Whether retirement is only a few years away or several decades, there are things you need to do to get ready. The earlier you start planning for retirement, and the quicker you start saving, the better off you will be. And regardless of where you are in your journey, it’s never too late to start saving for a better future.

Step 1: Breathe.

Retirement planning can be overwhelming. You can have thoughts such as “There’s no way I can ever retire” or “I am so far behind, it’s impossible to catch up!” These thoughts are normal! Money can be very stressful and life really likes to get in the way, sometimes. Take a breath. There’s nothing you can do to change the past and worrying about it won’t help you get ahead. Instead, realize that you’re in the same position as millions, if not billions, of other people. But, you can start taking the steps needed to improve the future today.

Step 2: Build a safety net!

Even the best-laid plans will suffer from hurdles and detours along the way. The loss of a job, unexpected medical expenses, a broken-down car–any of these can impact your retirement planning. Chances are these will happen when you are least prepared to handle them. If you don’t build up your emergency fund first, you’ll be tempted (or forced) to dip into your retirement savings to take care of the current emergency. Robbing Peter to pay Paul is extra damaging to your retirement. You lose a substantial amount of interest and long-term returns on investments while you use that money for short-term expenses. It can result in a drastically reduced retirement income.

Your emergency fund should represent at least three months of your expenses, but preferably closer to 6-12 months. We’re not talking your full salary, here, but rather, your core expenses–things like your house payment, car, food, and basic utilities. This safety net will help keep you on-track for retirement by avoiding dipping into your funds for later in life.

Keep your emergency fund in an easily accessible account. A good option is a high-interest savings account, so you can quickly get to your money when you need it. Our top choices are Ally Bank and Synchrony Bank, but check out the best high-interest savings accounts for other options.

Step 3: Pay off debt.

Now that you’ve built up a rainy-day fund, you should be in a better position to avoid accumulating more debt. It’s time to start paying off your debt from the past. Contributing to retirement accounts is great, but you probably pay high interest on your debt. So, before you start contributing to retirement, get that debt under control. Focus on paying off high-interest credit cards and loans. Some debt, such as mortgage loans, are actually “good debt” which you want to keep around. But all of the bad debt that is really just you giving money away to banks needs to be reduced.

Consider consolidating your high-interest credit cards into a low-interest credit card or personal loan. Make more than the minimum payment on each account. If you have expensive student loans weighing you down, especially if the interest rate is sky-high, now’s the time to refinance them to a lower fixed rate.

Step 4: Maximize your employer’s matching contributions.

Free money is a real thing! A lot of employers offer matching programs on their retirement accounts, such as 401(k) or IRAs. Employers usually structure matches such that they will match a percentage of your contributions up to a specific portion of your salary. For example, they may match 50% of your contributions up to 6% of your salary. So, for every dollar you contribute to your retirement, your employer throws in some free money as well. If you’re not adding at least enough money to get the full match, you need to increase your contributions today.

These matching contributions are part of your total compensation plan, but if you don’t take advantage of them, you lose that money forever. Find out from your plan administrator or Human Resources what the retirement plan is and what the matching contributions are. Then, adjust your contributions as needed.

Step 5: Build your IRA.

An Individual Retirement Account (IRA), is an account set up at a financial institution that lets you save money towards retirement in a tax-free or tax-deferred way. Unlike your 401(k) or similar employer retirement plan, you can open an IRA virtually anywhere. And because these institutions are competing for your business, many have lower fees compared to an employer-sponsored plan. These lower fees can magnify your returns over time.

The two primary types of IRAs are:

• Traditional IRA – Your contributions may be deductible on your tax returns and earnings can grow tax-deferred until retirement. Many people fall into a lower tax bracket during retirement. Depending on what tax bracket you’ll be in, you may pay fewer taxes on your withdrawals.
• Roth IRA – You contribute money on which you’ve already paid taxes. Because of this, you can grow your earnings tax-free and withdrawal tax-free in retirement.

