Study after study has been released describing Americans' inadequate preparations for retirement. Many soon-to-be retirees haven't saved enough, and many people in the younger generation aren't taking the appropriate first steps. Here are four necessary ways to prepare for a successful retirement:
1. Live within your means. This is the first rule of successful finances, but far too many people neglect it. Living within your means isn't just about making sure that you don't exceed your income each month. It's also about planning ahead, and setting aside money for rainy days and for retirement.
Living within your means involves being ready for just about anything financially. You can't be ready if you spend every cent you bring in each month. You have to prioritize your spending, and cut out unimportant expenditures. Not only will this help you save up for retirement, but it will also help you develop good financial habits that will ensure that your budget remains under control in retirement.
2. Maximize your employer match. When you aren't taking advantage of your employer match, you're leaving money on the table. If your employer's plan isn't very good, contribute the amount necessary to get the match, and then open your own retirement account. A Roth IRA is a good choice if you meet the requirements. Try not to leave free money behind when you could be using it to your advantage.
3. Pay off your debt. It is ideal to have no debt at all by the time you retire. Aim to pay off all your debt before retirement. This includes mortgage debt as well as credit card and car debt. The more debt you have, the larger the demands on your income.
When you are living on a fixed income, the fewer obligations you have, the better off you will be. Make it a point to create a debt reduction plan that will have you financially free by the time you retire.
4. Ongoing planning. Our finances are rarely set in stone. You will typically need to do some ongoing planning. It's important to periodically revisit your retirement plan. Do you still have the same goals and interests? Has your financial position changed? Is your portfolio helping you meet your goals?
Every so often, review your retirement plan, and make tweaks as needed. This is important even after you have retired. Your account and life insurance beneficiaries and the portion of your budget that goes toward health care costs are examples of things that might need to be adjusted during retirement.
You also need to consider aspects of your retirement that may not be directly related to finances. Don't forget to think about the kinds of activities and hobbies you want to engage in, as well as the relationships that you plan to build. Developing your social life and hobbies can improve your quality of life in retirement.
Jeff Rose is a certified financial planner and U.S. combat veteran. He blogs at Good Financial Cents and Soldier of Finance.
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