Retirement Planning: Are You Doing the Right Things?

When people ask me whether they are on track for retirement I believe what they’re really looking for is reassurance.  But as much as I’d like to be able to tell you for sure whether you have enough to retire comfortably, the truth is that one can’t even hazard a guess without knowing tons of details about your personal finances.  I can tell you this, though: there are no shortcuts in retirement planning.  It’s all a question of getting the basics right.  If you can answer yes to the four questions outlined here, you are doing well to get – and stay – on track.  If not, you have some work to do before you can rest easy.

1.  Are you Maxing out your 401(k)?

I’m sure you’ve heard plenty of times that you have to fund your 401(k).  But let me be clear about this.  Maximizing your contributions to your 401(k) is the single surest thing you can do to put yourself on track to a prosperous retirement.  You should be saving a solid amount annually, and the earlier you start, the better.  A 401(k) gives you the biggest bang for every buck you save, so if you’re not making maximum use of yours, you’re not really serious about retirement.

To begin with, you get an up-front tax break on the money you contribute to a 401(k).  The most you can save away in pretax dollars in 2018 is $18,000, or $24,500 if you are age 50 or older.  Because your employer may kick in matching funds (typically half of what you contribute), you’re effectively starting off with a 50% return on your investment.  And you pay no taxes on your earnings until you withdraw the money.

If all that isn’t lure enough, think about the convenience: your 401(k) contributions flow directly from your paycheck, eliminating the natural tendency to spend your money before you can save it.

2.  Are you Keeping Tabs on Your Progress?

Unfortunately, you cannot simply save and forget.  At least once a year, especially when you’re within 15 years of your planned for retirement date, find out where you stand.  That way you can make necessary course corrections, such as increasing your savings or delaying your planned exit date.  For a more personalized look at your progress, consider engaging a financial planner to determine a more detailed projection of how large a portfolio you need and your odds of reaching it.

3.  Are you Grabbing Every Tax Break You Can?

As powerful as a 401(k) is, unfortunately it isn’t always enough, especially if you started late or have plans of an early retirement.  So don’t be surprised if your personalized plan indicates that you need to save outside your company sponsored retirement plan as well.

Those non-401(k) savings may also qualify for tax breaks.  Miss out on them and you’re passing up a very powerful way to build wealth quickly.  So once you fund your 401(k), determine if you qualify for a traditional or Roth IRA.  If you do, you can set aside up to $5,500 in 2018, or $6,500 if you are age 50 or older.

4.  Have You Created A Safety Net?

Last thing you want to do is save diligently for retirement only to have your efforts undermined by unexpected medical bills, an injury that keeps you off the job, or any other surprises life can throw your way.

To protect yourself and your family, you need to have three things in hand: life insurance, disability insurance, and an emergency savings stash equal to a minimum of three months of your living expenses.  That way you (or your heirs) won’t have to tap retirement accounts for emergency purposes.  A term life policy gives you the largest death benefit for the smallest premium – generally you should obtain coverage equal to 5 to 10 times your salary.  As for disability insurance, look for a policy that will pay 60% of your salary.  Before you shop, though, see if you already have coverage (or the option to obtain it) through your employer.