Work your way through this retirement checklist and you will have a successful retirement.
Build up Your Emergency Fund Savings Account
Do you have a minimum of three months worth of living expenses saved in a checking or savings account? Sometimes there are delays in the start date of pensions or Social Security. It is important to have savings you can rely on to cover your bills if you experience delays.
Make a Retirement Budget
Have you spent time analyzing your retirement expenses? Working through a before-and-after retirement budget is important. You must come up with an accurate estimate of what you spend now and what will change after retirement. Underestimating expenses is one of the biggest retirement mistakes people make.
Determine Your Health Insurance Options
Have you looked at how you will cover medical expenses and health insurance—and included these items in your budget? Health insurance coverage can be expensive if you plan on retiring early. Medicare begins at age 65, but on average expect it to cover only about half of your total health care expenses.
Learn How Retirement Income Is Taxed
Do you know how your various sources of retirement income will be taxed? Retirees who don’t realize that some of their income may need to go toward taxes are in for an unpleasant surprise. When you are planning for your retirement years, be sure that you’re preparing for any tax impact.
Make a Retirement Income Timeline
Have you made a retirement income timeline to show you when different sources of income will begin? You can line up an income timeline against potential retirement expenses (also laid out in timeline format) to help you manage cash flow.
Run Scenarios Using Online Retirement Calculators
Have you tried putting your numbers into an online retirement calculator? This helps you see how long your money will last. You can play around with decisions like retirement date, the rate of return, and the rate of inflation, and see how these things may affect your retirement income.
Use a Social Security Calculator Before You Claim Benefits
Have you used a Social Security calculator, or worked with a financial adviser who can give advice on your Social Security benefits? Don’t begin benefits until you have done an analysis to see when it will be most advantageous to you and your spouse to each begin your Social Security benefits.
Read up on the Best Retirement Investments
Have you studied various types of retirement investment options to learn how they can be used to deliver consistent retirement income to you? Each investment choice will have its own pros and cons. Best to learn how each tool works before you decide which is best for you.
Make an Investment Plan
Have you created an investment plan so you have a disciplined approach to follow throughout retirement? An investment plan is like a job description. Once you know the job you need your money to do for you it becomes easier to make the right hire (select the most appropriate investments).
Read at Least One Book on Retirement Planning
Have you read at least one book on retirement planning? Your money needs to provide for you for a long time. You can’t rely completely on other people to give you the best advice. You need to know the basics.
Interview Potential Retirement Planners
Have you had a fee-only financial advisor who has expertise in retirement planning review your retirement plan? You can find advisors who will do this for a flat rate, as well as advisors who will manage your retirement investments and help with planning decisions. Getting a second opinion on such a big decision is probably worth it.
Choose Pension Distributions Only After Analysis
If you have a pension do you understand your pension choices and know which one is best for you and your family? Pension decisions are irrevocable, meaning you cannot change them. These decisions should not be made without analysis.
Learn How to Take Money out of Your 401(k)
If you have a 401(k) plan, do you know whether you will leave your money in the plan or roll it over to an IRA account? The right answer may depend on how old you are. If you are over 59½, consolidating accounts is probably your best option.
See How Work Might Affect Your Social Security Benefits
If you plan on working in retirement, do you know how your earnings may affect your Social Security benefits if you begin benefits before your full retirement age? If you are under 66, have started benefits, and make too much, you may owe some of your Social Security benefits back.
Learn Medicare Basics
Do you understand the basics of your Medicare benefits and how much your Medicare Part B premiums may be? Medicare starts at 65, and Medicare Part B premiums are hefty for high-income folks. Best to understand how it all works before you get there.
For many, the idea of retirement means easing into a more relaxed lifestyle, having time to enjoy the things we love such as our hobbies, family and friends, travel, and recreational activities. However, for many approaching retirement, apprehension and worry about the ability to afford retirement is a very real concern. Luckily, there are some steps you can take to ensure a financially secure retirement.
Table of Contents
- Know How Much Money You Will Need for a Financially Secure Retirement?
- Saving your Money
- Cutting Your Expenses
- Investing Your Money Wisely
- The Right Time for Social Security
- Pick your Retirement Date
- Consider Your Home
The Employee Benefit Research Institute reports that 54 percent of American workers have saved less than $25,000 for retirement and about a third of them feel that they will have enough for a comfortable retirement.
Is that realistic?
How much should you have saved?
What if you’re barely making ends meet now?
What can you expect from social security?
Can you afford long-term care?
If you’re still working and earning money, it’s not too late to get ready for retirement. In the end, it’s all about being smart with your money and paying some attention to how you use it, save it and where you hold it.
In this article, we’ll break down seven simple steps to help you get to a financially secure retirement plan:
- Calculate How Much Money You Will Need to Retire
- Saving Your Money
- Cutting Your Expenses
- Investing Your Money Wisely
- The Right Time for Social Security
- Pick Your Retirement Date
- Consider your Home
It’s a personal question that starts with understanding what your day-to-day expenses will be.
How Much Money Will You Need for a Financially Secure Retirement?
This is the magic question. How much will I need for a retirement income? It’s a personal question that starts with understanding what your day-to-day expenses will be. Remember: you will spend less on some things and may spend more on others. One of the first steps in planning for retirement is getting a handle on what your day-to-day expenses will be. Make note of fixed expenses like rent or mortgage (if you have any), pharmacy, groceries, utilities, insurance, and taxes. Then you have discretionary expenses like spending on gifts, clothing, entertainment, and travel. Remember that some expenses related to work can be reduced such as commute expenses.
