Retirement comes sooner than we think. And, while it’s important that we’re emotionally ready for that moment when it comes, it’s just as important that we’re financially ready.
And that means preparing.
For the vast majority of our lives, retirement is decades away. This makes it easy to put off planning for it until later. Unfortunately, once retirement is on the horizon, it could be too late. While there are some benefits to later-in-life investing, early planning often reaps the best benefits...
Retirement comes sooner than we think. And, while it’s important that we’re emotionally ready for that moment when it comes, it’s just as important that we’re financially ready.
And that means preparing.
For the vast majority of our lives, retirement is decades away. This makes it easy to put off planning for it until later. Unfortunately, once retirement is on the horizon, it could be too late. While there are some benefits to later-in-life investing, early planning often reaps the best benefits.
The best way to prepare for retirement is to set goals and take action to meet them. However, a middle step often gets forgotten: evaluating retirement readiness.
Evaluating retirement readiness helps us determine whether we’re on track to meet our goals. And if not, it helps us take the necessary steps to fix it.
But first, we have to understand what retirement readiness is and how to evaluate it.
What is retirement readiness?
“Retirement readiness” refers to a person’s ability to support themselves financially once they leave the workforce.
While that’s a simple definition, it insinuates something a little more complex: “retirement readiness” is what someone achieves after setting retirement goals and taking appropriate actions to meet or exceed them.
Someone who is retirement ready can afford the expenses of a comfortable lifestyle without working to earn a regular paycheck. They’ve saved enough throughout the years that their retirement income can cover their bills, hobbies, food, recreational activities, travel costs, and more.
But how does one become retirement ready? And what methods are there for checking your retirement readiness?
What is a RISE score?
RISE stands for “Retirement Income Security Evaluation.” Much like a credit score, it evaluates your retirement readiness and assigns a score from 0-850. A simple online calculator can perform the evaluation for you. All you have to do is input financial information, such as expected Social Security benefits, expected pension, how much savings you have, living expenses, etc. Then, the algorithm crunches the numbers and scores your readiness.
The scores represent a scale of readiness and generally equate to:
- 0-349: Very Poor
- 350-649: Poor
- 650-699: Fair
- 700-749: Good
- 750-799: Very Good
- 800-850: Excellent
Keep in mind that these ranges are open to interpretation.
Several websites offer a RISE calculator tool. An online search can provide options for you to choose from.
How to make sure you’re retirement ready
A RISE score can give you an idea of how ready you are for retirement. However, there are a few steps you can take to:
- Create a deeper understanding of your retirement readiness, and
- Keep you on track for meeting your retirement goals
Some simple steps you can take to make sure you’re retirement ready include:
Create a budget
Creating a budget is perhaps the most fundamental step to ensuring financial health. That’s why I recommend budgets to just about everyone, not just those using them as a tool to prepare for retirement.
A budget is a complete and honest look at your current financial situation: income, necessary expenses, “fun” lifestyle spending, and any other incoming or outgoing funds. By putting everything into a budget, you can compare how much money you earn/have with how much you need/spend.
When creating a budget, including all income and expenses is helpful. While this list isn’t exhaustive, it can serve as a reminder of what to include. Consider including:
- Work/earned income
- Other sources of income
- Mortgage/rent
- Loan/credit card debt repayments
- Car payments
- Groceries
- Health insurance/auto insurance/homeowner’s or renter’s insurance premiums
- Retirement plan contributions
- Other bills (Phones, internet, TV/cable)
- Subscriptions (Streaming services, meal kits, etc.)
- Medical expenses
- Long-term care expenses
Perform a retirement plan review
Is your retirement plan up to date? While your retirement plan might not need updating often, it’s still helpful to review it annually. When performing an annual retirement review, it’s helpful to check your retirement accounts and any other retirement savings you might have. This can help you:
- Ensure you’re on track toward hitting your retirement goals
- Determine whether you can contribute more/maximize contributions
- Discover if you can save money on management fees
- Shuffle your investments to match your goals and risk tolerance level better
Perform annual financial checkups
An annual financial checkup takes a full accounting of your finances to determine the overall health of your current financial situation. This can take a little time and effort, but the results give you a complete understanding of what you have now and what you can expect to have in the future.
The good news is both creating a budget and reviewing your retirement plan are part of an annual financial checkup. So, once you perform those first two steps, you’re already well on your way to a complete understanding of your finances.
Performing checkups like this can help you make adjustments to increase your current and future financial health—including during retirement.
Hiring a financial advisor can help ensure you don’t forget any accounts or income. They can also help explain the process and the eventual findings to you.
Which retirement plan should you choose?
When choosing a retirement plan, you have many options. Each has benefits and disadvantages, so your decision depends on your specific goals. Of course, you can have more than one plan to receive the benefits of each.
As always, I would recommend a retirement plan over a savings account. Though savings accounts come with interest rates that help them grow, these rates typically fall far below inflation. This means that, even with interest, the money in a savings account loses value yearly. However, a financial advisor can help you find alternative accounts that can help you earn more on your cash.
The two most popular retirement plans you can choose from are:
401(k) plans
401(k) plans are popular because they’re simple to set up and are widely available. They’re employer-sponsored plans, meaning many companies offer them to their employees—even those who work part-time. Their simplicity even helps small business owners offer employee retirement plans. All employees have to do is sign up and choose how much they’d like to contribute. Contributions typically get invested into a combination of stocks, bonds, and mutual funds.
401(k) contributions are made with pre-tax dollars. This offers two immediate benefits:
First, you don’t pay any income tax on your contributions. This helps your account grow more quickly.
Second, this helps lower your taxes each year you contribute to your plan.
Remember that any distributions you take during retirement are considered taxable income. So, you’ll have to pay income taxes on them at the end of the year.
IRAs
IRAs are Individual retirement accounts. There are several types to choose from, with Roth IRAs among the most common.
Roth IRAs are similar to 401(k)s and offer similar investment options. However, there are two primary differences:
First, they’re not offered by employers, so retirement savers must find and purchase a plan independently.
Second, contributions are made with after-tax dollars. While this means you’ll have to pay taxes on your income before contributing it to your plan, distributions during retirement are tax-free.
Though somewhat less common, you can also purchase a traditional IRA. Like a 401(k), contributions to a traditional IRA are made with pre-tax dollars. This offers the same immediate tax benefits as a 401(k).
Performing a rollover
Any time you leave an employer, you risk accidentally abandoning an employer-sponsored retirement plan. This is a common problem and results in a lot of lost income savings every year.
Rollovers can help transfer funds from an old retirement plan to one with your new employer. Because it concerns employer-sponsored plans, performing a 401(k) rollover is most common.
The process for a rollover is relatively simple. First, you contact your previous plan’s administrator and tell them you’d like to perform a rollover. They can either send the money directly to your new plan (a “direct rollover”) or mail you a check for the balance (an “indirect rollover”).
With an indirect rollover, you have 60 days to deposit the total balance into your new retirement plan. If you fail to complete the rollover within this time limit, it becomes an early withdrawal. This makes it subject to income taxes and hefty penalty fees.
