Challenging though it may be, there are steps you can take in your mid-60s and beyond to plan for retirement.
The age for retirement was once 65, but that has changed over time. The Social Security Administration has raised the age at which full retirement benefits are available.
-There has been a shift from company-sponsored defined-benefit plans to defined-contribution plans.
Individuals may need to postpone retirement due to changes in the economy and projected returns on investment programs.
Age 65 does not always mean that it is time to retire for many people who enjoy their jobs and want to continue working. However, there are a few things to take into consideration for retirement planning during your mid-60s and onward.
How Much Do You Need to Save for Retirement?
One of the hardest things about preparing for retirement is thinking about what your life will be like when you’re in your 70s. A lot of people get so overwhelmed about saving for an unknown future, that they end up not saving anything at all. Thankfully, planning for retirement is not overly onerous, but you will need a road map — one that can evolve over time — to keep you on track.
Think about what your life might look like in retirement and write down your goals.
You should think about how much everything will cost and plan for higher prices in the future. Your day-to-day expenses, like housing costs, food and health care, will increase over time. However, some of the expensive items you have now, such as a mortgage or childcare costs, may no longer exist, which could result in a decrease in your overall expenses as you near retirement.
Add up all of the income you expect to receive during your retirement years. This includes pension income, social security payments, and any other sources of income, such as rental income from a property. Match up your expected income with your expected expenses to get an idea of how much you will need to save for retirement.
Determine Your Retirement Readiness
Before you decide to retire, think about whether you are ready to quit from a psychological and financial perspective. If you’re not ready, consider asking your employer to allow you to work a few more years, or if you’d like to work part-time or be hired as a consultant.
You should ideally start thinking about your retirement several years before you turn 65, as some employers may start the retirement process early. Many employers now focus on hiring and retaining employees who have experience and “know the business” to strengthen their intellectual banks.
Here are some things you should factor into your calculations:
- Housing costs, including rent or a mortgage, heating, water and maintenance
- Health-care costs (Fidelity estimates that the average couple will need $295,000 in today’s dollars for medical expenses in retirement, excluding long-term care.)
- Day-to-day living, such as food, clothing, transportation
- Entertainment, including restaurants, movies, plays
- Travel, including flights, hotels, gas if driving
- Possible life insurance
What’s the right amount to retire with?
Finance experts have offered various savings goals over the years, with the most recent suggestion being $2 million. This is due to changing cost of living and age demographics. Some experts advise that you should save 80-90% of your pre-retirement income each year, or 12 times your pre-retirement salary. However, these numbers should only be used as a guide as everyone’s situation is different.
Create a Retirement Budget
When people retire after saving up for years, they may feel like it is finally time to enjoy themselves. While it is fair for them to want to do this, the risk is that they will spend all of their savings in a short period of time.
To stay on top of your finances, budget your expenses and include costs you plan to incur in the future, like extra travel. This will help you figure out what you can realistically afford.
A budget is especially important when you’re retired and no longer bring in a regular paycheck. Your income during retirement is likely to come from savings, Social Security, and any pension plans you have.
The most recent pay stubs can be used to easily budget for retirement according to William DeShurko. The monthly number after deductions is typically not much different, and occasionally goes up to account for travel. If every expenditure must be budgeted, it may not be possible to retire.
Decide When to Take Social Security
If you are including Social Security in your retirement planning, one key decision is whether you will receive full or reduced benefits.
The year you were born determines when you are eligible for full retirement benefits from the Social Security Administration. If you were born between 1943 and 1954, you are eligible to receive benefits at age 66. If you were born in 1955 or afterward, your full retirement age is determined by your birth year.
If you start receiving Social Security payments before you reach the full retirement age for your birthday, your annual benefits will be lower than if you waited until you reached your full retirement age.
Waiting until you are 70 years old to start receiving benefits will give you the maximum possible benefit. Waiting any longer will not increase the amount you receive.
Sign up for Medicare
Medicare can be used to cover certain medical-related expenses related to hospital stays and physician services instead of using your savings to cover those amounts.
Medicare is available to individuals who are age 65 and older, or younger if they are disabled or have permanent kidney failure. The medical portion of the insurance is available at a premium and is optional.
