Define Your Ideal Retirement
As you work toward this time, consider how you will shape your plan. What do you look forward to doing the most during retirement? Will you stop working completely or do you plan to take a part-time job or start a business? There are no one-size-fits-all answers to these questions. Personalize your vision of retirement in a way that matches your values and life goals as you carefully consider your preparations.
Look Forward To The Longest Vacation Youll Ever Take
Our fearless leader Dean Barber often says, People will plan longer for a summer vacation than they will the longest vacation of their lives, their retirement.
Think about that for a second. The longest vacation youll ever take is retirement. Its a great comparison. When youre in school, its easy to think that the longest vacations youll ever have are each summer between school years. Those pale in comparison to retirement, though.
If you put retirement in the framework of a vacation, planning for it might be slightly less daunting of a task. Lets say that youre still several years away from retirement and are planning a two-week vacation to Europe. Its going to take a decent amount of time to plan for that vacation.
However, lets put planning that vacation to scale with retirement. Lets say it takes 10 months to plan a two-week vacation, and you want to prepare for a 30-year retirement. Using that same 20:1 metric, you should be planning for retirement for 600 years. Thats unrealistic, but it illustrates the point that we often overlook how much time we should be putting into planning for our retirement.
Determine Your Retirement Needs
Before you can retire, you have to decide how you want to retire. Consider where you want to live, whether youll have a job , and what your expenses will be. Try to be realistic in terms of retirement length, too. This can be difficult to predict, but you can always refine your estimate down the line.
You should also create a timeline to show when different streams of income will begin. This will help you manage cash flow and determine how much you need to save to retire. Look to your Social Security account, employer-sponsored retirement accounts, individual retirement accounts, and, for some, wages and a pension. Be sure youre thinking of each income in post-tax dollars, as many retirees fail to factor in taxes.
See how your pre-and post-retirement budgets compare. The more realistic you are, the better prepared you can be. If you need help building or vetting your plan, you can find a financial advisor to help.
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Who Would You Like To Be Close To
You need to think about who you would like to spend most of your time with. Considering this factor can help you determine where you would like to live after you retire.
Maybe you would like to live closer to friends and co-workers, your children or close family friends. Maybe you and your spouse would like to move to a location that is a median for everyone you would like to be close to.
To help with this factor, consider who brings the most pleasure and meaning to your life. Many people who are retired are not completely satisfied with their retirement because they are far from their loved ones.
Create Or Update Your Retirement Budget
Put together a detailed monthly budget estimating your expenses during your first year of retirement. Then do the math to make sure you can afford to withdraw from your retirement accounts the amount youll need to fund your spending after accounting for any other sources of retirement income you might have, such as Social Security or a pension. Plan to withdraw enough to meet minimum distribution requirements and avoid tax penalties but not more than you need.
You dont want to have money sitting in a checking account that you can afford to keep investing in a tax-advantaged retirement account. And unless your account is a Roth IRA, with no taxes due on withdrawals, you dont want to pay more in taxes on distributions each year than you have to.
If your estimated budget comes up short, better to find out while youre still working. You might be able to postpone retirement if you need to save moreif not, at least you have time to rework your budget before you start spending.
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Cut Through The Noise
Its been a topic of interest for us as of late to talk about how so many current events, namely Russias invasion of Ukraine, has been affecting the stock market. In the , Dean and Logan DeGreave addressed the importance of staying calm during economic uncertainty, especially because of how conflicting economic news can be with coming from multiple sources. Its even confusing following news from the same source at times. So, what should we believe?
Its important to do research on your own and review multiple sources to give yourself a wider view outside of news media echo chambers. A couple of years ago, Shane Barber did a great job bringing together research from multiple sources to deliver a well-thought-out article on Presidential Elections and the Stock Market to see if there was a correlation between the two. Give it a read to find out, but the moral of the story is following market fundamentals based on whats important to you, and your plan will outweigh most news-based market fluctuations.
Emotions are high and only getting higher as we move along in the 2020s. Dont capitulate based on your emotions, understand your plan, and talk to your financial planner. Make adjustments together that make sense to your overall goal and arent just knee-jerk reactions to market scenarios.
While its key to cut through the noisy news media, its also imperative you do the next thing before you retire in the 2020s
Choose An Ira Based On Expected Income
Many experts say that a traditional IRA is a smart choice if you think youll be in a lower tax bracket when you reach retirement. It can also offer two tax benefits. For one, the contributions you make might be tax deductible. Second, the earnings and gains in your traditional IRA are not taxed until theyre distributed.
