Yahoo Finance How To Plan For Retirement in 9 Steps, According to Dave Ramsey
Today, 20% of Americans over 50 don’t have any retirement savings, and more than half are unsure if they will have enough. Finding ways to put money away for retirement and maximize your savings can be challenging when you don’t have a map.
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Dave Ramsey, personal finance expert and host of the investing podcast “The Ramsey Show,” has a lot of advice regarding retirement planning. His team has broken down the nine steps anyone can use to secure their finances when it comes time to retire.
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Make Retirement Goals
Having a plan and saving with intention is essential to live financially free in retirement. This requires you to make a retirement goal. To do this, you must determine what you want to do in retirement. Don’t start with a savings goal that you merely think will be sufficient.
Ramsey’s team suggested you ask yourself what your dream would be. It may be relaxing and spending time with grandkids or traveling around the Mediterranean. Having a very clear idea of what you want will allow you to calculate how much you will need to make it a reality.
With your retirement goal, you can create an accurate strategy to reach it. Each plan will vary depending on how much you’ve already saved, your debts and your financial obligations.
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Put Away 15% of Your Income
It’s impossible to save for retirement without making a sacrifice and putting a percentage of your income aside each month. Your savings will depend on your financial situation, but Ramsey’s team recommended saving and investing at least 15% of your gross income.
Saving 15% of your income and investing it in an individual retirement fund or a 401(k) will add up over years of contributions. Leaving 85% of your paycheck for the rest of your financial needs allows you some flexibility. If you can save more than 15%, you’ll have more money generating income in retirement. However, those living paycheck to paycheck may find it difficult to put away 15% of their incomes and can benefit from any amount of savings.
Invest In Your 401(k)
Many employers offer 401(k) plans, which are great ways to accumulate retirement savings. A 401(k) is a retirement plan with tax advantages. Employees get a portion of their pretax wages deducted from their monthly salaries and deposited directly into their 401(k) accounts. The plan invests their monthly contributions into predetermined assets, which can grow free of capital gains tax. When the employee retires, the IRS taxes the distributions withdrawn from their 401(k).
Contributing to your 401(k) has a big advantage apart from the tax benefit. Ramsey pointed out that many companies offer an employee match based on your contributions. If you invest $100 into your 401(k) each month, a participating employer might add another $100. Your $200 will grow over time through the investments, adding even more to your retirement savings. The employee match alone is an excellent reason to sign up for a 401(k). How much the employee match will vary by company, but it’s often a percentage of the employee’s salary.
Open a Roth IRA
Regardless of whether you have a 401(k), there’s another retirement investment option. A Roth IRA is a retirement account in which you can put a limited amount of after-tax dollars each year to invest. Because the money deposited is after-tax dollars, the IRS doesn’t tax your gains or withdrawals in retirement.
Ramsey pointed out that there is another huge advantage to investing in a Roth IRA apart from the tax benefits. Unlike with a 401(k), you have complete control of your investments. You can put your money into stocks, mutual funds, commodities or other assets.
Get Out of Debt — Including Your Mortgage
Maximizing your retirement accounts and saving for retirement can only get you so far if you haven’t paid off your debts. One of the most common and longest-lasting debts is a mortgage. Ramsey’s team explained that debt is a risk, and having payments left on your mortgage in retirement can have devastating consequences. He suggested paying down your mortgage quickly by paying more than the minimum each month, especially as your income increases over your career.
Remember that you don’t want to retire with any other debts, either. Personal loans and credit card debt can cut into your savings fast. Planning to take on these smaller debts can ensure you begin amassing some savings faster. Two effective plans are the snowball and avalanche methods.
When you have multiple debts, the snowball method helps you gain momentum to pay them off. Start with the smallest debt and pay it off completely. Next, move on to the second smallest debt and continue in that order until you’ve paid off all your debts. Fully paying off one debt after the other will lead to a sense of accomplishment instead of paying haphazardly and feeling like you’re not progressing.
The avalanche method is similar but prioritizes debts based on their interest rates. Debts with high interest rates, like credit cards, cost you more over time. Putting any extra money toward paying off the highest-interest debts first will help you finish faster and save you money. Once you’ve paid down your small debts and mortgage, you can divert all of those monthly payments toward your retirement savings.
Know Your Social Security Choices
The future of Social Security is unknown. The Social Security Administration recently reported that the program will remain in existence at least through 2035, but retirees should plan to receive only 83% of their benefits. This means you shouldn’t depend entirely on Social Security, but you should still understand your choices.
Ramsey’s team broke down the options you have for Social Security. You can apply for the benefits at any age between 62 and 70. If you file for Social Security benefits at age 62, you’ll be eligible for up to $2,710 every month. If you wait until age 66, you’ll get up to $3,652 per month. Waiting to file until you turn 70 gives you the most value per month at up to $4,873.
Determining which route is best for you depends on your personal preference.
Prepare For Healthcare Expenses
One area that many overlook when planning for retirement is their healthcare expenses. As you get older, your health will get worse. Retiring without an adequate strategy could mean you’ll have to make large withdrawals from your savings earlier than you expected, which could throw off your finances for years.
Ramsey’s team gave two suggestions on how to plan ahead. The first is to open a health savings account. In an HSA, you set aside pretax money to use later to pay off qualified medical expenses. An HSA allows you to use untaxed money to cover deductibles, copayments, coinsurance and other expenses. It’s also possible to grow your HSA by investing.
The second suggestion is to sign up for Medicare when you’re 65. Medicare is federal health insurance that can help take the stress off covering your healthcare expenses in retirement. Ramsey’s team noted that you can still sign up for the benefits while working.
Think Big Picture
With all the stresses that life throws on you, it’s easy to lose track of the big picture. When unexpected car trouble or a family emergency occurs, there’s a risk of putting your retirement plan on the back burner and forgetting about it completely.
Ramsey’s team said feelings like fear, anxiety and impulsiveness can creep in to wreak havoc on your retirement savings goals. A bad situation could lead you to pull your money out of your retirement funds early, racking up harsh penalties. Or, a sudden drop in the stock market could tempt you to give up on investing altogether.
Coming up with a plan and sticking to it is difficult. It requires a lot of patience and perseverance to work. Keeping a long-term perspective and foregoing the temptations and challenges of the present is a vital step to securing your retirement finances.
Use a Financial Advisor
Coming up with and executing the best strategy for your retirement can put a lot of pressure on you. When your future is at stake, sometimes it’s best to spend a little extra to make sure you’re on the right track. Speaking with a financial adviser can help ensure you’re on the road to a happy retirement.
Ramsey’s financial consultancy, Ramsey Solutions, conducted a survey and found that 68% of the millionaires it spoke with used a financial adviser to achieve financial success. Consulting one can help you shape and reach your financial goal. It doesn’t hurt to get some guidance if you’re unsure about how effective your retirement plan is.
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