Realistically, you should factor higher medical expenses because as we age we are more vulnerable to developing chronic and serious medical problems. You need to evaluate your health care coverage make sure you have enough coverage. When you become eligible for Medicare you should consider supplement medical coverage since Medicare doesn’t cover all medical expenses. Unexpected out-of-pocket medical expenses can devastate your savings and create debt during retirement. Take some time to understand the cost of purchasing extra medical coverage and factor that into a financially secure retirement budget.
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MORE ADVICE Discover more tips for comfortably aging in place
Ideally, you should be saving 10–15% of your gross income for retirement.
Saving Your Money
Ideally, you should be saving 10–15% of your gross income for retirement. If you work in a company where your employer matches your retirement contribution then you can adjust your saving amount to add up to 10–15% of gross pay (for example, you get 3% then you can save between 7–12%). If you’re just getting started, you can start with a lower amount. If you start by saving say 5%, plan to bump up 1% or even 2% in the following year so you don’t really shock your budget. Boosting your contribution each year, you’ll get to the 10–15% level within 5 years.
The savings plan should be an employer-sponsored plan like a 401(k), 403(b), or SIMPLE IRA. Note that 401(k)s, 403(b)s, 457s, annuities are not subject to current income tax as they are tax-deferred. Otherwise, open an IRA that allows for automatic contributions (automatic withdrawals from your bank account to the IRA on a scheduled day like your payday). It’s never too late to start saving. Just start off with a scheduled withdrawal schedule and plan to increase over time to get to your saving goal.
Cutting Your Expenses
Now that you’re putting money aside, you may feel an uncomfortable gap in your bank account but there is way, to get around that with some honest evaluation of your expenses. There are probably a few things you can find right off the bat that you can cut back on. The best way to start is to create a detailed list of your spending (collect your receipts, bills, and banking statements) and see exactly where your money goes. There are always unexpected expenses, but what about the every day and regular things? Smart spending on the little things can add up. For example, splashing out on one specialty coffee a week instead of five, bringing lunch most days, and reserving a lunch out once a month can soon add up. Saving on electric bills, gas bills, and phone bills can add up as well. What you save can add up to more than what you’re actually putting aside for retirement savings.
Your retirement savings shouldn’t be a mystery; you simply need to understand how it is invested so you know if it’s working to your best advantage.
Americans are making a series of easily fixable mistakes that are slamming their retirement savings.
Binder labeled retirement savings plan with calculator sitting on top of it. (Photo: Getty Images)
The number of Americans 65 and over increased 33% to 49.2 million from 2006 to 2016, and that population is projected to almost double by 2060.
Given that you might fall into that category now or in the future, there’s plenty you should do to prepare for old age, financial planners say.
Don’t leave your retirement to chance
People spend more time planning for a vacation or buying a car than they do for retirement, says Jeanne Fisher, a certified financial planner with ARGI in Bowling Green, Ky. “Retirees are about to have significantly more free time than they’ve had the last 40 years,” she says. “They need to plan for the lifestyle changes as much as they plan financially.”
Others agree. “It’s not always how much you have, it’s more important to know how much you can spend,” says Larry Stein, president of Disciplined Investment Management in Deerfield, Ill. “Ideally, you want to align your spending with what you enjoy.”
What else to consider? Unexpected expenses. “Some years you will have big expenses such as new roofs, new cars and other life expenses,” says Lynn Ballou, a certified financial planner with EP Wealth Advisors in Lafayette, Calif. “Be ready and have the liquidity to cope without needing to sell investment assets in a down market.”
Preserve your dignity
A. Scott Ward, a certified financial planner with Johnson + Sterling in Birmingham, Ala., says it’s vital that older Americans preserve their dignity throughout retirement, which, for some, could last for more than three decades.
One way to do that? If you’re thinking about whether to start your Social Security benefit early, say age 62, Ward suggests considering how long you might need the benefit for yourself — and how your decision affects your loved ones who might survive you.
(Photo: Getty Images)
Think about the surviving spouse
Thinking about your household and not just yourself is vital. Consider: Females reaching age 65 have an average life expectancy of an additional 20.6 years while males have an average life expectancy of 18 years, according to the Administration for Community Living. What’s more, almost half of older women (45%) age 75 and over lived alone.
“Unfortunately, many women have had very little involvement in their family finances,” Fisher says. “Women nearing retirement should be engaged with their finances and work closely with their spouse and a certified financial planner so that they are prepared to handle their personal finances if the need arises.”
Plan for health care costs
According to the Administration for Community Living, the need for caregiving increases with age. For instance, the percentage of older adults age 85 and over needing help with personal care was 22% in 2017, more than twice the 9% level for adults aged 75 to 84 and more than six times the 3% level for adults ages 65 to 74.
“Retirees should be cognizant of how (demographic trends) will affect health care and long-term care costs and plan accordingly,” Fisher says.
For his part, Stein urges you to be smart about your health. “We all know the right things to do — eat healthy, exercise regularly, get enough sleep, manage stress — but not all of us live that way,” he says.
Stein says the two biggest risks most retirees face are financial and health. “And they’re equally critical to having a comfortable retirement,” he says. “One without the other can make retirement very challenging. Make sure you have a way to pay for long-term care, whether it’s through insurance or your own funds — this is one of the biggest risks you face to having a comfortable retirement.”
