7 Things You Can Do Today to Prepare for Retirement

Joshua Says:

September 11th, 2007, 5:42 am

Ever since I first read about the emergency fund on here I’ve begun slowly building one up in a savings account. I’m actually a systems engineer in my early 20s and a lot of the financial advice I’ve run across on this site has proven invaluable. I suppose I don’t exactly fit the young professional stereotype in so much as I don’t place a lot of emphasis on procuring ’stuff’. It doesn’t lend itself too well to embracing a minimalist lifestyle as it turns out :p

David Says:

September 11th, 2007, 6:20 am

A good list - but it is purely from a financial perspective. A lot of people hit retirement, don’t have financial worries, but struggle with what to do with their time. Career goals have disappeared, but many people may live 30 years of more in retirement. Any suggestions from a psychological / spiritual perspective? (given that this is *zen* habits :-) )

Anita Says:

September 11th, 2007, 6:56 am

David beat me to the observation that this post was purely about the financial aspect of retirement. I’ll be retiring next year and I found the recent post “Design Your Life: What Would You Do If You Had Nothing To Do?” to be something I plan to work with.

I’ve already been thinking about what I’ll do during retirement and what things I’ve always wanted to do. One of them is programming, but I always felt it might be a job with too much stress. Now I’ll be able to do it for fun.

Leo Says:

September 11th, 2007, 7:24 am

@David & Anita: You’re absolutely right … there are many other things to consider when preparing for retirement besides financial. Obviously I wanted to focus on financial in this article, but I think your points are ones that would be good for a second article.

Briefly, my thoughts:

1. As Anita said, Design Your Life is a great place to start. How do you want to spend your days?

2. I would also work on simplicity. Without the complications of work, you can simplify your life in many ways, and it has the added benefit of reducing expenses (perfect for retirement). See the 72 simplifying ideas article earlier this week.

3. Search for another article I did on the Key to Dying Happy. This article is important to everyone at any age, of course, but I think of it for those in retirement because they almost have a blank slate — they can redesign their lives and start afresh. I’d recommend starting by deciding exactly how you want to live your life, and how you want to be remembered.

4. Lastly, if you have a lot of time on your hands, I would consider volunteer work. I’ve found it to be vastly rewarding, although I don’t have as much time for it now as I’d like. There is nothing better than doing something with a positive purpose, with giving your time and compassion to others in need.

Just some thoughts. A more in-depth article is warranted, of course. Thanks for the ideas!

Joshua Says:

September 11th, 2007, 7:27 am

@Leo - I wholly agree with number 4. Not saying I don’t agree with the others, but that certainly struck a chord with me. It’s kind of one of the baselines I live my life by, this mentality that at the very least with the short amount of time we have in life if you can find a way to enrich the lives of others it provides a sense of happiness and fulfillment that you’d be hard pressed to find in other pursuits.

Klaus Says:

September 11th, 2007, 10:21 am

From the point of view of a retiree the most important thing to do in young age to prepare for retirement is to live a healthy lifestyle. Of course, you shouldn’t smoke, but little or no alcohol is important too, and low cal food as well. Take a nap in the afternoon, if you can.

Other than food and cigarettes, I have this advice to offer: don’t move to often in life from one home to a new one. I lost a lot of money chasing the money in other jobs…

Kristi Wachter Says:

September 11th, 2007, 10:37 am

#3, Track Your Earnings: Not only is it unnecessary to track your earnings every day, it’s actually better to avoid it. At least one study (I wish I had the cite handy) showed that people who tracked their mutual fund savings frequently (weekly or more) did WORSE than those who checked their holdings every year or so, simply because keeping a close eye on the market makes it hard to resist the temptation to react to the market - it makes you want to move your money around more. That hurts your savings in two ways: first, there are often fees associated with each transation; second, it’s hard to outguess the market, so leaving your money where it is is often a better long-term strategy than trying to pick this week’s hot fund or stock.

According to much of what I’ve read, a good strategy is: use index funds; buy and hold; and, as you say, start early. It seems like a good, simple, Zen Habits strategy.

Debbie Says:

September 11th, 2007, 11:22 am

I couldn’t understand #1 (max your 401K), so I did some research. Your employer must severely limit your maximum contribution because the maximum is either the maximum percentage your employer allows or $15,000 ($20,000 at age 50+).

