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Retirement isn’t something that’s just going to happen one day – you need to think about what steps you can take today to retire successfully. If you ever hope to cut ties with work and live off your life savings, then you’re going to need to build up a pretty big nest egg starting ASAP.
I’ve read dozens of books and probably thousands of articles on how to retire successfully. And you want to know what? A lot of them have some pretty themes.
In this post, I’ll summarize these themes for how to prepare for retirement into 11 actionable steps that you can use to jump-start your retirement planning efforts starting today.
1. Have a Vision of What Retirement Life Will Be Like
I remember when I was younger thinking that retirement was this far-off, abstract thing that only people my grandparent's age should be concerned about. But then I started to think about what my life would be like when I retired, and suddenly the concept started to feel “real”.
Think for a minute about what you would do if you no longer had to go to work. With your new-found time, you could:
- Travel the world
- Spend more time with your loved ones
- Pursue a hobby that has always interested you
- Start a business
Your vision of retirement should serve as your motivation. It should be what keeps you going even when you don’t want to. In addition, none of us know what the future may hold. If our health takes a turn for the worse or something else prevents us from working, we’ll need to prepare for that. Goodness knows that if you or a loved one faces health issues as you get older, you should not have to continue working. What will life look like then?
Remember to discuss your vision openly with your partner. It’s important that the two of you get on the same page and find ways to make both of your visions for retirement come true.
2. Define a Specific Goal
When it comes to retirement planning, it’s simply not enough to just say “I will retire someday”. Statements like this are far too vague to be achievable.
So the question is not just “how to retire successfully.” Start with how you would like to retire. To what extent do you want to enjoy financial freedom in your golden years? No matter what vision you have in mind, it’s necessary to clearly define your goals, strategize accordingly, and commit to the defined plan.
Instead, productivity experts recommend that we should make what’s known as SMART goals. SMART stands for: Specific, measurable, achievable, relevant, and time-bound.
For instance, saying something more descriptive such as “I will save up $1 million and retire by age 55”. is far more specific and gives you a clear target to work towards.
It doesn't matter what your SMART goal is. What’s important is that you make one so that you can start laying out a plan for how to get there.
When you have clearly defined goals in mind for how to retire successfully, and you’ve made a firm decision to attain those, you’ll feel naturally more and more inclined to set aside a bigger proportion of savings each pay period to reach your goal faster or even set higher retirement benchmarks for yourself once you get there.
3. Start Contributing Now
When starting a good habit, it’s natural to want to procrastinate. Many of us are quite familiar with the natural tendency to make excuses and promise to start “later” whether it is going to the gym, acquiring a new skill, or saving for retirement. In your youth, you may feel that you have more than enough time at your disposal to think about how to retire successfully and that you can always start later.
But the truth is, the years go by fast and as the responsibilities pile up, it’ll get harder to save a portion from your monthly paycheck. The only way to get around this challenge is by making a firm resolve to start contributing now, no matter at what age you are.
And, If there’s been one other thing that has helped my retirement nest egg to flourish, it’s the power of compounding returns.
Compounding returns are when the earnings you’ve made off of your investments start making earnings themselves. Over a long enough period, they can really start to take on a life of their own!
For example, if you started investing $10 per day at age 18 and then stopped at age 40, then you’d have $80,000, right? Nope. Thanks to compound interest, you’d actually have $178,873 (assuming 7% growth). Then, even if you never touched that money again, it would have the potential to grow to over $1 million by the time you're 65!
To harness the power of compounding returns, you have to give them time to do their thing. That's why if you haven't started contributing to your retirement plan already, you should start now. One extra year now could equal out to hundreds of thousands of dollars in the future.
So the answer to “How to retire successfully?” is very simple: by leveraging compound returns and starting as early as you can!
4. Invest Aggressively
I had this coworker who told me once how he thought his 401k was a joke because it hadn’t grown in years. When I asked him how much of his portfolio was in stocks, he said “none” – I’m scared of them.
Sorry, but if you want to optimize your nest egg for the greatest returns possible, then you're going to need to get comfortable investing in stocks. Stocks have classically returned a much higher rate of return as opposed to other types of assets such as bonds (typically 10% versus 6%).
The good news about stocks is that you don’t have to pick individual ones to invest in them. Most retirement plans have simplified the process by letting you select simple index funds that automatically let you invest in hundreds of stocks all at once.
5. Get Your Full Employer Matching
Believe it or not, your employer wants to pay you to save for retirement. This is something called 401k employer matching contributions, and if you’re not taking advantage of them, then you’re simply passing up free money.
Although each one is unique, a common 401k employer matching plan is to give one dollar for every dollar that you contribute; up to some percentage of your salary.
For instance: Let’s say you earn $60,000 and contribute 10% of your paycheck to your 401k. If your employer matches dollar for dollar up to 5%, then this would mean:
- Your bi-weekly 401k contribution per paycheck (26 pays) = $230.77
- Your employer 401k matching contribution = $115.38
If you're not taking advantage of this, then you need to start right away. Trust me – it will be the easiest money that you've ever made in your life. Ask your HR department for the details.