If you already have health insurance through your job, you may not need to get the medical portion of Social Security. You can compare the costs and features of both and choose the one that is most suitable for you. The hospital insurance part of Social Security is available at no additional cost to you, as you have already paid for it as part of your Social Security taxes while you were working.
Use Your Home for Income
If you live in a large place, you may want to consider moving to a smaller home or an area where the cost of living is lower. This could provide some additional funds to add to your retirement nest egg.
If you aren’t willing to move or sell your home but need additional income, you might want to consider a reverse mortgage. With a reverse mortgage, a lender uses the equity in your home to provide you with tax-free income.
Before applying for a reverse mortgage, be sure to find out as much as possible about the fees you’ll pay, the terms of the mortgage, and your options for receiving payments.
Set Automatic Transfers
This is a tool you can set up to automatically move funds from your checking account to your retirement account every month. This way, you will never forget to save, and there is no risk of you spending that money.
Create an Emergency Account
Creating an emergency account with 3-6 months of salary saved up will help you pay for unexpected expenses without disrupting your retirement plans.
Pay Down Debt
One goal people should have is to be debt-free by the time they’re 65. That means being free of credit card debt, especially the high-interest kind from rewards cards, as well as car and mortgage loans and any other big loans. The reason is that you want to increase your monthly cash flow as much as possible.
What Investment Accounts Should You Use?
While saving money is critical to retirement, investing that money is just as important. This is because of compounding, which is when gains grow on top of other gains. For example, if you invest $100 one year and it goes up to $110 the next year, your gains for the following year will be based on the $110, rather than the original $100. Compounding can have a large impact over time, positively or negatively.
Accounts you can use for retirement savings:
High-yield Savings Account
The funds in a federally-insured savings account are not invested in stocks or bonds, so there is very little risk; however, you will not make much money on the funds in the account. Currently, the highest-yielding savings accounts are under 1% on the dollars saved, and have been trending down with current Federal Reserve policy to keep its benchmark rate lower for longer. Your money should grow more over time in a more traditional investment savings vehicle.
Traditional Individual Retirement Account (IRA)
The contribution limit as of 2021 is $6,000 for people under 50 and $7,000 for people 50 or older The IRA is an individual account that you open and contribute to yourself in order to save for retirement. The traditional IRA allows you to deduct your contributions from your taxable income. However, you will be sharing your withdrawals with Uncle Sam in the form of taxable income.
Roth IRA
Roth IRAs are similar to traditional IRAs in that you can contribute $6,000 a year, or $7,000 if you’re over 50. The difference is that with a Roth IRA, you don’t get a tax deduction when you invest, but you also don’t owe the IRS anything when you withdraw. All of your contributions can, therefore, grow tax-deferred over time, and ultimately your withdrawals will be tax-free.
Simple IRA
While small businesses are not required to offer 401(k) plans, they are allowed to offer a SIMPLE IRA. A SIMPLE IRA works in a similar way to a 401(k) in that both employees and employers can contribute funds, which reduce each side’s taxable income by the amount that each party invests. The annual contribution limit for SIMPLE IRAs for 2022 is $14,000, up from $13,500 in 2021.
Traditional 401(k) plans
A 401(k) account is a retirement account offered by a company to its employees where they can contribute a percentage of their salary before taxes are taken out. This account can grow tax-deferred, which means you won’t have to pay taxes on the earnings from investments until you withdraw the money during retirement. .
Roth 401(k)
The Roth 401(k) is an employer-sponsored account which is not tax deductible but the withdrawals are not subject to taxes. The contribution limits for Roth 401(k) are $20,500 for people below the age of 50. The employers and the employees can contribute to this account.
The Bottom Line
Your timeline for retirement and how you choose to manage your income during retirement are both personal choices. Although you will come across many suggestions about when to retire and how to handle your money, it is important to keep in mind that there is no single answer that applies to everyone. Your decision about when to retire and how to manage your income during retirement are both personal choices.
Working with someone who specializes in retirement planning can help you create a plan that is custom-tailored to your needs and income. The sooner you start planning for retirement, the better, and don’t forget to match your investment portfolio with your risk tolerance.
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