Roth IRAs, on the other hand, are often recommended for younger workers who believe theyll be in a higher tax bracket by the time they retire.
Understand How Your Social Security Benefits Are Taxed
Your Social Security benefits are technically income. So do you owe taxes on Social Security?
In some cases, yes.
If you have additional income, whether its from a job or investments, theres a good chance at least part of your Social Security will be taxed.
Retirees must pay federal income taxes on their Social Security benefits if:
- Half of their yearly Social Security benefits + other income = more than $25,000 for single filers or $32,000 for married couples filing jointly.
The IRS wont tax your entire Social Security income, even if you exceed those thresholds. Instead:
50% of your Social Security benefits are taxable if:
- Half of your benefits + other income = $25,000 to $34,000 for individuals or $32,000 to $44,000 for married couples filing jointly.
85% of your Social Security benefits are taxable if:
- Half of your benefits + other income = $34,000 and up for individuals or $44,000 and up for married couples filing jointly
Keep in mind that while 50% or 85% of your Social Security benefits may be taxable, they will be taxed at your ordinary income rate.
Switch Health Insurance To Medicare
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Most people are eligible for Medicare at age 65, but there are a variety of plans and coverage options youll need to evaluate based on your medical needs. Keep in mind Medicare may not cover everything. Prescription costs, copays, hospital costs, and nursing home care may need to be paid out of pocket and can be incredibly expensive if youre not prepared.
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The Thrift Savings Plan
Plan Your Living Situation
A common practice after retirement is to downsize the home or plan to do so in retirement. Its a significant thing to plan for in the event you buy or rent a new home and incur new debt. What if you want to relocate to be with kids and grandkids? Plan for it! The better you plan, the more information you can provide to your financial planner, and they can build it into your retirement.
Also, living situations can change multiple times in retirement. Like in the event mentioned previously, if you were to lose a spouse, maybe youll no longer need a full home to live in on your own. Or what if you or your spouse experience a life-changing medical event and need long-term care or live-in care? These are things you need to consider and have addressed in your retirement plan.
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Health Care Is Expensive
Medicare, the federal program that provides health coverage for more than 61 million older Americans, doesn’t start until age 65. Until then, you’ll need an alternative and it won’t come cheap.
“Private health insurance before Medicare kicks in costs an arm and a leg, says Brian Schmehil, director of wealth management for the Mather Group in Chicago. Current law says your insurance costs can’t be more than 8.3 percent of your household income. For a person with a household income of $50,000, for example, a mid-level silver plan would be $346 a month, or $4,150 per year.
Review Your Estate Plan
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Along with ensuring your finances are in order before retirement, you should also look over your estate plan, which details the dispersion of your assets and liabilities upon your incapacitation or death. Included in this plan are three documents: a living will, a trust, and a will. A living will details your medical preferences and your chosen power of attorney. A trust utilizes a third party to hold assets or benefits for beneficiaries, allowing the distribution of your estate to move more quickly than a traditional will. A will details your wishes for how you want your personal assets divided, which goes into effect after your death. You can make changes to your estate plan as often as you like, provided youre of sound mind. If you havent put together an estate plan yet, do so immediately.
Examine Benefit End Dates
Some benefits may stop the day youre done with work, but others may extend by a set number of days. However, those benefits arent as common as they used to be, says Winston.
This list can help in the retiring transition:
- Upcoming checkups: If you have dental or vision insurance now but wont when you retire, schedule appointments before your last day while those expenses may still be covered.
- Life insurance extension: To convert a voluntary life insurance policy , contact your benefits administrator to get the paperwork started. The difference: Youll pay the premium directly to the insurance company, rather than having it payroll deducted.
- Health insurance and retirement: More on those topics below.
Tip: Enter your employee benefits or human resources department into the contacts on your phone in case you have questions once youre retired.
You Sacrifice The Power Of Compounding Interest
Time is your friend when you are saving for retirement, but not when you are spending. If you sock away $250 a month $3,000 a year from age 25 to age 55, you’ll have about $237,000 when you retire, assuming you make no withdrawals and earn an average 6 percent annually on your investments. Seemingly not a bad return on your $90,000 in contributions.