How long-term financial planning can provide benefits now (Photo: Brighthouse Financial)
Have a Plan B for your sources of income in retirement
While many American workers say they want to work at least part time during their retirement, Ward says less than 20% over the age of 65 are actually working at this time. “This places a premium on working ‘the plan’ now — from contributing to a workplace retirement plan to making sure you have appropriate investment choices for your goals — and having a backup plan if your paycheck retires before you do,” he says.
Check your financial plan for leaks
Whether you are still working or retired now, regularly checking your budget and investments for “leaks” can add value to your plan over time, Ward says.
Look for areas in your budget where you could save some additional dollars each month. Evaluate the fees you are paying for investments. “Are there any investment choices in your workplace retirement plan that can help you achieve your financial goals at a lower cost?” Ward asks. “Keeping your thumb on investment costs can help you keep more of your potential earnings.”
Make sure your legacy documents are current and in order
Ward recommends checking whether your beneficiary designations for your IRA, Roth IRA or workplace retirement account are still accurate. Also, check whether you have an updated will, an advance medical directive and a durable power of attorney. “Having all of your legacy documents buttoned up can provide comfort and peace of mind,” Ward says.
FILE – In this April 10, 1997, file photo, Doug Ford watches his shot during his opening round if the Masters Tournament at the Augusta National Golf Club in Augusta, Ga. Ford, the oldest surviving Masters champion and a Hall of Famer, died Monday, May 14, 2018. He was 95. (AP Photo/Curtis Compton, File) (Photo: The Associated Press)
Enjoy retirement
Old age is a time to enjoy the ordinary and the exceptional. “Whatever your passion, whether it’s travel, time with loved ones, sports, volunteering or even just socializing with friends, enjoying retirement is about having time to do what is fun and/or meaningful to you,” Stein says. “Having all three — financial comfort, reasonable health and enjoyment — is the recipe for a comfortable and enjoyable retirement.”
Give gifts of love and money
Consider, too, creating special videos for family members. “I would love to hear and see my parents again — we did not have movie cameras that recorded sound — and our pictures are all hard print — rather than digital,” says Neal Van Zutphen, a certified financial planner and president of Intrinsic Wealth Counsel in Tempe, Ariz.
Also, calculate how much you can give “with warm hands and heart” and still afford to do what you want to do and avoid being a burden to your children, Van Zutphen says.
“How can I afford retirement?” It’s a question that probably crosses everyone’s mind at some point. In fact, having insufficient retirement funds is the single biggest financial worry of 66 percent of Americans.
Unfortunately, far too many people leave this issue as something to worry about and fail actually to make a plan to be financially successful in retirement. However, it’s never too late to plan your retirement savings strategy. Even if you’re already in your 50s, you still have a good 10 or 15 years to save, and that can make a meaningful difference.
If you want to make sure you’re financially stable in retirement, here’s a look at some tips that will help you prepare, and you can implement some of them right away.
#1. Get Started
One of the most important parts of making sure you’re ready for retirement is to get started saving. Now. Thirty one percent of working adults say they have no retirement savings at all. And while that number does decline as age increases (90 percent of working adults over the age of 45 have at least something saved for retirement), it’s still true that some working adults haven’t saved anything at all.
If you feel like it’s too late to start saving for retirement, don’t underestimate how quickly a nest egg can grow. If you want to catch up and you’re still working, contribute as much to your 401(k) as you possibly can.
#2. Be Debt Free
It doesn’t matter if it’s credit cards, a vehicle, or a private loan, debt can be crippling at any age, and especially tough in retirement. As you approach retirement, make an aggressive effort to pay off any debt and to avoid taking on any new debt.
According to a recent study, 42 percent of Americans age 56 to 61 have debt, with an average amount of $17,623. If you take out the seniors who only have mortgage debt, the average load still sits at almost $12,500, with about $5,000 of that being credit card debt.
In a time when you’re going to be making less money than you did in your working years, debt can be a tremendous burden. Do everything you can to make sure it won’t be holding you down.
#3: Choose A Strategy For Your Mortgage
A home mortgage is indeed a debt, and while we just recommended paying off all debts, there are two different schools of thought when it comes to having a mortgage in retirement. The first is that you should make it a priority to pay off your mortgage before you retire. If you’re within about 10 years of retirement age, this is probably the strategy you want to use.
But if you’re a little farther away from retirement, you might want to consider paying off your mortgage as scheduled and investing any extra funds or use the money to pay off debt. Your potential earnings will likely be more than the interest paid on your home loan if you invest, and as discussed in the previous tip, it’s a smart move to get rid of debt before you are living on retirement income. A mortgage provides a tax benefit through the interest deduction, which is something that can be useful in your working years.
If you’re considering a reverse mortgage, be sure to read our reverse mortgage guide as you start your research.
#4. Create A Spending Plan
Budgeting is a crucial step toward financial peace at any age, but it is even more important in retirement. Experts have a few tips for building that retirement budget:
Plan on spending about 4 percent of your retirement savings every year, which should make your savings last about 25 years.
Instead of planning a budget based on a single month, take a look at your last 12 months of expenses combined to get a realistic idea of what you’ll be spending.
