Pay Off Your Mortgage
If youre looking at where to put your cash when you retire, consider paying off your mortgage. By the time you retire, the remaining balance on your home might be small enough to pay off in a single lump sum. Then, you can enjoy the remaining years of your life without having to worry about a mortgage or rent payment. This can free up your funds for other activities, or at the very least, give you peace of mind that you will always have a place to stay for free.
Consider A Lifetime Isa
If your earnings or way of working means you dont qualify for auto-enrolment but you have money to save you could try a lifetime Isa.
The lifetime Isa is a tax-free savings or investments account designed to help those aged 18-39 at the time of opening to buy their first home or save for retirement.
For every £4 you save, the government will add £1 up to a maximum of £1,000 every tax year until you turn 50 years old.
However, you should bear in mind that you only gain the 25% bonus on top of what you save until the age of 50, but you cannot access your funds until you reach 60.
You can withdraw money at any time though if you do before you turn 60 the government will take 25% of the total amount you withdraw as a penalty.
- Find out more:lifetime Isa v pension
Spend Time With Your Grandkids
A Welsh proverb says: Perfect love does not come until you have your first grandchild.
If you are looking for things to do in retirement, you might want to think about things you can do with your grandchildren. There is something unbelievably special about being a grandparent. You get all the magic of the child and not as much of the burden.
Retirement can be a wonderful time to spend time with your grandchildren. You can share experiences that are important to you and learn about things that are important to them. They can keep you young and you can help them grow up.
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Review Your 401s Payout Policy
One key question in retirement is how youll create an income stream that is, a retirement paycheck from your savings. If your 401 lets you set up regular withdrawals or an installment payment plan, then it might make sense to keep your money in the plan.
If your 401 doesn’t allow for periodic payouts, consider rolling your savings over to an IRA.
A growing number of employers allow retiring workers to say, Pay out X dollars per month, says Steve Vernon, author of Retirement Game-Changers and a research scholar at the Stanford Center on Longevity.
But 401 plans vary widely. Some allow lump-sum disbursements only. Others might offer partial withdrawals, but the number is limited. If and when you need periodic payments, youll need an account that allows that. If your 401 doesnt, consider rolling your savings over to an individual retirement account. See this quick-start guide on 401 rollovers for more on this process.
How Do Benefits Work And How Can I Qualify
While you work, you pay Social Security taxes. This tax money goes into a trust fund that pays benefits to:
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Those who are currently retired
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To people with disabilities
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To the surviving spouses and children of workers who have died
Each year you work, youll get credits to help you become eligible for benefits when its time for you to retire. Find all the benefits Social Security Administration offers.
There are four main types of benefits that the SSA offers:
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Selling Your Current Home And Buying A Less Expensive One
Selling your home and buying a less expensive one can provide you with extra money in retirement. This is often called downsizing.
You may save money in rent or mortgage payments, or free up some of the money that is invested in your home, by moving into a less expensive home. You may also pay less for utilities such as heating and electricity. However, remember that there are many fees and costs associated with buying and selling a home.
Consider A Roth Conversion
Tax professionals and retirement advisors often push clients to roll retirement accounts into Roth IRAs, where time and tax-free growth can work their magic. But its not a silver bullet, and the move may not make sense for some workers.
The conversion of a traditional 401 or traditional IRA to a Roth IRA will generally trigger a tax bill. However, once you make the move, all the funds grow tax-free and can remain untouched.
For example, lets say a 43-year-old gets a new job and decides to move $150,000 from their 401 into a Roth IRA. If this person is in the 35 percent federal tax bracket, theyll owe $52,500, which would be wise to pay with funds outside of the IRA. If the entire amount in the Roth remains untouched and it grows at an annual rate of 7 percent, it would be worth $1.14 million in 30 years.
What about someone whos close to retirement or taking RMDs? If you need the retirement funds for yourself and dont plan to pass them on to heirs, then it may be smart to leave them where they are.
But if you want to preserve that retirement asset for heirs, Slott says, its a great move because it removes the uncertainty of what future taxes will be. Converting to a Roth is a great thing to do for the next generation.
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Get Involved In The Political Scene
Do you have an activist bent? There’s no better time than retirement to take a greater interest in the issues affecting your city, your state, or the country in general. You could become a poll worker, volunteer on election campaigns, organize rallies, collect signatures on petitions, attend town hall meetings, or even run for local office.
Make An Investment Plan
Instead of rolling the dice with your money, make an investment plan and follow it. Successful investors follow a disciplined process and stick with it. An investment plan helps you align the investments you choose with their intended purposes.
You don’t need to reinvent the wheel when you’re investing there are many simple plans published in various types of media that have plans that work. The most effective ones involve the steps mentioned here.
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Roll Your Assets Into A New Employer Plan
If youre changing jobs, you can roll your old 401 account assets into your new employers plan . This option maintains the accounts tax-advantaged status. Find out if your new plan accepts rollovers and if there is a waiting period to move the money. If you have Roth assets in your old 401, make sure your new plan can accommodate them. Also, review the differences in investment options and fees between your old and new employers 401 plans.
Periodic Distributions From 401
Instead of cashing out the entire 401, you may choose to receive regular distributions of income from your 401. Usually, you can choose to receive monthly or quarterly distributions, especially if inflation increases your living expenses. If the 401 is your main source of income, you should budget properly so that the distributions are enough to meet your expenses.
