Of all the misguided concepts I embraced when I was younger, one of the most ridiculous involved retirement planning. “Why plan for retirement?” I thought. “I’ll be dead by then.” Luckily, as I got older I wised up and realized that I needed to start planning. But I’m sad to say there are still folks out there that think the way I did in my youth, and as a result they are not properly planning for retirement.
Retirement isn’t a question of if—if you’ll get sick, if you’ll have unexpected expenses, and so on—it is a question of when. It is also about making the right decisions now—preparing for the worst and hoping for the best.
Here are some things for which you should be planning as you chart your course toward retirement. This way, you can enjoy your golden years instead of working yourself into the grave.
Realistic future living expenses
Food, shelter, transportation, and clothing—these will all be more expensive when you retire. If you think a loaf of bread and a gallon of milk are expensive now, can you imagine how much more they will cost in 20 or 30 years?
A prime example: When I was in my teens, I purchased gas for my car at less than $1 a gallon. Now, almost 30 years later, I am paying upwards of $4 a gallon for gas, an increase of over 300 percent.
When you are younger and retirement seems far away, you just don’t think about inflation. But as the cost of living increases, you will need more retirement money to pay for things. The only way you can be ready for this is by setting aside more money in your retirement savings account now than you think you’ll need in the future.
Freedom from debt
Would you believe it if I told you that in 2012, Americans aged 50 and older had a higher combined balance on their credit cards than younger people did? Having debt at any age puts you at a higher risk for a financial disaster, but as you get older that risk grows exponentially.
Having little or no debt at retirement is extremely important. Let’s say you have a house payment of $2,000, credit card debt that costs you $200 every month, and a $300 car payment. When you are working, those payments might be manageable, but having to pay out $2,500 each month on a fixed income can really hurt.
Your goal should be to be completely out of debt by the time you retire, if not sooner. And that means setting aside money each month to pay down debts.
A larger emergency fund
Most experts recommend having at least three to six months of your living expenses in a liquid emergency fund, but that amount is for people who are working. At retirement, it might make sense to have more in your emergency fund than you did when you were working—unless you plan to go back to work after you have retired.
There is no magic number, but you might consider having at least one to two years of your post-retirement living expenses in an accessible emergency fund. That way, if you need a large amount of cash quickly, you can get it without having to pay the extra fees, taxes, or penalties you could face if you pulled that money from a retirement account.
In order to have a large liquid savings account when you retire, you need to get started funding it today. Be sure to add money to your savings account in addition to your retirement account each month. And in retirement, don’t give up saving money; you should still be adding to your savings each month.
There are many things to consider when planning for retirement. By thinking about these issues and taking early action on them, you greatly increase your chances of a comfortable retirement.
Steve Repak is a CERTIFIED FINANCIAL PLANNER™ professional, CFP® Board Ambassador, and financial literacy speaker. He is also an Army veteran and the author of Dollars & Uncommon Sense: Basic Training For Your Money. Follow him on Twitter: @SteveRepak