Budget for the “big three” separately. The US Department of Labor recommends that in retirement, you should spend no more than 34 percent of your money on housing (including utilities, maintenance and insurance), 16 percent on transportation, and 14 percent on healthcare. Estimate what you will be receiving in retirement and make sure what you’ll be spending lines up with these numbers.
#5. Consider Retiring Gradually
The notion of retirement can be alluring, but many people end up with a sort of buyer’s remorse when they retire and see that they can barely afford to live. Therefore, more and more Americans are choosing to retire gradually. Here are some of the top ways to retire gradually.
Be a valuable employee Companies invest a lot of time, money and resources into finding good employees so most want to keep quality staffers for as long as possible. Become one of those key employees.
Find a part-time need for your skills If your company doesn’t have a need to keep you on full time, try to find a reason they can use you part time. For example, if you’ve been a sales manager for 30 years at your company, you’ve gained a lot of knowledge about sales operations specific to that company. Inquire about taking on a sales onboarding role to help onboard new hires.
Make a financial case Hiring and training a new employee takes time and money. If you want to retire gradually, you have a good financial case to present to your company. If your job can be done remotely or even part-time, that just adds to your case.
#6. Don’t Expect Social Security To Cover It All
According to the AARP, almost a quarter of Americans plan for Social Security to be 90 percent of their retirement income. With the average Social Security payment is right at $1,400 a month, it is not hard to see why so many senior citizens struggle. If you are looking toward retirement with a plan of relying on Social Security, you may need to reassess. Decide now to fund a 401(k) or IRA. As stated earlier, it’s never too late to start saving. Also, you can delay taking your Social Security payments. By pushing receipt of Social Security to age 70, you will receive 130 percent of the benefit amount you would have at standard retirement age.
The Bottom Line: Get Started
Preparing for retirement can be overwhelming, and the numbers may be scary. However, with just a little planning, you can make a significant impact on your financial stability going into retirement. Start now, eliminate debt, and push your retirement age if necessary to be comfortable in your senior years of life.
When it’s time for you to retire, will you be able to afford it? Almost all of the research conducted on the subject over the last few years shows that most individuals are unable to demonstrate financial readiness for their retirement years. This only serves to underline the fact that saving for retirement is a challenging process that requires careful planning and follow-through. Here we review some helpful tips that should help you on your way to a comfortable retirement.
1. Start as Soon as You Can
It is obvious that it is better to start saving at an early age, but it is never too late to start—even if you are already close to your retirement years—because every penny saved helps to cover your expenses.
If you save $200 every month for 40 years at a 5% interest rate, you will have saved significantly more than an individual who saves at the same rate for 10 years. However, the amount saved over the shorter period can go a long way in helping to cover expenses during retirement.
Also, keep in mind that other areas of financial planning, such as asset allocation, will become increasingly important as you get closer to retirement. This is because your risk tolerance generally decreases as the number of years in which you can recuperate any losses goes down.
2. View Savings Deposits as a Bill
Saving on a regular basis can be a challenge, especially when you consider the many regular expenses we all face, not to mention the enticing consumer goods that tempt us to spend our disposable cash. You can guard amounts you want to add to your nest egg from this temptation by treating your retirement savings as a recurring expense, similar to paying rent, mortgage, or a car loan. This is even easier if the amount is debited from your paycheck by your employer.
If the amount is deducted from your paycheck on a pre-tax basis, it helps to reduce the amount of income taxes owed on your salary.
Alternatively (or in addition), you may have your salary direct-deposited to a checking or savings account, and have the designated savings amount scheduled for automatic debit to be credited to a retirement savings account on the same day the salary is credited.
3. Save in a Tax-Deferred Account
Contributing amounts earmarked for your retirement to a tax-deferred retirement account deter you from spending those amounts on impulse because you are likely to face tax consequences and penalties. For instance, any amount distributed from a traditional retirement account may be subject to income taxes the year in which the distribution occurs, and if you are under age 59½ when the distribution occurs, the amount could be subject to a 10% early distribution penalty (excise tax).
If you have enough income, consider whether you can increase the amount you save in tax-deferred accounts. For instance, in addition to saving in an employer-sponsored retirement plan, think about whether you can also afford to contribute to an individual retirement account (IRA), and whether the IRA should be a Roth IRA or a traditional IRA.
4. Diversify Your Portfolio
The old adage that tells us that we shouldn’t put all of our eggs in one basket holds true for retirement assets. Putting all your savings into one form of investment increases the risk of losing all your investments, and it may limit your return on investment (ROI). As such, asset allocation is a key part of managing your retirement assets. Proper asset allocation considers factors such as the following:
- Your age: This is usually reflected in the aggressiveness of your portfolio, which will likely take more risks when you’re younger and fewer the closer you get to retirement age.
- Your risk tolerance: This helps to ensure that, should any losses occur, they occur at a time when the losses can still be recuperated.
- Whether you need to have your assets grow or produce income.
5. Consider All Potential Expenses
When planning for retirement, some of us make the mistake of not considering expenses for medical and dental costs, long-term care, and income taxes. When deciding how much you need to save for retirement, make a list of all the expenses you may incur during your retirement years. This will help you to make realistic projections and plan accordingly.
6. Retirement Savings Is a Must
Saving a lot of money is great, but the benefits are eroded or even nullified if it means you have to use high-interest loans to pay your living expenses. Therefore, preparing and working within a budget is essential. Your retirement savings should be counted among your budgeted recurring expenses in order to ensure that your disposable income is calculated accurately.