Which one is right for you comes down to determining what you think your taxes will be in the future. With a Roth IRA, you get a bonus of being able to take a withdrawal of contributions tax- and penalty-free. This can make it less detrimental if you quickly need more money then you have saved in an emergency fund.

Our top choice for an IRA is Vanguard. With a wide variety of funds and asset classes to invest in, along with low fees and top-notch features, Vanguard sets the bar high for the competition.

Step 6: Maximize your individual contributions.

You have a cushion for unexpected expenses. Your debt is under control. You’ve got an employer-sponsored retirement plan where you’re earning the full match. You have set up an IRA to supplement your retirement savings with low-fee funds. AWESOME JOB!

Things are beginning to look up. You can now focus on putting as much money as possible away for retirement. That nest egg is going to start growing rapidly! Help nurture it by working towards contributing the maximum to each account. As of 2019, the limits for contributing to a 401(k) plan increased to $19,000 per year. The IRA limits also saw an increase to $6,000 per year. The more you contribute early on, the more you’ll see returned later in life.

Step 7: Live within your means.

“Beware of little expenses; a small leak will sink a great ship.”

-Benjamin Franklin

As life progresses, you’re bound to start earning more money than you did previously. As you get promotions and raises, and as you move jobs or change careers, focus on adding more of that money to savings and retirement. It’s tempting to spend more money as you earn more money, but that only hinders your financial position. Eating out more frequently, buying more expensive cars, taking more trips, purchasing larger TV’s–these all eat away at your retirement.

We’re not saying you can’t celebrate your achievements. You absolutely should treat yourself every once in a while. Just don’t increase your expenses in line with your income. Make sure you pay yourself first (by saving), and then you know where you stand with “fun money.” As you begin to earn more money, you should begin putting a higher percentage of your income into savings and investments.

Step 8: Diversify your income.

Working for a paycheck is what most people do. But then again, most people are ill-prepared for retirement. You are at the mercy of the economy, your industry, and your employer. This is still where most of your money is coming from, but that doesn’t mean it should be the only place your money comes from.

Recessions happen. Lay-offs are a reality. Even a bad management decision could result in you losing your job. Many of these things are outside of your control. Stop putting all of your eggs in one basket and find a way to bring in some alternative revenue streams.

If you’re creative, open an Etsy shop. If you like to write, consider starting a blog. Have specialized skills? Try consulting. Build up your side gigs and diversify your income stream. Having some options on the table for where your income is coming from will help you avoid dipping into your savings during a downturn. It also might open you up to a different vision of what retirement means for you. Perhaps the “live on a beach and travel the world” retirement isn’t really what you’re after. Maybe you really want to just stop working for someone else and want to start working for yourself.

Step 9: Rebalance to minimize risk.

Market conditions change over time. Like the ocean’s waves, there are ebbs and flows. Certain industries or asset allocation sectors may become more or less valuable as time progresses. Your portfolio can begin to see the percentages of your assets becoming too highly concentrated in one area. Because diversification is key to maintaining a stable portfolio, this concentration can increase your risk for losses.

Periodically, you should rebalance your portfolio to maintain the concentration that matches your risk tolerance. Many services offer automatic rebalancing to help you accomplish this. If not, taking a look at your holdings around once per quarter isn’t a bad idea.

Step 10: Detach from emotions.

Money can stir up all sorts of emotions. When you add this on to anxiety about the future, you can get into a dangerous mindset. The stock market naturally has ups and downs. If you overreact to a market downturn, you’ll end up pulling money out when its at a low point. As you see things going extremely well, you’ll put money in at a high point. This is exactly the opposite of the “Buy Low/Sell High” concept. Unfortunately, it happens all too often.

You can’t effectively time the market. Traders on Wall Street try to do this, and even they fail at it. Instead, focus on making continuous deposits to your savings and retirement accounts. Maintaining a steady stream of savings over the long-term will almost certainly result in better returns than trying to time your deposits. This dollar-cost averaging approach is one of the simplest and most effective strategies there is. Step back and let your good planning do it’s job!

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