Ways to Financially Prepare for Aging Without Stress
Planning for the future can seem like a distant concern—why? Because it is in the future. You might be one of many people who think about today but delay thinking about tomorrow, so you delay doing it until forced to. Don't be one of these people—especially when it comes to planning for retirement.
You are likely to live a long life. According to the Social Security Administration's Actuarial Life Table, a 40-year-old today is expected to live another 41.07 years.
Since you are lucky enough to reach old age, you should ensure financial stability for yourself. After all, as we age, our ability to earn income often decreases, so having funds set aside for living expenses, medical and long-term care costs, unexpected events, and simply enjoying life is absolutely crucial. And yet, almost half of American households do not have savings in their retirement accounts, much less planning for the consequences of aging. Needless to say, this is a recipe for disastrous aging.
Start laying the groundwork today to ensure a pleasant and stress-free life in your golden years. Here are four things you can do now so you can age gracefully and comfortably without financial stress.
Effective Ways to Prepare for Retirement
Retirement can be stressful, with many feeling less useful and more isolated after leaving behind the 40- to 60-hour work weeks. It's important not to compound that stress by lacking a safety net.
While it's best to start planning for your financial future early – the earlier you begin, the more time your savings and investments have to grow – it's never too late to start. Here's how you can do it beginning today.
Keep a Detailed List of Your Finances
To lay the foundation for effective retirement planning, create a detailed list of your finances, including details on your savings accounts and investments such as 401(k) plans or IRAs, pensions, and Social Security benefits.
It's also important to factor in any state-specific considerations. State payroll taxes can indirectly impact your future retirement savings by reducing the amount of your paycheck you can allocate to retirement accounts.
Higher payroll taxes mean less disposable income, which may lead to decreased contributions to retirement plans like 401(k)s or IRAs. Over time, this can significantly affect the growth potential of your retirement savings due to lost compound interest and reduced investment opportunities.
Therefore, understanding how state payroll taxes affect your take-home pay can help you plan and adjust your retirement savings strategy accordingly. For example, if you're in New York state, take some time and effort to understand the implications of payroll tax in New York as they can affect your overall income and, as a result, your retirement saving strategy.
However, in New York, tax-qualified Long-Term Care Insurance can be tax-deductible, plus contributions to traditional 401(k)s, IRAs, and other qualified retirement plans typically reduce your state tax liability in the year you make the contribution.
There are financial apps that can track all your accounts and monitor changes in value over time. It's also a good idea to keep important documents, paper and digital, in a secure location and well-organized so you can review them annually to ensure everything is accurate and going according to the plan. If not, you'll be able to make adjustments on time.
Repay or Reduce Debt
The next step is non-negotiable if you want to prepare for aging without stress – eliminate or at least reduce your debt before retirement. Reducing debt now will go a long way in alleviating financial strain and, equally important, freeing up your resources for other purposes, such as investing (more on that later).
So, one of your priorities should be paying off debts, especially high-interest debts, as you want to avoid accruing unnecessary interest charges. To do this, create a debt repayment plan by focusing on one debt at a time while making minimum payments on others.
Don't hesitate to talk to your creditors about lowering your interest rate. It might not always work, but it's worth a shot. Even if they can't lower the interest rate, they might be able to offer a repayment plan that's easier on your wallet.
Save What You Can, Then Invest Wisely
According to the U.S. Department of Labor, the average American spends about 20 years in retirement – that's a long time, so make sure you have a decent retirement plan set in motion before you actually retire. To do this, save whatever you can and invest it into your savings or pension plan. While it's best to make retirement your top priority, it's ok to start small and then try increasing the amount you save each month.
Saving for retirement is crucial, but what if there was a way to add free money to your nest egg? Many employers offer a retirement plan match. A retirement plan match means the employer contributes a certain percentage of your contributions to your retirement savings account, often based on the amount you contribute to the plan. It's free money for your future, so don't miss out on this valuable benefit!
These contributions are typically placed in a tax-deferred account (401(k), which means you only pay taxes on the money you contribute or the earnings it generates once you withdraw it in retirement. This allows your money to grow faster and helps you reach your retirement goals.
Highly recognized financial advisor, author, and motivational speaker, Suze Orman, says to use the power of an employer-sponsored retirement plan.
If you're not contributing to your 401(k) or another employer-sponsored retirement plan, you're basically saying you'd rather have a slightly bigger paycheck today than a much bigger nest egg tomorrow. Don't do that. Take advantage of any employer match. It's free money, and it's a great way to jumpstart your retirement savings.
Check with your employer's human resources department to learn more about their retirement plan and the matching program. It's a simple step that can make a big difference in your long-term financial security.
At the same time, make sure you fully understand how your savings are being invested. Consulting with a financial advisor can be of immense help as a professional can advise you on how to diversify your investment options best. Always remember: it's best to put your savings into different types of investments.
Build an Emergency Fund
Being financially resilient means having a safety net to fall back on in case something doesn't work out or something unexpected happens. This is why having an emergency fund is so important: not only for practical reasons, of which there are many but also for your peace of mind.
Ideally, you should save at least three to six months of living expenses in a liquid and accessible account. Suzi Orman suggests having an emergency savings fund that can cover up to 12 months of living costs.
The easiest way to do this is by setting up automatic transfers from your checking account to your emergency fund. It's also a good idea to try and find a high-yield savings account for your emergency fund so you can earn a modest return while remaining accessible.
Remember to use your emergency fund only for genuine emergencies, such as medical expenses or unexpected home repairs!
Safeguard Retirement Savings from Future Long-Term Care Expenses
As people age, the need for long-term care services increases. The U.S. Department of Health and Human Services reports that when people reach age 65, they have a 56% chance of needing long-term care services.
Your health insurance, including Medicare and supplements, only pays for short-term skilled services. Unless you want to burden your adult children and make them caregivers, you will pay for future long-term care through your income and assets, reducing your lifestyle and adversely impacting your legacy unless you include Long-Term Care Insurance in your retirement plan.
LTC Insurance is affordable for many people, especially if you obtain coverage when you have very good health and are younger. Premiums vary dramatically between insurance companies on the same level of coverage.
Be sure to seek help from a qualified LTC Insurance specialist who represents the top-rated insurance companies that offer this coverage to get accurate quotes.
Don't Delay - Aging Happens
Planning for retirement is best tackled before you step away from your career; even minimal planning is preferable to none. Early retirement planning allows individuals more time to build up their savings, benefiting from compound interest over an extended period. This approach helps grow a more substantial retirement fund and provides a buffer against potential financial pitfalls later in life.
Starting your retirement planning early also offers the flexibility to adjust your savings strategy based on changing financial situations, investment opportunities, and life goals. It enables you to make informed decisions about when you can afford to retire and what your lifestyle in retirement will look like. Without any plan, you may find yourself financially strained, limiting your options and possibly forcing you to compromise on your quality of life.
Even limited planning can significantly impact your financial security in retirement. Setting up an automatic savings plan, contributing to a retirement account like a 401(k) or IRA, adding an LTC Insurance policy, and learning about basic investment principles can set a foundation that can be built upon as circumstances allow. The key is to start as early as possible and adjust your plan as you go, ensuring a smoother and more secure transition into retirement.
Aging happens, and the consequences will impact your family, lifestyle, and legacy if you avoid the reality of getting older.