7. Periodically Reassess Your Portfolio
As you get closer to retirement and your financial needs, expenses and risk tolerance change, strategic asset allocation must be performed on your portfolio to allow for any necessary adjustments. This will help you ensure that your retirement planning is on target.
8. Optimize Your Expenses
If your lifestyle, income, or fiscal responsibilities have changed, it may be a good idea to reassess your financial profile and make adjustments where possible, so as to change the amounts you add to your retirement nest egg. For instance, you may have finished paying off your mortgage or the loan for your car, or the number of individuals for which you are financially responsible may have changed.
A reassessment of your income, expenses, and financial obligations will help to determine if you need to increase or decrease the amount you save on a regular basis.
9. Consider Your Spouse
If you are married, consider whether your spouse is also saving and whether certain expenses can be shared during your retirement years. If your spouse hasn’t been saving, you need to determine whether your retirement savings can cover not only your expenses but those of your spouse as well.
10. Work With a Financial Planner
Unless you are experienced in the field of financial planning and portfolio management, engaging the services of an experienced and qualified financial planner will be necessary. Choosing the one who is right for you will be one of the most important decisions you make.
The Bottom Line
What we’ve discussed here are just a few of the factors that may affect the success of your retirement plan and determine whether you enjoy a financially secure retirement. Your financial planner will help you to determine whether you should consider other factors.
As we said above, starting early will definitely make the task ahead easier, but it is not too late to adopt some of these practices, even if you are already retired.
For many Americans, retirement feels like a far-off and distant dream. The most common age to retire in the US is 62 years old, which is also the minimum age to collect Social Security.
However, as demographics change in the US, Social Security will become less and less of a dependable, viable source of full income for future generations of retirees. It is of paramount importance that young people begin to plan and save for retirement sooner, rather than later.
There are several ways to predict and budget for the money you will need in retirement. Here’s how to estimate how much you need to save to live comfortably in your later years.
How much money do you need to live on after you retire?
The first step is establishing what your general living costs are and trying to adjust how much you will need to live on in retirement. The overall goal is to get a clear picture of how much you need, and then finding the sources of retirement income to match that result.
It’s hard to predict the future, but as a rule of thumb, most experts suggest that you will need 80% of the income you earn while working. That does not consider variables like healthcare, which can be a substantial cost in your later years. Some other factors to consider are:
• Monthly housing costs (mortgage, rent, or assisted living)
• Transportation expenses
• Food, clothing, and personal care
• Taxes and insurance
• Other travel and entertainment
• Family care (helping your children or grandchildren)
According to the Employee Benefit Research Institute, almost 50% of families end up spending more during retirement in comparison with their working salaries. Nearly one-third of families surveyed actually spend 120% more than they did while working. In retirement, many families have the time to enjoy traveling, buy a second home, or spend money on entertainment they otherwise wouldn’t while working.
Taxes and Retirement
Taxes will also play a role in how you budget for retirement. There are tax implications when you withdraw from retirement investment accounts like the 401(k) or a traditional IRA. Taking money out of your 401(k) means the money will be taxed as ordinary income based on your tax bracket.
Retirement taxes don’t end at the 401(k) investment. There are also Social Security benefits taxes. If your income is above $25,000 for singles and $32,000 for married couples filing jointly, federal taxes apply to Social Security benefits. The tax rates depend on your tax bracket and your state’s tax rules – 13 states tax Social Security, each with their own rules. The best way to estimate your future tax rates is to research what taxes your state imposes, plus your current federal income tax rates to get a rough estimate of what you can expect to pay. It’s also worthwhile to consider switching to a Roth IRA account if you’re at least five years from retirement.
The Impact of Healthcare Costs
Bottom line: healthcare in the US is expensive. Many adults underestimate how much money they will need to save for healthcare in retirement. In 2018, Fidelity Investments estimated that a healthy, 65-year-old couple would need $280,000 to cover their healthcare costs in retirement. This figure included “premiums, cost-sharing provisions and out-of-pocket costs associated with Medicare parts A, B, and D,” but not “other health expenses such as over-the-counter medications, most dental services, and long-term care” or any employer-sponsored retiree health coverage.
Often, seniors assume that Medicare is free and will be enough to cover their healthcare costs. However, Medicare premiums can be quite high. Social Security considers some individuals to be a “higher-income beneficiary,” meaning they pay higher rates for Medicare Part B, the health-insurance portion of Medicare. In 2017, higher-income beneficiaries were individuals who made $85,000 or married couples filing jointly who made $170,000.
Estimating Your Sources of Income
As soon as you have a figure of what you need to live comfortably in retirement – including day-to-day living expenses, your predicted tax bracket, and some extra funds for healthcare costs – it’s time to find the best investment sources for your retirement fund. This means understanding what you can expect from pensions and Social Security, as well as your own personal saving goals. Here are some of the vehicles for saving for retirement you may consider.
If you work in the private sector, it’s rare to have a pension; government organizations may offer a pension plan, as well as a handful of large companies. If you do have a pension, the way that it works is the employer contributes money into your pension plan for as long as you work for them. When you retire, that money is then paid back to you in the form of a monthly check. The amount you will receive depends on a formula that considers the number of years you worked for the company, your age, and your salary. Pension benefits are taxable.
