How to Plan for Your Retirement

Just starting on the road to retirement? Here are 10 tips to get you started.
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At the age of 25, retirement seems like it will never come. At retirement, 25 seems like it just happened yesterday. Such is the paradox of time, which may be why many of us are caught in our mid-40s or early 50s woefully unprepared financially for retirement.

For those just setting out on the road to retirement planning, here are 10 tips to get you pointed in the right direction:

1. Create a budget.

One of the most important first steps to take in building a nest egg, says Kathryn Garrison, senior financial adviser with Moss Adams Wealth Advisors and president of the Financial Planning Association of Puget Sound, is tracking your spending and developing a budget so that you can determine how much you can afford to set aside. “Sometimes, just seeing how much you’re spending on certain things— eating out, clothing, video games—can provide incentive to reduce your spending,” she says.

2. Max out your 401(k).

In 2015, the maximum pre-tax (deductible) amount you can contribute to an employer-sponsored 401(k) is $18,000 with an additional $6,000 allowed for individuals over the age of 50. Depending on your plan, you may also be able to make non-deductible post-tax contributions and your employer may be able to make contributions, as well. The total combined contributions for any employee, however, cannot exceed $53,000 annually for 2014. (Contact your employer to determine what your plan allows.) If you don’t have an employer-based 401(k) or if you are self-employed, Garrison suggests speaking with a financial adviser to discuss your options. These include SEP IRAs for the self-employed— which allow you to invest up to 25 percent of your income, maxing out at $53,000—as well as individual IRAs, which allow you to invest $5,500 or an additional $1,000 if you are over the age of 50. “If reaching that maximum seems daunting, increase the amount you’re contributing each time you get a raise. Again, having a budget in place will help you understand how to maximize your savings,” says Garrison.

3. Consider your retirement as a whole.

When working with her clients Kerry Wallingford, founder of Wallingford Financial and College Planning, breaks down the retirement years into three segments: the go-go, slow-go and no-go years. “The early years are the go-go years, when people travel and see their grandkids,” says Wallingford. “The slow-go years are those years when you may not travel as much, but you’re still active. The no-go years are when you’re not traveling or going anywhere and you may need a little more help [with physical activities]. Each of those components need different focuses,” she says. The planning, she notes, is a bit like reverse engineering, in that you need to determine how you will pay for each stage of retirement, including nursing care or home health care in your later years. “Plan for play and plan for care,” says Wallingford.

4. Contribute to a Health Savings Account.

Health Savings Accounts (HSA) are nontaxed savings accounts that may be used for qualified medical expenses. “You can contribute up to $3,300 for an individual and that contribution may be tax deductible. Any amounts you don’t use each year roll forward into the next year and, under most plans, can be invested with the interest and earnings tax free. Distributions are tax free if they are used to pay qualified medical expenses. The accumulation in your HSA may be used to cover Medicare and other health care coverage if you are 65 or older,” says Garrison.

5. Diversify your investments.

Garrison says that portfolios should be well diversified, with exposure to equities and stocks—including U.S., international and emerging markets—as well as fixed income, bonds and alternative investments, such as real estate and commodities. “Most retirement plans offer various investment options which include allocation funds that either maintain a certain allocation—say, 60 percent equities and 40 percent fixed income— or adjust the allocation based on your retirement date…getting more conservative as you get closer to retirement. If you aren’t likely to be very good about rebalancing your portfolio on a regular basis and/or if you have less than $100,000 or so in your account, one of these funds might be a good idea,” says Garrison. Wallingford suggests looking at taxfree retirement options, such as Roth IRAs, which offer qualified tax-free distributions, or select life insurance plans, which may allow you to access tax-free loans and withdrawals for income or other uses. “When you put your money in a 401(k), you’re saying, ‘I’ll pay the taxes later,’” notes Wallingford, “There’s always a lien on your 401(k); you don’t know what the tax rates will be [when you retire].”

6. Pay down your mortgage.

Garrison says that if you pay your mortgage off five to 10 years sooner than its term, you’ll save a substantial amount in interest payments. Plus, she says, “If you can get your mortgage paid off before you retire, you’ll significantly reduce the amount of income you’ll need in retirement. If you haven’t refinanced in a while, it might be worth looking into that now while rates are still historically low.”

7. Understand your Social Security options.

If you are divorced and at retirement age, you may be able to file a restricted application under your ex-spouse’s record, leaving your own Social Security payments to grow until you’ve reached age 70. “Your ex does not need to do anything in order for you to claim under his or her record,” says Garrison. In addition, she notes, your application does not affect his payments. However, you must have been married to your ex-spouse for at least 10 years and cannot be currently married to someone else. If you are widowed and at retirement age, you are entitled to either your or your deceased spouse’s full Social Security payments.

8. Do a reality check.

Garrison notes that, in order to reach your retirement goals, you may need to make some significant changes now, such as downsizing your home, working longer than you’d expected or cutting back on vacations.

9. Make a will.

To protect your heirs, businesses and estate, Wallingford says it’s imperative that you create a will now and make sure that all of your critical documents are in order.

10. Seek out the advice of a financial planner.

It’s a smart idea to seek the objective advice of a qualified financial planner to help you determine how much you need to save in order to retire to the lifestyle you’re comfortable with.