Barbara O’Neill, Ph.D., CFP®, AFC®
Distinguished Professor and Extension Financial Management Specialist Emeritus
Rutgers Cooperative Extension
A popular word around Rutgers University on Fall weekends is "chop" as in "keep on chopping." This metaphor (often accompanied with lively hand gestures), when applied to football, means that the team generally gets touchdowns slowly yard by yard. In other words, small steps ("chops") can bring big results.
The same is true about retirement planning. Most people "chop" (i.e., save small amounts of money on a regular basis) for decades to build wealth for a comfortable lifestyle in later life.
Below are ten small steps (i.e., "chops") to prepare for retirement:
Set a Savings Goal- Use several online retirement savings calculators such as these from FINRA, Bankrate, Vanguard, and Calculator.net to determine what you need to save. Also envision your future lifestyle. Where do you want to live and what activities do you plan to pursue?
Estimate Retirement Living Expenses: Consider employer benefits (e.g., health insurance), if any, and estimate expenses for housing, healthcare, daily living expenses, and "bucket list" items like travel.
Contribute to Retirement Accounts- Save as much as you can in tax-advantaged retirement savings accounts such as individual retirement accounts (IRAs) and employer savings plans (e.g., 401(k)s and 403(b)s). Traditional accounts are funded with pre-tax dollars and Roth accounts are funded with after-tax dollars.
Maximize Employer Matching- Try to save the maximum amount that your employer will match (e.g., 6% of pay). This is "free money" that will boost your savings and should not be left on the table.
Diversify Your Investments- Build a portfolio that spreads investment risk across different asset classes such as stocks, bonds, cash equivalent assets, and real estate. This way, no one investment can cause major losses.
Reduce Debt- Pay off high interest loans and credit cards as quickly as possible to free up money to save and do an amortization calculation so you can pay off your mortgage before you retire.
Consider Downsizing- Evaluate whether a smaller home or other lifestyle adjustments can reduce living expenses in retirement. Another money-saver is "geographic arbitrage" (i.e., moving from a high-cost area to a low-cost area). For example, a move to a state with low property taxes and no state income tax.
Optimize Social Security- Learn the rules and options for claiming benefits (e.g., reduced benefits before full retirement age and delayed retirement credits through age 70). Deciding when to claim benefits will have a significant impact on your retirement income and, perhaps, that of a spouse.
Obtain Adequate Health Insurance- Ensure that you have adequate health insurance for retirement. This will likely include Original Medicare (Parts A and B) with a supplemental plan and drug plan or a Medicare Advantage plan (Part C). Contact a local SHIP office for assistance by trained volunteers.
Monitor Progress Regularly- Regularly review your financial progress by preparing a net worth statement (PDF) that lists assets (including retirement savings account balances) and debts. Make adjustments, as needed, to stay on course and consider increasing your retirement savings when you get a raise or an expense like childcare ends.
For additional information about preparing for retirement, review the Purdue University Extension online course, Preparing for a Secure Retirement.