Most companies don’t offer pensions, but they do offer 401(k) plans. A 401(k) is a way to avoid paying income tax in the current year on the amount of money you put into your retirement account. The employer makes contributions to the 401(k) as well – either by matching the amount you contribute, putting in a set percentage, or using a profit-sharing formula that bases their contribution on the company’s success.
A “salary deferral contribution” is the amount you add to your 401(k) each year to save for retirement. This contribution is tax-deferred, meaning as you earn investment income, you don’t pay tax on the annual investment gains. As mentioned previously, you will pay income tax on the amount you withdraw during retirement. If you withdraw from your 401(k) too early, you’ll pay a 10% penalty tax on top of your income tax.
Like the 401(k) is the IRA, or individual retirement account. There are two main types of IRAs: Roth IRAs and traditional IRAs. These accounts hold retirement savings with some tax benefits that depend on the type of account you open, with contribution limits, early withdrawal penalties, and other implications that you must research ahead of time.
Finally, Social Security benefits are guaranteed income the government raises from your taxes. The amount you receive will depend on the amount of Social Security taxes you paid, with wages adjusted for inflation (this is your Average Indexed Monthly Earnings, AIME). There’s a tool that helps estimate your Social Security benefits on the organization’s website. Remember, this estimated Social Security benefit is primarily based on your salary; adjust your expectations depending on how far you are from retirement.
If you’re worried about saving enough for your retirement, talk to the experts at CPA Services to get recommendations on the best investment plan for you and your family.
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The main challenge for those seeking to retire early is how to generate enough income to meet or even exceed their monthly household budgets. The challenge is magnified when you consider the fact that your cost of living is likely to grow exponentially as your children grow and enroll in schools. With a projected rise in household budgets, you will, therefore, need to also plan diligently on how to generate enough income over the years to meet those growing financial obligations.
Sources of income, rather than the uses of the income thus raised, should be your priority when you are planning your early retirement. Some of the sources of income will be applicable both before and after your retirement; while others will fall to either before or after your retirement. To afford an early retirement, you do need to plan for it in two ways.
you need to create a retirement fund that should have grown to a certain size to generate income and you also need to have income streams opened up that can generate passive or active income for you in your retirement.
Creating a personal retirement fund before retirement
To start saving in an organized manner for your early retirement, you will need to create a retirement fund for yourself. This will be a collection pool for all the cash you want to dedicate to your preparedness for early retirement.
Having regular monthly deposits into the retirement fund will help grow your wealth over time and create a good source of funds to meet your monthly bills immediately after retirement. The interest rate income in your fixed deposit account is however very minimal and it will require a long period of saving before you can feel the effect of the compounding power of the returns on your savings.
To maximize your returns from your retirement fund and grow it much faster, you can opt to venture into other investment channels that offer high return potential, albeit with equally higher risk exposure. Investing in stocks and bonds can provide good investment platforms for your retirement fund if you have a long way to go before you take your early retirement.
However, if you just have a few years to your early retirement, you will need to go for short-term financial instruments to grow your retirement fund faster.
Online trading provides various asset classes that you can trade on and return huge margins over a short period. You will, however, need to first learn the art of online trading through tutorials and demo accounts.
Thereafter you will have to keep tabs with the latest market trends through credible market information; for you to be able to make trading decisions that optimize your returns.
When you master the art of online trading of forex, indices, and commodities, you will be able to increase your return potential to the north of 80% depending on the asset class and the investment channel you choose.
Diversifying your sources of income when you retire early
Planning for early retirement is very important, and creating a retirement fund that is big enough will help you to have a buffer in case you face huge financial obligations that were unplanned before you retired.
In addition to the pre-retirement plans, you also need to have a way to continue generating income when you retire. This will require a different kind of thinking since you will now be your boss and your income will be determined by how much effort you make in generating income each day of your retired life.
Continuing with your online trading, investing in stocks and bonds as well as having some cash in a fixed deposit account can be some of the obvious ways to continue generating income after your early retirement. You can as well opt to go for investments through mutual funds and unit trusts as well as consider government bills and bonds.
For the unconventional individuals, you can choose to get into real estate investment so that you earn a regular rental income every month. For those who like writing, blogging could be a good channel to commercialize your writing talent; by providing quality content and having advertisers pay you to list their adverts on your blog.
Freelancing is also a very common way to generate income after you retire early; especially if you are an expert in your profession.
You should also start earning dividend income from stocks and stock funds that can partially offset the loss of your salary. Annuities can add other income streams as well.
Individuals have varying preferences when it comes to planning for their early retirement.
However, the fundamental consideration should always be how you will be able to raise enough funds to cater for your immediate expenses after retirement; and how to generate more income during your retirement to sustain a high-quality life.
Readers, Have you taken early retirement or planning to have one? do share your experiences with us.
Sound planning is essential for a secure financial future. This article tells you about how to plan financially for the future, so that you can draft a safe and flexible plan for your retirement to make it enjoyable.
Sound planning is essential for a secure financial future. This article tells you about how to plan financially for the future, so that you can draft a safe and flexible plan for your retirement to make it enjoyable.
Well, living in today is alright but we also have to think about tomorrow and hence, it is important to plan for the future. Since there is apparently only one thing that seems to control the world, that is money, one has to plan his or her finances wisely to have a secure future after retirement. Though, everything that one needs to ‘live’ cannot be bought with money, certain things that one needs to ‘survive’ have to be bought in exchange for money. So, one has to carry out meticulous financial planning for the future. If you are also of the same opinion, then you must read this article further.
