By Eric Bank
Smart retirement planning helps make the difference between a fulfilling and uncomfortable retirement. As we grow older and increasingly rely on predetermined sources of money, we often fret about outlasting our funds. With the right planning, it's possible for you to dramatically lessen this threat, even if you aren’t rich.
To handle the reality that people are surviving longer than in the past, you'll need a holistic strategy to prepare for your golden years. A part of this difficult task is to invest and save sufficiently throughout your employment years. Frequently, this boils down to a basic tactic: spend less, save more. The impact of compounding return means that time is helping you with investments that allow you to reinvest dividends, interest and capital gains.
Spending less means spending intelligently: employing credit carefully, searching for thrifty deals and remaining resolute about your financial decisions. The adage “pay yourself first” is crucial: as soon as you pay your fixed monthly expenses, you need to reserve a set sum for investing and saving, and then live on the remainder. If you make use of debt, do so with an understanding of the interest you're shelling out and identifying the most beneficial credit cards available to you.
The government assists you through laws creating tax-advantaged retirement programs that create wealth while postponing (or, with regards to Roth plans, eliminating) taxes on your investments. There are additional tax-favorable financial solutions, such as annuities and life insurance, to help underpin an effective retirement strategy.
In this Retirement Planning Guide, we'll provide you with the knowledge you need concerning the primary actions to take now to build a more contented retirement down the road.
A solid retirement demands a reasonable estimation of the amount of money you'll collect on a monthly basis and the costs associated with the way of life you intend to live.
You can receive cash inflows from a number of channels besides your savings and brokerage accounts:
Retirement Accounts and Pensions: If at all possible, put into your employee pension plan 10 to 15 percent of your income, as well as any matching contributions from your employer. You can also utilize an IRA and, in case you're self-employed, a one-person 401(K) plan to accumulate a tax-deferred nest egg. Commencing at the age of 50, you'll be able to boost your personal retirement plan yearly contributions by at least $500.
Social Security: Although you may begin receiving Social Security payments at the age of 62, every year you defer payments until reaching 70 increases the annual payout you'll eventually receive by about 8 percent a year. Considering that individuals are on the job for a longer time than before --including many self-employed persons -- putting off Social Security payments is ever more feasible.
Home Equity: You can monetize home equity by means of a secured line of credit or a reverse mortgage. We're not huge admirers of the reverse mortgage, but nevertheless it is one of the available methods to tap the equity in your home. Don't forget that a reverse mortgage is a loan, and if you relocate before you pass away, you must begin repaying the balance.
Annuities: These are available in several varieties, such as unqualified and qualified annuities that vary in the tax breaks they offer. Annuities truly are intricate and you ought to talk with your financial counselor prior to going forward. When put together correctly, annuities can supply you with secure monthly payments for the remainder of your lifetime, irrespective of how long that is.
Loans: Regular loans from your life insurance policies may be possible. Many whole and universal life insurance products permit you to borrow cash that needn't be paid back. You'll be assessed interest, but it (less fees) simply is applied back to the policy’s cash value.
Suggestions frequently vary, but quite a few experts recommend a goal with regards to your monthly retirement cash flow to be 70 to 85 percent of your earnings before retirement. This is approximately equal to putting aside about eight times your yearly, pre-retirement earnings. If this amount is not practical, you really should start thinking about adopting a more affordable standard of living.
These are some points working in retirees' favor:
In retirement, you will no longer be putting aside cash for retirement savings, and there is a reasonable probability that you have reduced or paid off your mortgage.
Medicare, particularly when augmented by a Medigap policy, will take care of the majority of your healthcare costs.
Normally, your tax bracket falls once you stop working.
Work-related expenditures, such as work clothes and commuting costs, will vanish.
Retirees are eligible for countless special discounts, from marked-down museum memberships to reduced bus fares.
Retirement signifies that you can carry out your activities more economically. For example, you'll have time to go shopping at the grocery store and prepare recipes in your own home rather than coughing up serious cash at eateries. Brewing beer at home is really an enjoyable and inexpensive pastime. A vegetable garden combined with canning apparatus will help keep you supplied with fruits and vegetables all year around. You are only limited by your creativity.
As long as we're on the topic of food, a great many elders have scaled-down appetites. By substituting a tofu stir-fry for a steak, you conserve cash and perhaps enjoy better health.
Certain hobbies and interests are more affordable than others. You can enjoy fly fishing without purchasing a boat. It’s exciting to travel, but it’s best to hunt for good deals offered during off-seasons. Collecting and using coupons has become an entertaining, money-saving activity. Reading books and listening to music are practically free of charge, thanks to public libraries.
Once you reach age 65, the IRS gives you a higher standard deduction that can decrease your yearly income taxes by $1,500 or greater. Being 65 means you also are able to write off medical costs exceeding 7.5 percent of your gross income rather than the 10 percent limit applied to younger taxpayers. This tax benefit is effective through the end of 2016.
