Like most people, you probably have a vivid, exciting picture of what your ideal retirement will look like. Maybe it’s spending time with family at a beach house, crossing off the books that have accumulated on your to-read list, or finally being able to volunteer enough of your time to make a difference for your favorite charity. But there’s no doubt that the journey to retirement is long and winding – and, as with any journey, you’ll encounter challenges along the way before arriving at your desired destination. Adopting good financial habits is a must for plotting a successful retirement journey. Let’s explore five positive financial habits to get – and stay – on the right track.
- Create a Budget
As a first step in creating new positive financial habits, it’s critical to determine how much money you have to work with each month and what you spend it on. Then, devise a budget based on those factors. Writing down your monthly expenses – or entering them into a spreadsheet or budgeting app – will clarify what your monthly income actually pays for.
Being able to decipher needs from wants is essential. Needs are necessary expenses, such as housing, food, utilities, and transportation. If you couldn’t pay for those, you would be in a serious bind! On the other hand, wants are $7 gourmet lattes, frequent streaming purchases, or vacations at luxury resorts that you could forgo.
Determining what you need versus what you merely want takes discipline, but it’s a key attribute of effective saving. You may be surprised at how quickly the cost of nonessential items adds up! And seeing those expenses on paper creates the accountability and motivation you need to commit to getting serious about a budget.
- Understand the Reality of Future Health Care Expenses
Having a realistic estimate of the health-related costs you may incur during your retirement is a critical item to cross off your preretirement planning list. Why? Because out-of-pocket health care expenses can eat into your retirement savings or, even worse, stunt your efforts to save. Several free online calculators can help you arrive at a reasonably reliable number and give you a target by which you can choose the most appropriate health care savings offering.
A common misconception is that Medicare, the federal health insurance program that kicks in at age 65 will cover your total health care costs when you retire. Medicare typically pays only about 60 percent of a retiree’s health care costs. Further, basic Medicare doesn’t cover some much-needed services, such as routine dental and vision care, hearing aids, and long-term care. You can plan for the future costs of health care by investing in a health savings account or obtaining a long-term care policy. These options could save you money in the long run!
- Start an Emergency Fund
Would you be surprised to know that 4 in 10 adults would be poorly prepared to pay for a$400 emergency expense? Having an emergency fund—a stockpile of money set aside to cover unexpected expenses such as car repairs or a broken refrigerator—will help you breathe easier during stressful times. An emergency fund can also help you pay for essential expenses without needing to dip into your retirement accounts or put a stop on saving. Ideally, your fund should have enough cash to cover three to six months of essential living expenses (such as those described in “Create a Budget”). That may sound like a lot of money, but if you commit to putting a little away at a time (e.g., $25 per week), saving becomes more attainable, and your long-term retirement savings goals can remain on track.
- Take the First Step Toward Controlling Your Debt
It’s a well-known fact that most Americans struggle with debt. And debt is a major driver of stress: research has shown that 64 percent of adults report feeling significantly stressed about money. When it’s a struggle to make the minimum payments on monthly credit cards, mortgages, or student loans, finding extra dollars to save for retirement can be a daunting task. How you accumulated your debt doesn’t matter; focus on how you’ll free yourself of it. Resolve today to take the first step toward controlling your debt. There are several tried-and-true methods for paying down debt, but most begin with having a solid debt-reduction plan and sticking with it. Not sure where to start? A financial advisor or a credit counselor can help you see the light at the end of the debt tunnel.
- Put Savings on Autopilot
When faced with difficult decisions, human nature often dictates that we make no decisions at all. That theory rings especially true when finances are at the heart of the decision-making process. If that sounds like you, try this: make your savings process automatic.
For example, when you enroll in your company’s 401(k) plan, participate in the automatic-increase program – that’s where the amount you contribute to your retirement account automatically increases each year incrementally, usually by an amount so small (such as 1 percent) that you’ll barely even notice. Or, you can have your paycheck direct-deposited and set up multiple subaccounts or buckets for various expenses or savings goals. Again, not having those dollars burning a hole in your pocket will make it much easier to save and accumulate money over time.
Authored by the Retirement Consulting Services team at Commonwealth Financial Network. | © 2021 Commonwealth Financial Network®