It may be easy to fill out a form, but suddenly living with over $10,000 less in pay is not so easy at all, which you do seem to acknowledge in your other suggestions.

Also, normally you have a choice in where to invest that money, and deciding what to choose isn’t so easy either for most people.

If I were making a list of 7 things you could do today to prepare for retirement, it would be this:

1) Find out what retirement vehicles are available to you through your employer(s), what your limits are, and what your options are. Or take the first step (make an appointment or look up where the office is, etc.)

2) Find out what retirement vehicles are available to you through the government.

3) Find a basic book on investing strategies and start reading it.

4) Take a test to learn about your risk tolerance.

5) Start thinking about what you would like to do in retirement. Try to think of options you could do with various impairments, especially ones that might be in your genes or that are common in your profession, etc.

6) Think about how your cost of living after retirement would compare to your cost while working–how much do you spend on work-related stuff that you wouldn’t spend if you weren’t working ( spend approximately zero extra, but most people spend quite a lot extra) and how much would you spend on other things if you had more free time? (There are essays and calculators to help couples decide how having one parent stay at home to raise the children would affect their finances; these bring up a lot relevant issues for this question also.)

7) Make a calculation–any calculation of interest to you. Calculate the soonest you could retire on your company’s pension plan. Or the most you could lose from your paycheck without really noticing. Or the amount of money you would have at retirement if you contributed a certain amount each year and earned a certain interest rate. Or how much money you would need at age 65 to equal the money you need now, given a certain inflation rate.

Another idea that goes along with your disability insurance, life insurance, and emergency fund ideas is to find out more about the medical history of people in your (biological) family, use online tests to calculate your risk of various health problems, learn how to recognized the signs of these problems, and let your doctor know about what you find. (In my family, people on one side have osteoporosis and people on the other have additional risk factors (skinny; pale skin), many people on one side have diabetes and hypothyroidism, and based on swimming every day of my childhood with no sunscreen plus having pale skin, I can’t help thinking I also better keep an eye out for skin cancer.) Doctors are so busy, you really need to be your own contractor when it comes to your health.

Luanne Says:

September 11th, 2007, 11:29 am

Great advice and if only our parents had known how “easy” it would have been to set their kids up for life. Even a small, but consistent amount each year into your kids accounts can turn them into millionaires (if that will be enough!) well before retirement age. Wish mine had thought of that, and had the “extra cash!” Thanks for a great post!

Leisureguy Says:

September 11th, 2007, 13:11 pm

I would add that the balance shown in tax-deferred plans (such as the 401(k)) is highly deceptive. You do not have that much money to spend. Close to 30% is destined to go to pay taxes. (And you also have to pay taxes on your Social Security income.) The amounts from tax-deferred plans and Social Security are taxed as ordinary income. So when you look at that balance, consider that only 70% is yours.

So your post-tax savings becomes VERY important. You can probably save 10-15% of your after tax income with no significant detriment to your lifestyle. Put that money in ING Direct until it’s enough to buy one of the balanced plans at Vanguard, for example. Keep adding to your after-tax savings the rest of your life.

Marc Says:

September 11th, 2007, 14:42 pm

Great list, Leo, but #1 and #4 assume that all of your readers are American.

Some translating needs to be done by your non-American readers (such as myself - Canada) to match their country’s investment system.

Leo Says:

September 11th, 2007, 14:56 pm

@Marc: Ah … I hadn’t even thought of that. I apologize. I have to confess that I don’t know anything about investment systems in other countries … perhaps you could educate me? I’d love to hear suggestions.

Leo Says:

September 11th, 2007, 15:06 pm

@Debbie: You have a point … I was assuming that people were already contributing to 401k, but at a lower level. A couple of points:

1. Remember that 401k is pre-tax, so if you increase your contributions by $10K a year, you are investing about $3K that would have gone to taxes but that can now earn you money. That’s huge.

2. Increasing contributions by $10K a year means about $7K a year net difference on your paychecks, as you would be taxed on that $10K first … that’s about $270/paycheck if you get paid every 2 weeks. Now I’ll admit that’s not an easy amount to cut from your paycheck. But I’d submit that some people spend that much on eating out, shopping, etc … and can afford to cut that much from their optional spending. For others, see what you can cut from your budget, and only increase your 401k by that amount.

