As the old saying goes: Inch by inch, life's a cinch. Accomplishing any big goal—from losing weight to paying off debt—doesn't happen overnight. And hitting your retirement goal is no different. The key is breaking this massive task into bite-sized pieces, then making a realistic plan of attack.
Wondering if you're on track? Whether you're just starting out or in mid-career, here are four ways to be sure.
1. Figure out your goal.
There's no magic number; it’s all about ballparking how much money you’ll realistically need to live comfortably after you stop working. (Online retirement calculators can help you run the numbers.) One rule of thumb is to assume you’ll need 70 to 80 percent of your pre-retirement income to cover expenses once you stop working.
To fine-tune that target, deduct any forms of guaranteed income, such as estimated Social Security payments and pensions. Now multiply what's left by the number of years you plan to stretch your nest egg—and, voilà, you've got a goal. The next step is to make a plan for getting there.
2. Utilize tax-advantaged accounts.
Tax-advantaged retirement accounts put real muscle behind your contributions by helping you shield some, if not all, of your investment income from taxes.
A 401(k) is an “employer-sponsored” account, which means you only have access to one if your company offers it as a benefit. Many employers will match a portion of your contributions. If yours does, make sure to take advantage of this perk—it’s free money.
Another type of retirement savings vehicle is called an Individual Retirement Account (IRA), which is available to anyone with an income (or even a spouse with an income). Depending on your income and work status, you might have a traditional IRA, Roth IRA—or a SEP IRA (available to side giggers and other self-employed people).
If you have a 401(k) at work in addition to your IRA, don’t feel like you have to choose—use both to save for later. Many experts recommend first contributing enough to your 401(k) to capture any company match, then maximizing your IRA contributions before saving more in your 401(k).
3. Put your contributions on autopilot.
The golden rule of hitting a big financial goal is to “pay yourself first” by setting up automatic transfers from your paycheck or checking account to your retirement accounts. This way, your retirement money is out of your hands for safe keeping—no willpower required. (And there are penalties for withdrawing that money from your traditional or SEP IRA before age 59 ½. You can withdraw contributions from your Roth IRA penalty-free, but you’ll miss out on gains.)
4. Build a strong financial foundation.
Once you’re chugging along toward your retirement goal, make sure you’re working to put out any other financial fires in your life that could derail your good habits in the future.
High-interest debt is the one that’ll cost you the most over time, so creating a plan to pay down your balances can go a long way. (Automation can help you here, too.) Building up an emergency fund is the other side of the financial health coin. If you don't have this safety net, an unexpected expense will likely nudge you into a new debt cycle, which can derail your retirement contributions over the long haul.