6. Challenge Yourself to Increase Your Retirement Contributions Every Year
Saving more than a few hundred dollars per month for retirement used to feel like a stretch. Then one day when I got a raise, I realized that this was a golden opportunity.
I had never had this extra money before, and I certainly wouldn’t miss it if it never made it to my paycheck. So I did the smart thing and bumped up my 401k contribution instead.
After doing this for several years in a row, it wasn’t long before I was contributing all the way up to the entire IRS max of $19,500 (as of 2021).
7. Keep Lifestyle Inflation at Bay
Another way to answer the question “how to retire successfully” is: curb lifestyle inflation! Have you ever known someone who buys a bigger house or fancier car every time they get a higher paying job? That’s something called lifestyle inflation. And while it's nice to enjoy the fruits of your labor, lifestyle inflation can become a major hindrance to your retirement saving efforts.
Incorporate the habit of saving to the point that you only ever spend what’s left after saving. While you don’t have to decline yourself of every want or desire in your lifeto retire successfully, it’s important to stay focused on your end goal and keep in mind that saving is an immensely rewarding habit.
If you haven’t started saving yet, remember it’s never too early or too late to start. Or if the concept of saving feels alien to you, start by saving what you can and then make gradual steps to increase your savings every month.
You’ll soon get accustomed to the habit and when you see how compounding can help you accrue high returns on your savings if you start early, you’ll feel motivated enough to save more and more with each passing month.
One of the most useful tips for retirement savings for those who find it hard to save is setting up an automatic debit or payment to contribute towards your savings. This way, you’ll resist the urge to spend more and save less, and after a while, saving will become an unconscious act on your part.
Part of what’s kept our savings on track is that as our income has continued to rise, our spending has stayed consistent. That means every year we have more money left to put away towards retirement.
You can do the same. By staying disciplined and keeping your spending habits tamed, you’ll be amazed at how much extra you’ll have to stash in your nest egg year after year.
8. Don’t Sabotage What You’ve Already Accomplished
One of my buddies asked what I thought about him taking out a $50,000 loan from his 401k. I told him it was a good idea as long as he planned on working another 10 years or so to build back up his nest egg.
Your retirement savings are meant for retirement. Every time you think about using that money for something else or even reducing your contributions, go back to your vision. Remember why you’re saving: it’s to retire successfully. As such it should be one of your top financial priorities.
9. Remember to Factor Social Security into the Equation
Does your retirement savings goal take into account the money you’ll receive from Social Security? If it doesn’t, it should.
Don’t listen to the nay-sayers when they pooh-pooh Social Security. Yes, it’s had some issues, but Social Security isn’t going away any time soon.
Even if your benefit was only $1,000 per month, that’s like having saved an extra $300,000 in your nest egg (using the 4 Percent Rule for retirement). You can calculate how much you might receive using the Retirement Estimator from the official Social Security website. This will take into account your actual personal information such as employment history, earnings, marital status, etc.
10. Optimize Your Tax Bill
Building up a nice, huge nest egg is a great goal. But you want to know what would be even better? Not having to pay taxes on your income when you retire someday! Yes, if you’re thinking about how to retire successfully, it’s not just savings but also taxes that should be factored in.
Because most retirement plans (401k, 403b, traditional IRA) are tax-deferred, the IRS will most definitely have their hand out once you start making withdrawals. That’s why, when you’re thinking about how to retire successfully, it’s important for you to also be thinking strategically about how you can reduce your tax bill as much as possible.
A good place to start would be to utilize a Roth IRA where withdrawals are tax-free after age 59-½. Relying on capital gains and dividends is another useful strategy because the taxes are much less than what you pay on ordinary income (a maximum of 20% versus 37%).
The tax laws can be complicated. To get some solid advice, be sure to speak with a tax professional about the best options for your financial situation.
11. Stay Engaged
If there’s one thing that’s helped build my nest egg, it’s the fact that year after year I stay engaged in what’s going on.
I’m amazed at how many people will go months or even years having no clue about how their investments are performing or if their retirement savings are on track. That’s why if there’s one piece of advice you should take away from this post, it's to stay on top of what’s going on in your finances and always be asking yourself what you can be doing to make it better.
And remember that yes, it will take some work. But this is why you created your vision and SMART goals. There is no point of going through the entire planning of how to retire successfully and what steps you can possibly take to get there if you’re not going to stick to them for the long-term. This is why you started investing as early as possible, practicing frugality, and began thinking about things like taxes and Social Security.
It's your retirement. And if you want it to be the best that it can be, then you’ll want to be as active in it as possible. Because no one should want your retirement to be successful more than you.
Contributor’s opinions are their own. Always do your own due diligence before investing.
- The Importance of Starting Retirement Planning Young
- Understanding 401k and IRA Retirement Plans
- How Can You Retire Without a Nest Egg?