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Retirement is no longer an abstract concept when you reach your 50s. It's important to take a closer look at your financial plans now, while you have time to make any corrections. Consider these five steps to ensure the retirement of your dreams – or at least avoid the retirement of your nightmares.
1. Outline Your Retirement Goals
What do you really want to do when you retire? Buy a retirement home on the beach? Travel abroad? Start an expensive hobby? It's time to figure out how to pay for those goals.
Lay out your primary retirement goals and estimate the major expenses associated with them. Place those expenses on a timeline spread throughout your retirement. You now have an estimate of how your cash flow needs will change because of your retirement plans.
2. Rethink Your Expenses
Reassess your budget given the above retirement goals. Generally, income in retirement should be around 70 percent to 80 percent of your pre-retirement salary. More extensive – and expensive – retirement goals could shift this to 100 percent or higher. Make your best estimate of your expected regular monthly expenses in retirement and include those on the timeline you made above.
Don't forget to build in a healthy cushion for medical expenses. A 2019 Fidelity survey suggests that the average 65-year old couple in relatively good health can expect to spend around $285,000 in medical costs during retirement.
3. Plan Your Retirement Income
With expenses estimated, look at the income side of the ledger. Get an estimate of your Social Security benefits at retirement.
Does your expected monthly income equal expenses? If not, you'll have to adjust either spending or income to make them match – and that could require re-thinking your retirement goals or working longer to achieve them.
4. Cut Down Debt
The budget you created above falls apart given excessive debt. Strive to have little or no debt at all entering retirement – especially high-interest debt such as running credit card balances. If necessary, cut your spending now and divert the savings toward debt reduction.
5. Maximize Your Retirement Savings
Contribute as much as possible to your 401(k), IRA, or other retirement programs. Annual limits for 2019 are $19,000 for a 401(k) and $6,000 for an IRA. Beyond age 50, you can take advantage of "catch-up" contributions – you can add an extra $6,000 annually to a 401(k) and $1,000 to an IRA.
Typically, you should shift your investments toward lower risk as retirement nears – but if planning shows that retirement funds may fall short of your goals, you may shift your investments toward growth. Keep in mind that this comes with greater risk as you approach retirement age. You have less time to recover from a market drop and could have to work longer or adjust your retirement plans.
You can't plan for everything that will happen in your post-working years, but you should take reasonable steps to plan for a comfortable retirement. Just like landing an airplane, preparation is key for a smooth transition into your new destination – a difficult task if you haven't considered where you want to land.
This article was provided by our partners at moneytips.com.