As you’re planning for retirement, you may think you have plenty of time to figure everything out. Especially if you still have decades before you can even consider retiring, it’s easy to push saving to another day down the road.
However, successfully preparing for retirement requires a lifetime of hard work. You’ll likely need to have several hundred thousand, if not upward of a million dollars, saved for retirement, and saving that much isn’t something that can be achieved in just a few years.
By the time you turn 40, you should be seriously thinking about retirement — even if it’s still decades away. And to make sure you’re on the right track, there are a few questions you should be able to answer.
1. What age do you plan to retire?
It’s a simple question with a complicated answer. It’s easy to throw out a ballpark number, like the traditional retirement ages of 65 or 67, but try to be as accurate as you can. The age at which you retire will affect the rest of your retirement, and it also has an impact on how much you need to save. And if you end up retiring even a few years too early, it could end up costing you.
For example, say you think you’ll retire at age 67, but you actually end up retiring at 62. If you’re spending even a conservative $30,000 per year in retirement, retiring five years early can cost you an extra $150,000.
Of course, no matter how much thought you give to retirement age, life can always throw a wrench into your plans. Nearly half (43%) of current retirees say they retired earlier than they planned, according to a report from the Employee Benefit Research Institute. The two most common reasons why workers retired earlier than anticipated were health issues and unexpected job loss due to changes such as downsizing or reorganization within the company.
While you can’t predict the future and can never know with 100% certainty when you’ll retire, you can plan for it the best you can. If you currently have health issues, for example, it may not be realistic to expect to work into your 70s or beyond. When you have an accurate idea of when you hope to retire, it will give you a better picture of how much you should be saving.
2. How much will you rely on Social Security benefits?
Many retirees are far too dependent on Social Security, and it’s not financially healthy. Roughly half of baby boomers say they expect their benefits to be their primary source of income in retirement, a survey from American Advisors Group found, and the Social Security Administration estimates that one in five married couples depend on their benefits for at least 90% of their retirement income.
In reality, your benefits are only designed to replace around 40% of your pre-retirement income. However, there is a chance that benefits could be reduced in the next few decades, so it’s extra important to not be too reliant on your monthly checks to make ends meet in retirement.
To get an estimate of what you can expect to receive each month once you start claiming benefits, create a mySocialSecurity account to see a snapshot of your future benefits based on your real earnings. Keep in mind that your basic benefit amount is based on your 35 highest-earning working years, so at age 40, you likely still have a lot of high-earning years left. One other thing to note is that your basic benefit amount is what you’ll receive if you claim at your full retirement age (which is either 66, 67, or somewhere in between depending on when you were born). Claim before or after that age, and you’ll receive less or more each month.
Once you have a rough estimate of what you’ll be receiving from Social Security in retirement, you can figure out how much you have to save on your own. It may be wise to be conservative with your benefits here and assume you’ll likely receive less than you think — it’s better to build a strong and healthy retirement fund and be pleasantly surprised with fatter benefits checks than to overestimate what you’ll receive each month and fall short on savings.
3. Are you doing enough to prepare for healthcare costs?
Healthcare is a significant expense that’s often overlooked when planning for retirement, and many workers don’t fully understand what they’ll be financially responsible for. Nearly three-quarters of older Americans admit they don’t fully understand Medicare, according to a survey from the Nationwide Retirement Institute, and 53% mistakenly believe Part B coverage is free.
Even with Medicare coverage, you’re still responsible for all premiums, deductibles, coinsurance, and copayments. In addition, Original Medicare (or Parts A and B) doesn’t cover prescription drugs or routine care like dental and vision. So you’ll need to pay extra for that type of coverage or enroll in a Medicare Advantage plan, which offers greater coverage but at a heftier price.
One other major expense Medicare won’t cover is long-term care, such as nursing home care. Someone turning 65 years old today has a 70% chance of needing long-term care at some point in their life, according to the U.S. Department of Health and Human Services, and those who require this type of care need it for an average of three years. Nursing home care is also incredibly expensive, and you can expect to shell out roughly $6,800 per month for a semi-private room in a facility.
Because healthcare expenses can take a huge bite out of your retirement budget, it’s important to consider how you’ll cover them long before you retire. Long-term care insurance, for instance, can help shoulder some of the costs, but you’ll need to enroll sooner rather than later for the best rates. A health savings account (HSA) is also a good option if you’re eligible by having a high-deductible health plan. An HSA allows you to invest tax-deductible dollars, let your savings grow, and then withdraw your money tax-free as long as it goes toward qualifying medical expenses. No matter how you choose to prepare, make sure you’re at least thinking about these costs now so you can save accordingly.
It’s never too early to prepare for retirement. In your 40s, you don’t have to know all the answers regarding your future, but you should start seriously considering whether you’re on track to retire. By planning for it now, your future self will thank you.
