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Small Steps to a Secure Retirement

September 2012

Barbara O’Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension

Want to have financial security in later life? Consider these steps to prepare for a comfortable retirement:

Start Saving Early - Early savings of a smaller amount of money for a longer period of time (e.g., 35 years) can result in a bigger sum than saving a larger amount for a shorter time (e.g., 15 years). The earlier someone starts investing for retirement, the longer compound interest can work its magic.

Save as Much as You Can - The maximum amounts that can be contributed annually to tax-deferred retirement savings plans such as 401(k)s and 403(b)s are $17,000 (under age 50) and $22,500 (age 50+). At the very least, try to save enough to earn the maximum match from your employer.

Invest Tax-Deferred - Tax-deferred investments are those where taxes on investment earnings are postponed until a later date, typically at retirement. Examples include 401(k) and 403(b) employer retirement savings plans, SEPs for self-employed workers, the Thrift Savings Plan for federal government workers and service members, and traditional IRAs.

Conduct a Personal Financial Analysis - It is wise to periodically review your current financial situation. A net worth statement is a “snapshot” of your finances at a point in time and is calculated by subtracting debts from assets. Ideally, workers should repay their mortgage and consumer debts before retiring. A net worth worksheet (PDF) can be downloaded from the Rutgers Cooperative Extension Money and Investing Web site at.

Estimate Retirement Living Costs - Some expenses may go up in retirement (e.g., health care and leisure activities) and others may go down (e.g., gasoline, clothing, and taxes). To make a good estimate of post-retirement living costs, prepare a spending plan (budget) with estimated expenses. A spending plan worksheet (PDF) can be downloaded from the same Web site at.

Carefully Evaluate an Early Retirement - Early retirement shortens the time to save and lengthens the time that someone needs to live off retirement assets. In addition, people often earn their highest salaries between ages 55 and 65 and will lose some of those salary increases if they retire early. Other early retirement considerations are possible reductions in Social Security and/or pension benefits at earlier ages and tax penalties if tax-deferred plan assets (e.g., regular IRAs) are withdrawn before age 59 ½.

“Retire” While You Work - In the past, people often made a choice between 1. retiring early and risking running out of money during their lifetime or 2. retiring later and risking “waiting too long” and experiencing problems that affect their quality of life. A third strategy is to start to pursue retirement activities (i.e., work on your “bucket list”) while still working, using some money earmarked for savings, if needed. Benefit increases and fewer years of asset withdrawals will still make this strategy attractive even if savings deposits are reduced.

Try a Monte Carlo Calculator - Type the words “Monte Carlo Calculator” into an Internet search engine and you’ll find many online calculators that will estimate the probability of having a sum of money last your lifetime. Typically they assume a 30-year retirement. Like retirement savings calculators, be sure all the information entered is accurate and realistic. Otherwise, the results will be GIGO (garbage in, garbage out).

Beware of “Stampedes” - In recent years, large numbers of workers, particularly in the public sector, have been retiring early thinking they’ll “get out while the getting is good.” This is not necessarily true and there are no guarantees that benefits will be “grandfathered. The one thing workers can control (assuming they aren’t laid off) is the number of years of service in the formula used to calculate a defined benefit pension payment.