1. You need a plan
Going into retirement blindly could mean setting yourself up for disappointment, especially if your savings can't support your goals. That's why it's crucial to sit down and think about what retirement looks like for you. Though you may not have every detail mapped out (especially if retirement is years away), it's never too early to ask yourself some key questions. Where will you live, for example? Do you see yourself working in some capacity when you're older? And how will you spend the majority of your free time?
Oddly enough, it's estimated that close to 60% of Americans don't budget for leisure activities in the course of their retirement planning. But given the amount of downtime you'll potentially have on your hands, it's important to think about these things now -- while you still have an opportunity to save more money to meet your personal objectives.
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2. You'll need more than Social Security income
Many workers assume that once they retire, their Social Security payments will be enough to cover the bills. But most people can't live on Social Security alone. In fact, your monthly benefits are only designed to replace roughly 40% of your pre-retirement income. Even if you're willing to adopt a more frugal lifestyle in retirement, you'll still most likely need a minimum of 70% of your former income to stay afloat financially. And if you don't want to cut corners during your senior years, you'll need considerably more.
In fact, you may be surprised to learn that nearly 50% of senior households wind up spending more money, not less, during their first few years of retirement. Being realistic about what Social Security will and will not cover can help you set a more accurate savings goal to work toward.
3. You need a solid investment mix
For years, retirees have relied on the 4% rule to guide their savings utilization. The rule states that if you begin by withdrawing 4% of your savings during your first year of retirement, and then adjust future withdrawals for inflation, your savings should last a good 30 years.
While the 4% rule isn't perfect, it's a solid starting point for retirees looking to make the most of their savings. But one thing many people don't realize is that the rule assumes a healthy investment mix of stocks and bonds. If you load your portfolio too heavily with one and not the other, you risk one of two scenarios -- suffering financially as a result of stock market volatility, or falling short on income by unloading your stock positions and congesting your portfolio with bonds. On the other hand, if you maintain a decent investment mix, you'll get the best of both worlds -- the safety of bonds, the growth potential of stocks, and the opportunity to establish a steady income stream from dividend and interest payments.
Tax-advantaged retirement accounts, like IRAs and 401(k)s, make it easier for workers to set money aside for the future, and the sooner you start funding your retirement plan, the more opportunity you'll have to benefit from compounding. On the flipside, if you wait too long to start building your nest egg, you'll limit your growth potential and risk coming up short in retirement.
The following table shows how much of a nest egg you stand to accumulate if you start saving just $300 a month at various ages throughout your career:
The more prepared you are going into retirement, the smoother the transition is likely to be. Stick to these rules, and you'll be well on your way to the fulfilling retirement you deserve.As you can see, thanks to the power of compounding, you can turn a series of relatively modest contributions into a respectable sum over time. In fact, if you give yourself a solid four decades to save, you can turn $144,000 in lifetime contributions ($300 per month x 480 months) into $932,000 -- a $788,000 gain! But the longer you wait to start saving, the less time you'll have to put your money to work.
This article was originally posted on Motley Fool.