Retirement isn’t a reward for spending three or four decades working. It’s finding a way to support yourself without a job. Those without traditional pension benefits may need to make sacrifices during their working years if they want to be able to retire comfortably. Social Security will provide a small retirement income, but you are responsible for saving any additional retirement income you will need. Here are some of the sacrifices many Americans will need to make if they want to retire comfortably.
[See 10 Historic Places to Retire.]
Don’t inflate your standard of living. As you get raises and promotions throughout your career it’s common to want a bigger house and nicer stuff. But part of each pay increase should go toward your retirement savings. Instead of buying something with a bonus or trading up to a nicer car when you get a raise, some of that extra money needs to be tucked away for retirement. Only about 19 percent of current workers have increased their retirement savings since 2008, according to a recent Harris Interactive and Principal Financial Group survey of 1,172 employees who work at small and mid-sized businesses. Keeping your expenses low will allow you to save more and reduce the amount you need to accumulate to maintain your current lifestyle in retirement.
Strive to be debt free. You should aim to pay off all of your debt before retirement. Many workers have spent less money (68 percent) and paid down debt (52 percent) over the past 2 years, Principal found. If there’s no room in your budget to further cut expenses or you simply don’t want to, look for potential ways to make extra money through a side job or hobby.
Read the fine print on your 401(k). Your 401(k) won’t get you to a secure retirement unless you use it properly. Try to contribute enough to get your employer’s maximum 401(k) match and consider staying with the company until you are fully vested and can actually keep your employer’s contributions. If there is a waiting period before you can join a new employer’s 401(k) plan or if you work for an employer without a 401(k) plan, you need to save on your own in an IRA or taxable account.
Learn how to invest. In addition to investing money in your 401(k), you also need to invest some time learning how to pick investments that balance your needs for safety and growth. About half of current workers (48 percent) say they will manage their own money in retirement and 69 percent of retirees already do, Principal found. Only a minority of retirement savers say they use online tools (10 percent) or a professional adviser (5 percent) to help manage investments.
Protect your savings. Once you accumulate a significant nest egg, your focus needs to change to protecting it. A quarter of current workers say one of their top financial priorities is protecting their existing savings and 22 percent recently shifted some of their retirement savings into more conservative investments. You’ll also need to take some time to figure out how to transition your retirement savings into a steady stream of income in retirement. Only about a quarter of current workers have a plan for spending down their assets in retirement.
Save outside of a retirement account. It is even more difficult to accumulate an adequate nest egg if you borrow against or raid your retirement accounts every time your car breaks down or you change jobs. Early retirement account withdrawals typically cost you a 10 percent penalty and income tax on the amount withdrawn. About half (49 percent) of current workers say they have an emergency fund and 27 percent have boosted contributions to it since 2008. A significant emergency fund outside of your retirement accounts is a necessity to protect your nest egg.