But let’s say you work 10 more years and retire at 65. In that scenario, you’ll have about $464,000, nearly double. Why? The extra decade’s worth of contributions helps, but that only adds up to $30,000. The real growth comes from another 10 years worth of interest earned not only on all the principal you contributed but also the interest earned on the interest that has compounded for four decades.
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Retirement Can Be Tough On Couples
“Retirement is a major life transition, and you have to be patient with yourself and your spouse, says Patti Black, a certified financial planner in Birmingham, Alabama. Most retired couples do not look like those pictured in ads and commercials. You’ll have to decide how work around the house will change. Will you really share cooking, cleaning and yard work? And do you honestly want to be together 24-7, particularly if you downsize to a smaller home?
These decisions can have serious consequences for a marriage. Gray divorce, or divorce after age 50, has doubled since 1990 while declining across all other age groups, Black warns. And it is most often the wife who asks for divorce after age 50.”
John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter forKiplinger’s Personal FinanceandUSA Todayand has written books on investing and the 2008 financial crisis. Waggoner’sUSA Todayinvesting column ran in dozens of newspapers for 25 years.
Also of Interest
Make A Retirement Bucket List
Youve worked your entire life for retirement, so create a bucket list of everything you want to do in your golden years. Whether its seeing the pyramids in Egypt, taking up a dance class or buying the yacht youve always wanted, its important to have goals and plans in retirement that will keep you excited and motivated to save.
Discuss your bucket list with your spouse, and pin it up somewhere in your home to remind you of your upcoming adventures.
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Top 10 Things To Do Before Retiring
In many ways, retirement feels like crossing the finish line of a very long race. Its the milestone that we all work towards throughout our careers. But its important not to retire too early. Doing so could make it difficult to enjoy your newfound freedom.
Instead, you need to make sure that youre prepared for retirement before you quit your job. Here are 10 things that you should do before you cross the finish line.
Crunch Your Retirement Numbers
Before you retire, you should take the time to understand how much youll need in retirement and how your accounts will provide income. Common sources of retirement income include Social Security, a pension, your employers 401, other retirement accounts, passive income sources, and more. Some people choose to work part-time in retirement, as well.
You may want to consult with a financial plannerto help you plan how much youll need, how much you currently have saved, and how to fill in any gaps. You will also want to take the time to estimate your expenses in retirement to confirm you have the income to cover them.
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Do Not Originate New Debt
Often new retirees will go and purchase items to satisfy their hobby dreams like an RV or boat. These depreciating assets can widdle away at your monthly income. If you need to sell quickly it is rare that you can sell these items for more than you owe if you did not put a significant amount of money down.
It is not only important to pay off your debt but also to stay out of debt in retirement.
Check Life Insurance Policies
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Many employers offer life insurance as a part of their benefits package. However, once you retire, you may lose this coverage. Having life insurance in retirement is a good way for your beneficiaries to be able to pay major expenses like a mortgage or funeral costs after your death. While double-checking, renewing, or replacing a life insurance policy doesnt have to be one of your first steps when preparing for retirement, it will make the following years more relaxed and carefree. Take time to review your life insurance policy to make sure any outstanding expenses will be covered in the years after your retirement.
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Keep Your Family And Friends In Mind
From reconnecting with old friends to enjoying quality time with family members, retirement offers many an opportunity to spend more time with loved ones.
- If you have a spouse/partner, do you want to spend more time with him or her? What would you like to do together? Alternatively, what options are out there if youre interested in finding someone to spend your retirement with?
- Do you have children and/or grandkids? How much time would you like to spend with them? Will you need to travel to visit them?
- Are there childhood friends youd like to see more often?
- How will you grow and maintain relationships with friends and/or former coworkers?
Make Sure Youre Properly Covered
Risk management, or as its more commonly referred to, insurance. No one buys insurance hoping they have to use it. You dont buy a new car, get updated insurance, and go immediately wreck the vehicle. However, insurance is a primary piece of any solid retirement plan. You need to know if you are adequately insured on the property and casualty side, but also from a life insurance or long-term care perspective as well. Theres a point where you can be over-insured. Not only is it unnecessary, but it can also cause more damage than protection. Another consideration is for those who are retired and no longer on a company policy but are too young to enroll in Medicare. Knowing your options for coverage is vital.
We encourage to check out Episode 60 of The Guided Retirement Show, where Dean is joined by Sarah Askren to discuss the Ins and Outs of Property & Casualty Insurance.
Our next thing to do before you retire in the 2020s is
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