Investing for Life: Preparing for retirement

Whether you hope to retire in a few months or a few years, to achieve the basic goal of financial security and independence, you probably need to step up your saving, investing and planning now.

The following are key steps to determine if you're ready to retire and, if you're not, how to put your retirement plan into overdrive so you can get there.

Run your retirement numbers

According to the annual Retirement Confidence Survey, only about 40 percent of workers report that they have tried to calculate the amount of money they will need to have saved so that they can live comfortably in retirement. That means that most people are flying blind when it comes to retirement. The time to find out you haven't saved enough is before you retire -- not after.

So, do some serious number crunching. Calculating how much income your current retirement account and annual savings will provide during retirement is a critical step. There are numerous free retirement calculators available online, such as ones from the AARP and Morningstar. Your own retirement plan probably has one available, too. Use it. You also may want to consult a financial planner to discuss matters particular to your own situation.

If necessary, make catch-up contributions

When you check your numbers, you'll probably find out you need to save more. Most people's retirement plans are woefully underfunded.

The amount of money you need have saved in order to retire can seem daunting. Consider this: If you've been a good saver, you'll have accumulated four-to-six times your annual income by the time you are 40. Assuming you are looking to retire at age 65 and earn an average income, by the time you in your mid-50's you should have accumulated eight-to-10 times your annual pay in retirement savings and be adding an additional 15 percent or more of your income to your 401(k) each month.

Behind? Now is the time to kick your savings into high gear. Make the maximum contributions to your 401(k) plan and even consider additional contributions that are available to workers age 50 and over. In 2014, the maximum pre-tax contribution allowed to a 401(k) type plan is $17,500. If you are age 50 by the end of the year, you can also contribute an additional catch-up contribution of $5,500, for a total pre-tax contribution of $23,000.

Step up investment monitoring and rebalance

Now is also the time to pay more attention to the actual investments in your retirement account -- probably an assortment of mutual funds. Make sure you are in funds that perform at least as well as their peers -- hopefully better.

Rebalance your account at least once per year to make sure you aren't taking on too much risk. You can try our asset allocation tool and read more about asset allocation strategies in this special report, Investing for Life). Most employers offer investment allocation and management services for an additional fee.

As you approach retirement, reduce the amount of risk you are taking with your investments. With a short time horizon, a loss of account value can be hard to recover from. With fewer years ahead of you before you'll start needing the money, diversification becomes more important. But, it's also important to recognize that you will not be making sizable withdrawals from your retirement savings for many years, and therefore it is suitable to still have as much as half of your account invested in stock funds. At this time, investing for growth and income can be a suitable investment objective.

Consider working longer

What should you do if you are not on track and aren't able to make the extra contributions to get there? One solution is to stay in the workforce longer and build up your savings. Postponing tapping into your retirement savings or Social Security funds means these accounts will generate more income per year once you start using them.

Need a change? You may find you can leave your current job and switch into a new field, which may be less demanding and more fun, but still provide enough income to support you until full retirement.

A retirement action plan:

Within 10 years to retirement:

  • Prepare a projection of retirement living expenses and income
  • Get an estimate of Social Security benefits and find out when you'll be eligible for full retirement benefits
  • Prepare a detailed list of all retirement investments and income sources
  • Take maximum advantage of contributions to retirement plans including catch-up contributions

When ready to retire:

  • Begin an application for Social Security three months before you want to be begin receiving your benefits
  • Compare IRA rollover options for your 401(k)
  • Review post-retirement health insurance and life insurance options
  • Look into health insurance in retirement and consider obtaining a health insurance policy to supplement your Medicare coverage
  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.

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