If you work for yourself, you can deduct your entire Medicare premiums plus a higher proportion of your long-term-care insurance premiums.
Examining your pre-retirement finances, write down all your income and expenses. If you monthly total is a negative number, you are actually spending beyond your means. If that’s true, correct it! You might be able to generate extra income (through additional work or more ambitious investing), liquidate unneeded assets and/or slash spending.
Having achieved a balanced budget, focus on adjusting it for retirement. You’ll need to modify your income numbers, and most likely, your spending. Account fully for any downsizing. As an example, it's possible to sell your home and relocate to a rental. This not only results in a lump-sum windfall that you’ll be able to invest, or to place in a life insurance policy/annuity, but moreover it rids you of quite a few expenses, such as home improvement projects, property taxes, homeowner’s insurance (rental insurance is less expensive), everyday maintenance, etc. Should you relocate to the downtown area or to a planned subdivision, you might be able to sell your car and enjoy significant savings.
Next, calculate the taxes associated with drawing Social Security benefits and retirement-plan income. Distributions from pensions and IRAs – but not from Roth accounts -- are taxed at your ordinary (and normally lower) tax bracket, and you are required to begin receiving minimum required distributions once you attain age 70 ½ (other than Roth IRAs, which don’t require distributions). Bear in mind that Social Security income is taxable anytime your earnings surpass specific limits. Dependent upon on the way your annuity is designed, you are on the hook for taxes for part or all of the cash flow. You can borrow from life insurance policies without incurring taxes, and any death benefits you collect from another's life insurance policy are typically (but not always) free of taxes.
If a portion of your earnings come from stocks, be sensible and recognize that you'll likely encounter bear markets in your lifetime, certainly not the best time to unload stocks (actually, bear markets are typically awesome times to buy). The nastiest situation is a serious bear market taking place at the beginning of your retirement. To decrease your risk, organize your budget so that you reduce your exposure to stocks for the initial three years of your retirement. Fortunately, interest rates have rebounded off rock bottom and are bound to go up, and that can translate into additional interest income from your investments. You can certainly profit by discussing your plans for saving and investing with a certified financial advisor. An advisor can describe what proportion of your capital you should cash out annually in order make certain you don’t outlive your funds. The traditional advice is to withdraw 4 percent a year, although you should choose a percentage that corresponds to your personal situation.
Most importantly, don’t anticipate that you'll die early just because your parents may have. Healthier personal habits and advanced medical engineering are expanding life spans – it’s wise to expect you’ll experience no less than 25 years of retirement life.
Long-term-care (LTC) insurance warrants consideration, as it will help you afford prolonged nursing home stays, as well as costs for hospice and palliative care. Regrettably, researchers have not yet discovered how to remedy dementia, an expensive and heart-breaking illness. Your LTC insurance policy ought to provide an extended period of coverage, considering that individuals with Alzheimer’s disease often survive long after the loss of cognitive ability. Keep in mind that Medicare protection for long-term-care is quite restricted, and to be eligible for Medicaid support, you'll need to spend down almost all of your money. New varieties of blended LTC/life insurance policies are on the market that feature lower premiums.
A final issue is inflation, the overall increase in prices as time passes. Inflation has remained fairly muted since 2008, although the past informs us that at some point inflation will make a roaring comeback. You'll want to have a portion of your money committed to investments that profit from inflation, including stocks and commodities. If you purchase only CDs or bonds, inflation can deprive your earnings of their purchasing power. Bear in mind that some insurance policies offer an option that raises rates and payouts to keep up with inflation – it’s advisable to take advantage of this option and include it in your budget. Under the present circumstances, you might want to position your policy to handle annual inflation of 3 percent inflation, but be ready to modify your budget in the future if and when inflation warms up.
The sooner you launch your planning, the greater opportunity you'll have prior to retirement to figure any required corrections. What's more, it may lead you to reevaluate your target retirement age – many individuals continue to work to age 70 and beyond, now all the more possible due to the work-at-home options offered by the Internet.
As we pointed out earlier, stocks ought to comprise a significant percentage of your portfolio so that you are shielded from the damage caused by inflation. The conventional wisdom for individuals nearing retirement is to invest 50 - 60 percent in stocks, the balance in cash, commodities, bonds, real estate and various other assets. Just as with any cliché, this has an element of truth, although you should adapt the percentage for several variables, including:
Your risk tolerance
Your present age
How much you'll rely on stock market income after you retire
The well-known “Rule of 110” has you subtract your current age from 110 and use the answer as your stock investment percentage. For instance, if you are age 50, then 60 percent of your holdings would be in stocks. At age 65, this falls to 45 percent. Of course, this figure ought to be modified to fit your individual situation.