Dave Ramsey, financial guru and founder of Ramsey Solutions, has a very simple approach to retirement planning. Save consistently, avoid (or get out of) debt, invest wisely and view retirement from a long-term perspective.
While this might seem like common sense, Ramsey’s financial tips posted to his blog can save retirees (and most anyone else) from financial disaster.
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Retirement planning begins with setting your retirement goals. But only about 52% of people have taken the time to calculate how much they need to retire comfortable, according to the 34th Annual Retirement Confidence Survey (RCS) conducted by the Employee Benefit Research Institute (EBRI) and Greenwald Research.
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If you’re in the early phases of retirement planning, ask yourself these questions posed by Ramsey:
When do you want to retire?
What do you want to do in retirement?
How much money do you need to have saved by the time you retire?
How much should you invest each month to achieve your retirement goals?
Which investments and retirement accounts should you pick?
How can I prepare for medical and long-term care expenses?
You should have a clear picture of what your ideal retirement lifestyle will look like as this will help motivate you to achieve your goals.
Ramsey suggested investing 15% of your gross income in good mutual funds, something you can do through tax-advantaged retirement accounts like an IRA or 401(k).
The reason for the 15% goal is simple. It’s high enough to make serious progress toward your retirement goals, while leaving some room for you to work on shorter-term financial goals.
Say you earn $100,000 a year (gross) and invest 15% ($15,000) in mutual funds with an average annual return of 8%. After 25 years, you’ll have just shy of $1.1 million — and that’s assuming you never increase your contribution amount.
If you’re closer to retirement, prioritize saving and investing as much as possible. You might not have as much time, but large contributions can go a long way to protecting you financially.
Ramsey is a huge advocate of debt-free living. As part of his 7 Baby Steps program, he advised paying off all your debts (aside from your mortgage) early on. Before retiring and ideally months or even years ahead of time, pay off your house.
Depending on where you’re at on the path to retirement, you might need to push back your retirement plan a little. It’s not ideal, but it’ll be a life-saver in the long run.
If you feel like you’re behind on your retirement savings, Ramsey shared the following suggestions in one of his other blog posts.
Max out all of your retirement accounts
Find ways to cut monthly costs and save the excess (or use it to pay off debt first)
Look for ways to increase your income (and invest the extra)
Push back retirement by a few years as you work on your investments and savings
Pay off your mortgage as fast as possible
Keep working after paying off your mortgage and invest the money you would have paid in good mutual funds (or similar accounts)
The 4% is a common rule of thumb for retirement spending. Essentially, you can take out 4% of your total retirement savings and investments per year of retirement (adjusted for inflation).
In a video, Ramsey talked about how the 4% rule doesn’t work for everyone. If you’re in a good financial situation, meaning you’re debt-free, have decent income and are invested in good mutual funds with average market 4 Housing Markets That Have Plummeted in Value Over the Past 5 Years of 11% to 12%, you might be able to adjust that number — or potentially even increase it. Someone in this situation could potentially pull out 6% or even 10%.
Review your finances, your goals and any concerns you have — including health. You should enjoy your retirement life, but you should do so with a clear understanding of your finances.
According to the Social Security Administration (SSA), Social Security is the primary source of income for nearly half (49%) of all U.S. workers. For older individuals, Social Security accounts for at least 90% of their household income.
But as Ramsey pointed out, the program isn’t exactly stable. If nothing changes by 2033, the SSA will have depleted its excess reserves. This means it won’t be able to pay out the full benefits amount to retirees.
Rather than rely on Social Security, Ramsey suggested viewing it as extra — the icing on the cake, if you will. At the same time, he suggested taking “those benefits early and often,” but only after consulting an investment professional. After all, once you start collecting, you can’t undo your decision.
For a couple planning to retire at 65 to have enough money to cover potential health care costs, they’ll need roughly $413,000 in savings, according to a research report by the EBRI. That’s in addition to the retirement fund.
The best option here is to plan ahead. Ramsey suggested opening a tax-advantaged health savings account (HSA), enrolling in Medicare even if you’re still employed and purchasing long-term care insurance. All of these things can help protect you from financial ruin in retirement.
Even if you’re only a few years or so away from retirement, it’s important to keep a long-term perspective. According to Ramsey, your biggest enemies as you prepare for retirement are:
Anxiety
Fear
Impulsiveness
By keeping a long-term perspective, you reduce the chances of you making a foolish decision (like withdrawing your entire 401(k) during a market downturn). And you increase your chances of financial success.
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This article originally appeared on GOBankingRates.com: Dave Ramsey’s Top 8 Tips That Will Save Retirees From Financial Disaster
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