As you start thinking about retirement, it's a good idea to dig into the numbers and establish what it'll actually take to maintain a reasonable standard of living. To do this, though, you need to confront a few basic things in a structured and thoughtful manner.
Assess and Reassess Your Situation
The further you are from retirement, the harder it will be to think about highly specific details. For someone who's 25 years old and unmarried, for example, the simplest solution is to focus on putting back a set amount of money. You might want to take 10% of your income and put it into investments that have fairly high historical rates of return, such as stocks.
As you get closer to retirement, your outlook will come into focus. By the age of 50, you should have a good idea of what your situation will be in terms of marital status, property holdings, total savings, and so on. You'll also have a pretty clear idea of what your standard of living is going to be. A commonly cited rule of thumb is to have monthly wealth available that equals about 70% of your pre-retirement income.
Confront the Numbers
It's easy to treat the process as one that goes on in the background of your life, but you need to take a look every six months or so at what the numbers actually are. Modern retirement software packages can give you a good idea of how your current retirement portfolio compares to your goals. By working with a retirement calculator, you can see that the pace of your investing and saving stays on target.
Understand Your Future Income Sources
In addition to what you squirrel away for retirement, you'll also have a few other potential sources of income. Most people, for example, will be able to draw on Social Security. Similarly, as long as your physical and mental health hold up well, you may even want to consider taking a part-time job.
Know the Fees and Penalties
A lot of retirement packages come with stipulations. A classic case is the 10% tax penalty that's applied when you take a premature distribution from an IRA. This occurs when someone takes money out of the account prior to 59.5 years of age, although there are exceptions, like using IRA money to pay for a current medical expense. Also, Roth IRAs offer more flexibility.