How Do I Retire? 6 Steps to Help You Prepare for the Future

If you’re wondering, how do I retire in Illinois or elsewhere in the country, this article is for you! From where to stash your retirement nest egg to how to figure out when to retire and how to budget for life on a fixed income, we break down the 6 steps you can take now to prepare for a successful retirement.

Start saving immediately!

While it's never too early to start saving for retirement, you can reach a point where it's too late to build a meaningful nest egg. That’s why the sooner you get serious about saving, the more time you’ll have to let your money grow and accrue interest. This will pay off in spades when you're ready to retire. So, where should you put your retirement savings? There are several options:

401(k) account

If your employer offers a 401(k) account, you should definitely sign up and contribute at least enough to get the full match your employer offers, which is usually up to a certain percentage of your salary. You may also be able to turn on an automatic annual increase for your own contribution, which is an easy way to gradually increase your savings without thinking about it. As of 2021, the annual limit on employee contributions to a 401(k) is $19,500. People aged 50 and up can make an additional $6,500 “catch-up contribution.” 

Individual Retirement Account (IRA)

An IRA account is great for self-employed folks and anyone else without an employer-sponsored retirement account. You can also use your IRA in addition to your employer plan to increase your tax-advantaged retirement savings. When choosing an IRA account, you can opt for the Traditional IRA, which allows you to save pre-tax dollars and reduce your overall taxable income, or the Roth IRA, which allows you to save post-tax dollars and enjoy tax-free withdrawals in retirement. As of 2021, the annual limit on employee contributions to a Roth or Traditional IRA is $6,000. People aged 50 and up can make an additional $1,000 “catch-up contribution.” 

Beyond these tax-advantaged retirement savings account options, you can diversify your pot of money with other types of interest-earning savings accounts such as Money Market accounts, CDs, or taxable investment accounts. After all, once you actually retire, you’ll need to divide your total retirement savings into three buckets: one for everyday expenses, one for longevity, and one in the middle to serve as a go-between to replenish the first bucket.

Consider how much money you’ll need

When it comes to planning for retirement, the big unknown is how long you’ll live after you leave the workforce. While you can’t look into a crystal ball to find the answer, you can at least use the average U.S. life expectancy to guide your planning. According to the most recent data, 77.8 years is the average life expectancy across the population. Men, as a group, have a slightly lower average of 75.1 years, and women’s is slightly higher at 80.5 years. The Social Security Administration offers its own resourceful life-expectancy calculator to provide you with estimated scenarios by factoring in your gender and date of birth.

EPIC, our Trust and Investment Services partner, also offers a variety of calculators to help you accurately estimate the longevity of your retirement savings, contributions, and much more. Check out EPIC's retirement calculators here.

The other variable with retirement is the age you step away from your career, which isn’t always in your control. Many people aim for 65, which is when eligibility for Medicare begins, or 67, which is when people born after 1960 can collect their full Social Security benefit. But what if you get laid off a few years before your planned retirement and can’t get back into your field at the same salary/job title? Health issues are another common reason for retiring sooner than planned. It could be your own health that forces your retirement, or the need to take care of an ailing spouse or another relative.

When you envision your retirement, where do you see yourself living? How much do you want to travel? Do you think you’ll continue working part-time or as a freelancer/consultant? Is there a business you’ve always dreamed of starting, such as opening a coffee shop or small retail store? Your answers to these questions will determine what your financial number is. Need help thinking through and identifying your retirement goals? Contact our Trust and Investments team to schedule a consultation regarding your personal financial planning.

As a baseline target, aim to have about 80% of your pre-retirement salary. This can come from a variety of sources, such as social security income, withdrawals from your retirement accounts, and more. So, if you currently bring home $5,000 a month, you’d want to live on $4,000/month in retirement. This assumes lower expenses in retirement, such as less spending on commuting and work clothes, a paid off house, etc.

Create a retirement budget

Budgeting is important at every stage of life, and it's no different after you've retired. In fact, budgeting could be said to be even more vital to a successful retirement. When you’re living on a fixed income, you can’t afford to mess up and overspend. If you don't have an influx of cash, you’ll need to budget carefully and be very mindful of your spending habits. A budget also helps you remain vigilant about where and how you choose to spend your money. If you have post-retirement financial goals, such as buying a second home or starting a business, you should also factor these goals into your budgeting process. Finally, think about long-term care and medical needs when determining your budget.

Estimate your Social Security benefits

The purpose of Social Security is to replace a percentage of your pre-retirement income based on your highest 35 years of earnings. Contrary to what you may assume, the Social Security taxes you pay while working aren’t set aside in a personal account for your future use. Instead, your payroll taxes go into a pot of tax money for paying current benefits to eligible Americans. 

Because Social Security usually doesn’t pay that entire 80% of your pre-retirement income mentioned earlier, it should be part of your retirement plan but not the only part. The age at which you start taking benefits also determines how much you receive. Check your full retirement benefit age by the year of your birth and estimate your retirement benefits. Having a figure to work with can help you work out other retirement goals, such as how much you need to save. 

Determine your housing costs

If you are planning to move, try to minimize what you spend on your new home. It’s best to have any home loans paid off before retiring so that you can reduce your monthly expenses. If you are downsizing, try to pay off your mortgage as soon as possible so that this isn't a drain on your retirement savings. Use the funds you get from selling your old property and put this toward paying off the new one.

Of course, there are also property taxes to factor in, as well as HOA fees if applicable. And if you are a renter instead of a homeowner, you can factor in your monthly rent, leaving room for potential future rent increases. 

Consider healthcare needs

Medicare is a federal health insurance program that offers premium-free Hospital Insurance, Medical Insurance with a standard monthly premium of $144.60, and Prescription Drug Coverage that varies in cost.

It’s important to know that there are out-of-pocket costs, such as premiums, associated with Medicare, and that it doesn’t cover everything you may need as you age. For example, Medicare doesn’t cover long-term care, most dental care, hearing aids, and more. So, you’ll need to factor healthcare costs into your retirement planning. 

We’re here to help!

Retirement and financial planning are not just for those with money to spare. Our Trust and Investments experts bring more than 80 years of combined personal and business banking experience. We can help you set and plan for your retirement goals, regardless of your current budget. Contact us today to schedule a consultation!