Financial Planning for the Future
Well, there are many things one needs to consider while planning for the future in terms of finances. Given below are some of the factors you need to look into:
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Current Economic Status: You must analyze your current economic status including your annual income. It will give you a direction towards financial planning for the future.
Expenses: You must also consider the expenses you make on a yearly basis. It is suggested to make a list of your ‘needs’ and ‘wants’ and determine how you decide your priorities and make expenditures accordingly.
Asset Analysis: Yes, this is one of the important aspects of financial planning. You must know and ascertain the number, or quality, of your assets before you start financial planning.
Liabilities: Liabilities are as good as expenses. So, you must pay attention regarding how you would deal with liabilities, and how you would manage and sustain them.
These were some of the crucial factors one has to consider when it comes to financial planning for the future. Now let’s take a look at some of the ways and ideas that can help you plan well for the future.
Financial Planning Ideas
Given below are some tips cum ideas that would answer how to plan financially for the future, take a look:
- Saving is one of the most important steps to ensure a prosperous future, especially when you carry out financial planning for the future. The early you start saving the more time you give to your money to grow. It is never too late, so start saving as early as possible.
- Once the significant savings are there in your account, there are many things you can do to invest these savings wisely. You can either buy gold, or invest money in assets that guarantee continuous income in the future as well. You can also think of investing money in stocks and bonds too, for long term benefits.
- Learning to plan a budget for daily day-to-day expenses is a key to financial planning for the future. You must try to balance between the income and expenses every month so that you save a certain amount.
- Along with a budget, one has to plan one’s lifestyle as it can have a major impact on your financial planning. You must learn to alter your lifestyle according to a stipulated amount every month and save the rest of the extra money for unexpected financial expenses in the future.
- Insuring important assets is also an important aspect of financial planning. Health insurance and car insurance are some of the must have insurances for greater security in the future.
- Another interesting way of investing in future is working after retirement. Yes, you can think of starting your own small business after retirement that guarantees income even after retirement. It can help you earn not only money but it would also help you kill the boredom and time, which many retirees are faced with.
These were some of the tips and ideas that can help you plan your finances well for the future. Go ahead and implement the aforementioned ideas and tips, and have a financially secure future.
Learn the best ways to plan for retirement financially
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Retirement planning isn’t something you can do overnight. It can take years to fully prepare for retirement, both mentally and financially.
Having a clear roadmap to follow can help you with that, particularly if you don’t have children who may be able to help with financial planning in your later years. If you’ll be entering retirement solo or you and your spouse are childless, here are six important steps to take to prepare for retirement now.
1. Assign Power of Attorney
Assigning power of attorney can ensure that your finances are managed according to your wishes if you’re unable to make decisions on your own behalf. The person who holds your power of attorney has the authority to manage your finances when you are incapacitated.
When choosing a power of attorney, select someone you trust completely to have your best interests at heart. For instance, that may be your spouse but if you’re unmarried, you can set up a revocable trust and appoint your bank as your trustee. The trustee would then handle everything from paying bills to filing insurance claims to maintaining/selling your home when you are unable to handle these tasks.
If you’re establishing a trust, consider naming a successor trustee. This person can take over trustee duties if the person you named initially is no longer able to handle their responsibilities.
2. Make a Will
It’s particularly important for people without immediate family to detail their wishes for the distribution of property, burial arrangements, and even guardianship of any pets. That’s where a last will and testament comes in.
When drafting a will, take time to learn the rules for will-making in your state. For example, some states allow legal wills to be handwritten while others do not. Or, you may need to have the will witnessed by a certain number of people. Remember also that you’ll need to ask a trusted person to carry out your final wishes as executor of the will.
3. Name a Medical Proxy
A medical proxy is someone who has the legal authority to make decisions about your health care when you are deemed incapacitated. This includes whether to move you out of your home and into a nursing facility. So, again, choose carefully. A spouse or domestic partner is an obvious choice. It’s good to have a backup proxy in case you outlive your primary one. If you don’t have children, ask a trusted relative (sibling, cousin) or friend to fill the secondary role.
4. Write a Living Will
This document details what type of medical care you want in certain dire situations, mostly related to end-of-life treatment. This is where, for example, you will formally tell your medical proxy and doctors that you don’t want to linger on life support.
Writing a living will is similar to drafting a last will and testament, in that you need to understand the laws for these documents in your state. Once you’ve completed a living will make sure that you share copies with your doctors and the person you’ve named responsible for making health care decisions for you.
5. Plan For Long-Term Care
Long-term care facilities can become quite expensive if you need nursing care in retirement. It’s possible to qualify for Medicaid to help pay for long-term care but you’ll be required to spend down your assets first. You should consider the cost of long-term care carefully when calculating how much you need to save for retirement.
If you haven’t saved enough to cover that kind of expense you may want to get long-term care insurance for yourself and your spouse if you’re married. Long-term care insurance can help pay the costs of health care since Medicare won’t cover these expenses.
You may also consider a hybrid policy that includes both long-term care insurance life insurance coverage. This way, your long-term care costs are covered if you need it and you can leave a death benefit for a beneficiary if you don’t require long-term care.
6. Downsize
If you live in a larger home, consider whether you still need as much room in retirement, especially if it’s just yourself. Also, think in terms of the cost of living in your current location and compare the cost of living in other places around the country. You may find that it makes more sense to a different city or state, or swap your large home for a tiny house as a cost-cutting measure for retirement.
