How to Financially Prepare for Retirement

When it comes to retirement, many dream of stress-free living with more time for the people and things they love, but that goal is just a dream without preparation. Fortunately, with the proper planning, you can live the retirement of your dreams. Use our retirement planning checklist to prepare for a lifestyle that’s active, fulfilling, and financially stable.

Preparing for Retirement Checklist

Contribute to 401k or IRA.

The most common way to prepare for retirement is by making regular contributions to a 401k, IRA, or both. If you’re employed, find out if your employer offers a retirement savings plan, like a 401k. Automatic payroll deductions automate your savings, and many employers provide matching or partial contributions. Beyond saving for retirement, the money you contribute to a 401k lowers your taxable income today. Read more about the benefits of 401ks.

If your employer doesn’t offer a 401k or you’re self-employed, contributing to an IRA is another way to save for retirement. Depending on the type of IRA you open, you can enjoy tax benefits now or in retirement. At FirstCapital Bank of Texas, we offer Traditional, Roth, and SEP IRAs, and we can help determine which account is best for your financial situation.

Pay off debt.

Paying off debt can seem daunting, but it is possible, and you’ll be glad you did before retiring. Start by paying off higher interest rate debt, like credit cards, personal loans, and auto loans. These debts have no tax benefits and eat through savings fast, so you don’t want them following you around. Then, focus on paying down your mortgage. While it’s ideal to be debt-free, having a mortgage payment in retirement is not uncommon, and it can offer tax benefits.

You may be tempted to “borrow” money from a 401k or an IRA to pay down debt, but that’s almost always a bad idea: You’ll owe taxes on the money, and if you haven’t reached age 59½, you’ll owe penalties. Sometimes it’s best to work another couple of years to pay off debts for more flexibility in retirement. Another option: Consider consolidating your higher interest debt with a home equity loan. Secured by your home, its rates are typically lower than unsecured loans, and it also may offer you tax advantages.

Understand Social Security benefits

Most Americans expect Social Security benefits to be a key source of income in retirement. On average, eligible retirees receive 40% of their pre-retirement income from Social Security benefits. Take time to understand the application process and how much you’ll be eligible to earn before retiring. Visit the Social Security Administration website to access these retirement planning resources.

Build an emergency fund.

Many people have an emergency fund where they keep money for life’s unexpected events—usually enough to cover three to six months of living expenses. In retirement, it’s best to keep a larger fund. A retirement emergency fund should cover at least 12 months of expenses. While it may seem excessive, it offers added security and peace of mind.

In addition to covering unexpected costs and medical emergencies, your fund can be a tool in the event of an economic downturn. For example, in a recession, you can access your emergency fund instead of your retirement account, giving the investments in your portfolio time to recover.

Ask questions.

Defining what your retirement looks like can help determine how much money you’ll need to support that lifestyle and if you’re ready to make the transition. Start with these questions:

  • How do you want to spend your time, and what do you want to do? (Volunteer work, family, hobbies, travel, etc.)
  • Are you eligible for Medicare? If not, how will you handle medical insurance?
  • Where will you live? Will you move or downsize your current home?
  • If you have a partner/spouse, will you retire together or at different times?
  • What does your monthly budget look like in retirement? Define budgets for household finances vs. personal money, i.e., needs vs. wants.
  • How much do you anticipate spending annually, and how long will your current retirement savings last you?

If you need help financially preparing for retirement, turn to a trusted financial partner. At FirstCapital Bank of Texas, we’re always ready to work with our customers to help them achieve their financial goals—now and in retirement. It’s another way we put you above all. If you need guidance in preparing  for your retirement or need a trusted partner in building a retirement portfolio, contact us.