Retirement is the dream of most American workers, but if you retire too early or without adequate preparation, you run the real risk of outliving your money. To avoid this situation and enjoy your ride into the sunset, it’s best to start preparing as early as possible.
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Here are some of the most important steps you can take to ensure you don’t run out of money by age 65, along with some insights from a study conducted by Morningstar.
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Work for an employer with a 401(k) plan
According to a Morningstar study, you’re more than twice as likely to be short of money in retirement if you don’t participate in a defined-contribution plan like a 401(k). Put another way, says Spencer Look, associate director of retirement studies at the Morningstar Center for Retirement & Policy Studies, “Participating in an employer-sponsored defined-contribution plan significantly lowers the risk of shortfalls in retirement.”
One reason for the higher success rate is that, in most cases, a 401(k) plan is a set-and-forget plan. Once participants establish an asset allocation and contribution percentage, they don’t have to do any extra work to increase the value of their account.
On the other hand, when you’re on your own, it’s far too easy to forget or “temporarily” stop posting. Once you slow down or stop posting, it can be difficult to get back into it.
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If you are self-employed, create your own plan
If you run your own business, you can set up your own retirement plan. In fact, there are several options available to you, from SEP IRAs to SIMPLE IRAs to solo 401(k) plans. Which option is right for your business depends on a number of variables that you should discuss with a financial advisor.
It is important, however, that you set up some type of retirement savings plan for your company since you will not be contributing to another company’s 401(k) plan.
Automate your posts
If you rely on yourself to remember to make regular deposits, you’re more likely to fail. If transfers aren’t automatic, life can all too easily get in the way and stop your deposits from happening. For example, you might find that you spend too much in one month and stop making deposits just to balance your cash flow – a pattern that’s hard to break.
In the hustle and bustle of everyday life, it’s also common to forget to make contributions. Automation ensures that your contributions are always made on time. This is one of the best ways to top up your retirement account and protect yourself from running out of money.
Stick to a strict investment budget
The amount you set aside for your investments shouldn’t be “what’s left over each month after paying your bills.” Instead, you should create a budget line item for your investments and be sure to stick to it.
For example, if you’ve decided to invest 10% of your monthly income, be sure to set that money aside even if you’re having a bad month or need more money for other bills.
The investing mantra “pay yourself first” means that the first amount you take out of your paycheck should go to your investment budget. What’s left is what you should live off of, not the other way around.
Maximize your social security benefits
While you shouldn’t rely on Social Security to fund your entire retirement (since the average monthly benefit for retirees was only $1,919.40 in July 2024), it can still be a big help to your retirement income.
Because your Social Security benefits last until you die and are adjusted each year for inflation, you’ll never outlive them. That’s why it’s worth getting the largest Social Security benefit possible.
During your working years, this means maximising your taxable income, as this is what is used to calculate your pension. It also means you should wait as long as possible to claim your benefits. For example, if you claim at 62, your benefits will be permanently reduced by up to 30%. On the other hand, if you wait until age 70, you will receive a benefit that is 24% above your full pension. That’s the amount you’ll be entitled to at age 67 if you were born in 1960 or later.
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This article originally appeared on GOBankingRates.com: How to retire at 65 without running out of money
