Since retirement planning necessarily incorporates a number of variables, it can be difficult to nail with exact precision. Two of the most important of these, your life expectancy and your return on investment, can at best be “estimated,” which means you’ll want to leave plenty of room for error.
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However, there are many steps you can take that have more certainty and can help ensure that a retirement crisis doesn’t happen to you. Here are the most important.
Save as much and as soon as possible
Ultimately, the best way to avoid a retirement crisis is to build up as big of a nest egg as possible. While not all of the factors are in your control, one of them is the most – and that’s saving as much as you can as soon as possible.
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The simple reason behind this is that compound interest works better over longer periods of time. If you start saving $200 a month at age 20, for example, you could end up accumulating nearly twice as much at age 65 than if you had started at age 45, even if you put in $1,000 a month at that age. .
Starting early and saving as much as possible is the best way to build a big nest egg and protect yourself from a future retirement crisis.
Avoid investing too cautiously
It’s a common mistake to think that when you retire, you should swap all of your investments for treasury bills and other conservative investments. While it’s true that you shouldn’t put all your nest egg into bitcoin and other speculative activities, it’s also true that you can be retired for 30 years or more.
Over such long periods, your portfolio can survive a few dips, with plenty of time to recover. You will also need growth investments to help counter the effects of inflation during this period. However, choosing the right balance between risk and reward is a tricky proposition. You will need to explicitly determine your investment objectives and risk tolerance and discuss your situation with a financial advisor.
Have a Social Security Claim Strategy
Social Security is not intended to fund your entire retirement, but it remains an important part of your nest egg. The average benefit for all retired workers in 2023 is $1,827, which is still $21,924. That’s a significant boost to most retirees’ income for the year, and it can help stretch your total nest egg significantly.
However, the actual amount you will receive from Social Security depends on both your work income and the age at which you apply for benefits. Since the Social Security Administration uses your best 35 years of earnings to calculate your benefits, you’ll want to make sure you work at least that long and don’t take any zeros in that calculation.
You will also want to consider whether you should collect your benefits at age 62, 70, or some other age in between. Taking your benefits earlier will provide you with more checks but lock in a reduced monthly payment. Conversely, waiting until age 70 will increase your checks by 24% compared to a draw at full retirement age of 67, but you’ll have to wait longer. Which option is right for you will depend on a number of factors, from your personal financial situation to your current health and life expectancy.
Consider a lifetime income
Buying an annuity isn’t for everyone, and you should speak with your financial advisor if you’re considering one. But one of the main benefits an annuity can provide is a guaranteed income stream for life. If you’re worried about outliving your money, you can ease that fear by choosing an annuity that will pay you income for as long as you live. But be sure to talk to an expert before investing to understand the pros and cons of annuities.
Anticipate changes and surprises
One of the best ways to avoid a retirement crisis is to prepare for the unexpected. Although you can’t always know exactly what retirement has in store for you, preparing for it as much as possible is a prudent approach.
For example, it is quite possible that you will be forced into early retirement, whether due to illness or corporate restructuring. The sooner you can build your nest egg, the more prepared you will be for this type of circumstance.
You should also plan ahead for a changing budget after retirement, especially a budget that includes higher health care expenses. Depending on your lifestyle, you can also plan ahead for higher travel expenses or an extra budget for gifts and charity.
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This article originally appeared on GOBankingRates.com: How to avoid the retirement crisis