1) Max out retirement contributions
People saving for retirement have plenty of options to put away extra cash in tax-advantaged retirement accounts.
In 2020, retirement savers will be able to put away $19,500 in 401(k), 403(b) plans and most 457 plans. In addition to this, savers over 50 can make additional “catch-up contributions” of $6,500, for a combined total contribution of $26,000.
You can also contribute $6,000 each year to either Roth or Traditional IRA’s, with an extra “catch up contribution” of $1,000 for savers 50 and older, though you may be “phased out” of making these contributions depending on your income.
2) Track your spending
Many people who are used to getting a consistent paycheck often save a little bit up-front in a 401(k), have their taxes withheld, and just kind of spend the rest. In my experience, most people have very little idea of what they spend other than their more obvious fixed expenses like their rent/mortgage or car payments.
I recommend using mint.com or a similar service to get an idea of how much you spend. You don’t need to do this with the intent of finding out bad financial habits (though you may find them), but just to take an honest look at where you spend your money and how much you spend.
3) Determine how much income you need in retirement
Once you have an idea of your monthly spending, you can start to get an idea of what you will need (or want) to spend in retirement. Some expenses (like a car or gas for a daily commute) may be reduced once you are no longer working. You may also want to add in any retirement activities you plan to pursue, whether that be taking lessons to learn something new or visiting family more often.
Want more details? My brother David wrote a whole section on determining how much income you need in his in his 7-step retirement planning ebook.
4) Choose a retirement date
Give yourself a “light at the end of the tunnel” and start thinking about the actual date you want to retire. Is it this year? Next year? Maybe 5 years from now?
Choosing your retirement date is important as it has a big impact on retirement. A few extra years of savings combined with fewer years of retirement spending means delaying retirement even a few years can have a big impact. But this needs to be balanced against the fact that life
is short, and if you already have more than enough to fund your retirement the extra years of working may not be worth it. There is no right or wrong answer.
5) Plan how you will spend your time
You will have a lot of extra time during retirement, I’d highly recommend having a plan for how you are going to spend it, or it can easily be wasted.
I recommend creating a retirement activity plan that reflects your goals, whether that be staying fit, staying socially engaged, learning a craft, spending more time with family, etc.
I think this is such an important element of a happy retirement, that I wrote an entire blog on this subject: How Will You Spend Your Retirement. In addition to providing some general advice on activity planning and the different phases of retirement, I provide some pretty important questions to get you thinking:
What will I do to stay physically engaged in retirement?
What will I do to stay mentally engaged in retirement?
What makes me truly happy? Visiting family? Volunteering?
What do I want my purpose to be in retirement?
Read the full blog here: How Will You Spend Your Retirement?
6) Get a financial plan that spells out your goals and makes sure you are on track
With an idea of when you want to retire and how much you need to spend to fund your activity-filled life, you may want a financial plan that ties everything together and lets you know if you are on track. If you aren’t, you can use the plan to guide any adjustments you need to make to get back on track, whether that be saving a bit more, working a little longer, or spending a different amount in retirement.