3. The real point is to max your 401k to the limit of your employer’s contribution match … most employers only match up to a certain percentage of your income … you want to take full advantage of that. Beyond that, 401k is still a great investment opportunity because of tax benefits, but the employer match is an instant investment return.

Debbie Says:

September 11th, 2007, 17:32 pm

Until fairly recently (certainly throughout my 20s and 30s), I never made more than 30K (before taxes). There is no way I would max a 401K (with 15K), let alone also try to max my IRA (with 4K+) in addition to all that insurance and emergency savings. I mean, I like to eat and live indoors.

Note: not everyone is in the 28% tax bracket. Even I’m still in the 15% tax bracket, so if I contributed 10K more, my pay would go down by 8.5K.

I totally agree with maxing the company match, however. That’s usually no more than 3-6% of your income and should be possible for almost everyone.

Doug Says:

September 11th, 2007, 19:16 pm

I was shocked to see your picture choice for this article. Since this is a self improvement website, I would think it best to have only positive and uplifting images associated with your articles and website. Negative motivation never works. I am aware of the realities of the world and know that people end up in situations reflected in the picture, but I know for me that seeing an uplifting picture is much more inspiring.
Loved the article, nix the picture.
Doug

Brett Says:

September 11th, 2007, 21:47 pm

Many companies (including mine, unfortunately) no longer match contributions. From what I understand, it’s something that’s definitely becoming a thing of the past but I don’t see too many articles that discuss what you should do if your company stops contributing. So far, I’ve gotten that idea that’s it’s probably better to put your money somewhere else if you’re not getting a match.

Alex Says:

September 11th, 2007, 22:43 pm

Even without matching, the 401K is probably the best place you can put your retirement money. (Also, into a Roth IRA). The fact that you are lowering your taxes this year while allowing your money to grow tax free is very valuable indeed. Also, you can only do Roth IRAS if you make below a certain amount of money (I believe for a couple it’s something like $165,000). That sounds like a lot of money, but some places are very expensive and wages (as well as costs) are higher.

Murtuza Says:

September 11th, 2007, 23:57 pm

the photo used with this article is kinda mean.

Leo Says:

September 12th, 2007, 0:17 am

Hmmm … I wasn’t trying to use the photo as a negative motivator … I didn’t think it would come off that way. I thought it was a bit humorous. I surely didn’t intend for it to be mean. :)

Sanjay S Says:

September 12th, 2007, 3:18 am

The one thing I disagree with is “Track your earnings” — whenever I have done that, all I have ended up with is mistakes and worry (I think something is not doing well and take money out and put it in something else that ends up appearing to be doing not so well when I look at my portfolio the next time).

I think the best thing one can do is to invest money in a target retirement plan like the ones Vanguard offers where this fund is composed of investments in various index funds, the fees are low and funds are adjusted for your risk tolerance as the years pass by. And once you do that FORGET about it until retirement. Don’t track your earnings. Or atleast track your investment less often.

Ofcourse this doesn’t mean you don’t re-evaluate your retirement goals atleast once a year — you should do this definitely.

JadeEJF Says:

September 14th, 2007, 11:51 am

What a great list! Actually, the whole concept of your blog is fantastic- I’m totally going to add it to my RSS feed, if you don’t mind. My husband and I have just started really thinking about planning for retirement, and all of these suggestions are… things we had to learn the hard way, I think. Now, we’re thinking about alternative investments outside of the stock market, since most of our stuff is 401(k), Roth-type stuff. I thought NuWire Investor’s article on the Top 10 Investments Under $25k was pretty helpful in terms of thinking outside the box. Anyway… thanks again for writing such an interesting blog, blog post, and for having excellent graphic design. I can’t wait to add you to my RSS feeder :D

Jamey Stanworth Says:

October 15th, 2007, 14:24 pm

I’d say number 1 the hardest, is to get out of debt. I can’t start saving until I have something to save with. Debt stinks!

Jefferey Says:

November 2nd, 2008, 14:55 pm

For those who are entering retirement or who have already entered retirement and have witnessed their retirement accounts’ value dwindle, a reverse mortgage can provide some real security. I have family members who have done this and its has been an amazing help, they’re basically set up for the rest of their retirement. I think more people need to look at this as an option, it should be on the list.