The Takeaway
While everyone should take these six steps in preparation for retirement, addressing these issues will provide an added peace of mind for those without the safety net that loving children can provide their aging parents.
If you want financial security, you’ll need to know how to make a better financial plan. The good news is that it’s not hard to create one. Here are seven expert-approved financial planning steps to help you get on track.
1. Track Where Your Money Is Going
The first – and most important – step to creating a financial plan is to develop a budget detailing where your money goes (expenses/savings) and comes from (income) each month.
Think of your budget like a monthly money guidebook. Creating a budget doesn’t need to be complicated either. You can create one by:
Tracking your income and expenses in a notebook
Using a budget template spreadsheet and updating it weekly
Finding a budgeting app that helps you automatically track your income and expenses. Some options are Mint, Wally, and Personal Capital.
Carry on this tracking and budgeting for more than one pay period to capture every expenditure. Once you figure out your current expenses, you’ll be able to make better future financial plans.
2. Set Goals for Your Financial Plan
Once you’re diligently tracking your income and expenses, it’s time to think about the future and how to make a financial plan that gets you to your goals. The first goal, however, should always be to have an emergency fund in the event of a personal financial crisis.
Then, ask yourself this question: “Where do I want to be 10 years down the road?”
Avoid generic answers like, “I want to be rich.” Answer with specifics like:
“I want to own a house with the mortgage half paid off”
“I want to have an investment portfolio of $500,000”
“ I want a college fund for my kids.”
“I want to travel to 15 countries.”
Setting specific goals helps to stay on track with your financial plan.
3. Start Saving Now
After you set your major goals, start saving for an emergency fund and then for your bigger goals. This means re-examining the expenses and income you’ve been tracking. You can start saving in one of two ways:
Cutting Expenses
After looking at your expenditures, determine where you might be spending too much. Are you splurging on entertainment? What about your car payments, vacations, or food?
Look for ways to save here and there, but always keep balance in mind. Your goal is not to eliminate all fun activities but to control your spending so you can free up some of your income for savings.
Increasing Your Income
You can also save more money by increasing your income. This can be done by asking for a raise, changing careers, picking up a side hustle, or taking on a second job. Just make sure that your extra income is actually being put into a savings account (and not being spent on lattes).
4. Learn How to Build a Portfolio in Your Financial Plan
While you save for your short term financial goals, there is a long term financial goal you must keep in mind: retirement. This will be one of your biggest life expenses and it needs to hold a major place in your financial plan.
You can find the money to invest the same way you did to start saving: Cut expenses and increase your income. The key to investing is to do it consistently over the long term, so start with as little as $50 a month and then increase whenever you can.
For new and seasoned investors alike, the easiest way to start building an investment portfolio is with mutual funds. You can easily find mutual funds that match your particular risk tolerance, and they’re great to spread out your investment risk. Mutual funds also provide professional money management, which is a great idea if you don’t have the time (or expertise) to go it alone.
5. Create Financial Plan Exit Strategies
You’ll want to plan an exit strategy to match every savings and investment goal in your financial plan. An exit strategy has two components: how you allocate money and how you can access that money.
Say that you want to buy a home within ten years. You’ll probably need to allocate less money towards your investment portfolio and save more money in a short-term account (like a money market account). When it comes time to purchase your home, make sure that it’s easy to withdraw your down payment money. This means checking the fees and withdrawal penalties of your account.
Similarly, if you’re going to require college money for children or retirement, be sure to have an exit strategy for that money. Consider an estate plan for your heirs, too.
6. Keep an Eye on Your Credit
Good credit is essential for finding the best interest rates for financing and the best credit card offers. It’s an important thing to keep track of when making your financial plan.
You need to check on your credit score with each of the three big credit agencies:
You can get a free copy of these official reports once per year at AnnualCreditReport.com.
Make sure that there are no discrepancies between your records and the credit reports. If there are errors, dispute them with the agency reporting them.
You can also keep track of your credit score during the year with websites like CreditKarma. If you notice a change in the score, it’s an indicator that something has changed with the accounts under your name (like the addition of a credit card or paying off a loan).
7. Keep Track of Your Financial Plan
Manage your financial plan. The financial planning steps above are not a one-and-done kind of system. You always need to check in with your personal financial situation.
Have your goals changed?
Has your income or debt gone up or down?
What are your current family needs and health?
How have your investments performed?
Depending on circumstances, it may make sense to review your financial plan quarterly. Remember: When you review your plan, don’t confuse your long-term goals (retirement) with short-term ups and downs in your personal situation. In a nutshell, don’t change your financial plan without looking at the entire picture.
Ask the Experts About Making a Financial Plan
Creating a financial plan takes some work and InvestingAnswers is on a mission to help consumers build and protect their wealth through education. That is why we have experts answering your pertinent questions at the end of each article.
Q: When Do I Make a Financial Plan?
You should make a financial plan as soon as possible. Financial plans are essential no matter where your income is at. You can take control of your money and get it working for you by making a financial plan today.
Q: Who Needs a Financial Planner?
Financial planners are typically hired when a major event has occurred with your finances. You might consider hiring one if you:
Are getting divorced
Sell your business
Are in serious debt
Inherit a large sum of money or property
A financial planner will help you navigate these kinds of challenging situations and point you in the right direction by providing a personal financial plan.
