Start planning now. Make today the day that you finally prioritize your future. We’ve got some great steps you can take to get started. Implement these steps and you’ll be on your way to a more secure retirement.
Your retirement will only be secure if you have a good understanding of the kinds of costs you can expect. There will mortgage/rent, utilities, insurance, groceries, travel, and entertainment expenses just like there are now.
Sit down with a financial planner to estimate what these expenses will look like for you at age 65. This can vary greatly based on where you live, so research those costs and sketch out a monthly budget that you can expect. You can work backward from this to determine how much you’ll need set aside.
Don’t Overlook Healthcare
One very important retirement expense many fail to plan for is the cost of healthcare in our golden years. Many Americans believe that Medicare is free and that it will cover 100% of their costs for healthcare services and pay for long term care too.
In fact, Medicare does none of these things.
While most people pay for their future Medicare hospital benefits via payroll taxes, they are unaware that those taxes do not cover outpatient expenses, cost-sharing or prescription drugs.
In 2019, Medicare Part B costs $135.50/month at a minimum, and some people pay considerably more than that based on their higher incomes. Part D drug coverage averages around $35/month.
What’s more, is that Medicare only covers about 80% of your healthcare costs. You pay the other 20% out of pocket as your coinsurance. You also pay both hospital and inpatient deductibles and copays.
Most people purchase supplemental coverage to fill in these gaps, so the cost of this gap insurance is yet another retirement expense that you need to plan for.
Hope for the Best, but Plan for the Rest
It’s easier to develop health conditions as we age since our immunity declines with the passing years. So, while you may be thinking you will plan to just keep working, that isn’t a foregone conclusion. If you develop a health condition, you could be forced to retire.
This is why it’s so important to set a goal date for your retirement and then work hard to have enough money set aside to retire by that date. If you are in great health and can continue working beyond your planned date, that’s terrific, but at least you’ll be prepared in the event that you are physically unable to continue working.
Having a plan in place is the best way to avoid retirement mistakes.
Reduce Everyday Expenses
One of the best ways to free up money that you can begin to save more toward retirement is to examine your existing expenses. Over the years, costs for things like cable and cell phone bills can creep up. Contact your providers and negotiate a better rate or consider switching from cable to cheaper options like Hulu, Netflix or Youtube TV.
Review how much you are spending on eating out at restaurants and make a plan to reduce that by half. Making dinners at home and brown-bagging your lunches can save you hundreds or even thousands of dollars each year. You can use some of the savings to attack debts in our next step.
One of the best things that you can do for yourself is to pay off all of your debt before you turn 65. Entering retirement with a free and clear mortgage and no car payment or credit card debt will go along way toward making your retirement a happy one.
Many experts recommend paying off your smallest debts first and then move on to eliminating bigger debts like your mortgage or vehicle loans.
There are a number of ways to reduce or eliminate your biggest debts. First, once the kids have flown the coop, you can consider downsizing your home. Moving into a smaller home or condo or apartment not only reduces your monthly outlay for housing, but it will also reduce all of the maintenance expenses that come with a larger home. If you opt for the condo or apartment, you can also sell off your lawncare equipment and make a few extra bucks to put toward retirement.
You can even go further and consider moving to a state with a lower cost of living or no state income tax. Your financial planner may be able to recommend areas of the country that will benefit you in terms of things like Social Security taxes.
You’ll also want to work on paying off your vehicles if you are still shelling out a monthly payment on a car note. Make a plan to pay off your car, and if that’s a tall order because your car payment is high, you can consider selling your car and buying a slightly older car for cash. Take whatever you used to spend for that monthly car payment and use it to eliminate other debts or to stash away in your retirement accounts.
Automate Your Savings
In addition to eliminating debt, it’s important to take advantage of what savings time you have left by investing your money into some tax-advantaged retirement accounts. If your employer offers a 401K with matching, this is the first account you’ll want to consider. Try to at least contribute enough to max out the employer match, and do more if you can.
Many people find that automating their savings into 401K accounts works best. When this money comes out of your paycheck before you even see it, it’s hard to miss.
If you don’t have access to a 401K, consider opening an IRA and setting up an autodraft to pull money from your checking account into your IRA each month.
By contributing money each and every month without fail, you’ll achieve dollar cost averaging as well. This means that you take advantage of market upswings and minimizing downside risk. It’s a great investment strategy for anyone who has several years of savings on the horizon ahead of them.
Open a Health Savings Account
Perhaps our favorite retirement savings strategy is the health savings account. If your employer offers a qualified high deductible health plan, you can enroll in this coverage and open a health savings account.
The insurance itself is often cheaper than a full-coverage plan, so that’s one benefit. Then when you contribute money into the health savings account, you can write these contributions off on your taxes. Lastly, when you spend the money on qualified medical, dental or vision expenses, you’ll pay no taxes on the distributions from your account either.
In 2019, you can contribute up to $3500 as an individual or $7000 if you are married. People age 55 or older can also contribute up to an additional $1000 per year. Any money in your health savings account that you don’t spend will grow and earn compound interest over time. If you are diligent about saving money into your H.S.A. each and every year, you can enter retirement someday with the perfect nest egg of money to be used on your Medicare premiums, deductibles and copays during your retirement.
Since Medicare doesn’t cover dental, vision and hearing expenses, your H.S.A. will also come in handy for paying for those things during retirement as well.
Another benefit of a health savings account is that once you turn 65 if you don’t use the money for medical expenses, you can withdraw money for other non-medical purposes and just pay ordinary income tax with no penalty.
Get Started Today
All of the steps we’ve listed here are a great way for you to start getting serious about your future today. While Social Security benefits act as a safety net, the average monthly income benefit is around $1400/month. This isn’t nearly enough.
However, if you start planning for tomorrow, reducing your expense, eliminating your debts, and automating your savings, you’ll soon find that you have a happier outlook for the long-term. You’ll be able to head into your golden years with less stress and worry.