For most people, retirement is the single biggest financial goal that they’ll save for. It often takes decades to financially prepare for retirement. And yet studies show that the majority of Americans aren’t adequately saving. 2020 has done even more to show us the importance of retirement readiness. Millions of people have lost their jobs, many with no idea when they’ll be back to work.
Personal Capital’s Chief Financial Literacy Ambassador and Financial Hero Baron Davis knows just how important it is to prepare for retirement. When Baron suffered an injury on the basketball court, he had to pivot his career. And while most people may not have a career in sports, 2020 has shown us that you truly never know what will happen.
By preparing for retirement early, you can have the peace of mind of knowing that you can live a financially secure life during retirement. And with the financial insecurity many people have experienced this year, now is a great time to revisit your retirement plan and make sure you’re on track.
How to Prepare for Retirement
Thanks to compound interest, those who start preparing for retirement early are rewarded. And while many people aren’t thinking about retirement in their early twenties, that’s the time to start. If you start setting aside a consistent amount of money each month from the beginning of your career, you’ll be much better off than if you don’t start preparing until you’re in your 40s and retirement no longer seems so far off.
And as we know from Baron’s story, you never really know when a financial disaster will hit. Baron didn’t expect to retire when he did, and he had to make an unexpected career pivot. The more financially prepared you are, the better you’ll be able to handle unforeseen events like that.
Set specific retirement goals
One of the roadblocks people run into when planning for retirement is that they simply don’t know how much to save. To figure out how much to save each month, try working backward. Estimate what age you’d like to retire and decide how much you’d like to have to live on each month. From there, using average market returns, you can figure out how much to save each month to get you there.
There are plenty of online retirement calculators that do this math for you. By setting a specific savings goal, you can feel confident that you’re putting enough away each month to ensure a financially secure future.
Take advantage of tax-advantaged accounts and employer matches
There are plenty of tools out there to make planning for retirement easier. First, many employers offer to match a certain amount of annual 401k contributions for their employees. If your employer offers this, be sure to take advantage of it. It’s basically free money.
There are also tax-advantaged accounts that can help make your money go further. Contributions to a 401k and traditional IRA are tax-free, while a Roth IRA allows you to contribute after-tax money, and then you can withdraw your money tax-free during retirement.
Adjust your asset allocation as you get closer to retirement
Your asset allocation refers to where you invest your money. It might include individual stocks, bonds, mutual funds, index funds, etc. The younger you are, the more aggressive you might choose to be with your investments, knowing you have time to rebuild if you lose money. But as you get closer to retirement, most financial experts recommend that you remove some of the risk from your portfolio.
Retirement Readiness During the Pandemic
The current global pandemic has thrown many people’s finances into disarray. And for some people, it’s affected their retirement plans. Surveys have found that one in three Americans have withdrawn money from their retirement savings in 2020. Nearly as many people have stopped saving for retirement altogether. And it comes as no surprise, given the number of people who have lost jobs this year.
So how can people help to ensure their retirement readiness in the midst of a pandemic? Here are a few tips to help you prepare:
- Build your emergency fund. 2020 more than any other year has shown us the importance of well-funded emergency savings. If you still have a job, use this opportunity to start saving.
- Keep contributing to retirement accounts if you can. Some people have paused retirement savings, either due to loss of income or to build savings. But if you still can contribute to retirement, try to keep at it.
- Don’t sell off your investments if you don’t have to. Some people may see stock market declines and sell their investments for fear of losing more money. Know that the stock market has recovered from every downturn in history and that selling prematurely only locks in your losses.
- Check-in on your retirement plan. 2020 has shown us that life is unpredictable. Retirement can come sooner than you expect, like it did for Baron during a now-infamous playoff game. That’s why you need a personalized plan, and Plan B, and a backup plan to your backup plan. Personal Capital has the tools to get you ready for retirement and on track to financial confidence.
Personal Capital compensates Erin Gobler (“Author”) for providing the content contained in this blog post. Featured individuals are paid spokespeople and not clients of PCAC and do not make any endorsements or recommendations about securities offerings or investment strategy.