For example, if you have accumulated $1 million in retirement savings, you can choose to receive $3,330 every month, which amounts to approximately $40,000 annually. You can adjust the amount once a year or every few months if your 401 plan allows it. This option allows the remaining savings to continue growing over time as you take periodic distributions.
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Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our reporters and editors focus on the points consumers care about most how to save for retirement, understanding the types of accounts, how to choose investments and more so you can feel confident when planning for your future.
Disadvantages Of Closing Your 401k
Whether you should cash out your 401k before turning 59 ½ is another story. The biggest disadvantage is the penalty the IRS applies on early withdrawals.
First, you must pay an immediate 10% penalty on the amount withdrawn. Later, you must include the amount withdrawn as income when you file taxes. Even further down the road, there is severe damage on the long-term earning potential of your 401k account.
So, lets say at age 40, you have $50,000 in your 401k and decide you want to cash out $25,000 of it. For starters, the 10% early withdrawal penalty of $2,500 means you only get $22,500.
Later, the $25,000 is added to your taxable income for that year. If you were single and making $75,000, you would be in the 22% tax bracket. Add $25,000 to that and now youre being taxed on $100,000 income, which means youre in the 24% tax bracket. That means youre paying an extra $6,000 in taxes.
So, youre net for early withdrawal is just $16,500. In other words, it cost you $8,500 to withdraw $25,000.
Beyond that, you reduced the earning potential of your 401k account by $25,000. Measured over 25 years, the cost to your bottom line would be around $100,000. That is an even bigger disadvantage.
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Remember That You Are Actually Only As Old As You Feel
Your age is only a number. It should not define what you do in retirement. Dont believe me? Look at these amazing accomplishments by 70, 80 and 90 year olds and more amazing accomplishments that prove that growing old is truly optional!
Furthermore, consider that Pablo Picasso was still producing art in his 90s. Thomas Edison invented the telephone at age 84. Laura Ingalls Wilder published her first book when she was 64.
What To Do With Your 401 Money When You Retire
By Rodney Brooks, Next Avenue Contributor
Billions of dollars are at stake as boomers decide what to do with the $5.3 trillion theyve invested in company-sponsored 401 plans when they retire. Leave the money where it is? Roll it over to an Individual Retirement Account at a financial firm? For many, its a head-scratcher.
The topic is especially timely with the Wall Street Journal recently reporting that the U.S. Department of Labor is looking into whether Wells Fargo has been pushing retiring clients to move their 401 money into more expensive IRAs at the bank.
Financial advisers say there are pros and cons to leaving your 401 in place and to rolling it over into an IRA.
Also on Forbes:
It depends on the individual needs of the employee and the quality of the plan, says Harris Nydick co-founder of CFS Investment Advisory Services in Totowa, N.J., and author of Common Financial Sense, Simple Strategies for Successful 401 and 403 Retirement Plan Investing.
There is not a one-size-fits-all when it comes to making this decision, says Dan Houston, chairman, president and CEO of Principal Financial Group in Des Moines,
5 Reasons to Leave your 401 With Your Company
Here are five reasons to consider leaving your 401 with your company as 22% of 401 owners did when exiting, according to an Ameritrade survey rather than moving it to a Rollover IRA when you retire:
5 Reasons to Roll Over Your 401 Into an IRA
What Not to Do With Your 401
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How To Invest Your Money After Retirement
As you prepare your retirement savings portfolio, the first thing you should do is set aside money for emergency purposes . The emergency fund gives you a cushion in the event of illness, natural disaster or any other unforeseen expense, and it provides a backup in the event of another economic crisis. Just make sure you can easily access your emergency money if the need ever arises. Once you’ve got that taken care of, you can explore relevant investment opportunities.
Retirement is not the time to put most of your money into high-risk investments. You want to ensure that you have a secure financial base to last the remainder of your life, which could realistically be several decades. Whatever money you put into a high-risk investment could be lost, so you need to balance things out with low-risk financial opportunities .
Treasury bonds are one of the safer options. They have a fixed rate of interest, which means you’re guaranteed at least that much growth over the life of the bond it won’t earn you as much money as a good stock market gamble, but it will certainly earn more than a bad one. CDs are also a possibility, although you’ll usually be penalized if you need to withdraw money early. If you have an IRA , you can keep our funds there and withdraw without penalty once you reach age 59 1/2 .
Check out the next page for more money management and investment information.
Registered Retirement Savings Plans
A Registered Retirement Savings Plan is a savings plan designed to help you save for retirement. RRSPs help you grow your money while offering tax benefits. For example, you may get a deduction on your income tax, depending on your income and the amount you contribute. You also dont have to pay tax on the money you earn as long as it stays in your RRSP.
You can claim a deduction on your income tax return for RRSP contributions up to your RRSP deduction limit. This limit is typically 18% of your earned income for the previous year .
Money taken out of an RRSP is considered income. This means that you may have to pay tax on it. This can also impact the amount of money you receive from government benefits that are based on your income, such as the Old Age Security pension and the Guaranteed Income Supplement .
There are some programs that allow you to take money out of an RRSP without having to pay tax. For example, if you use the money to buy a house or to pay for your or your spouses post-secondary education. Youll have to follow special rules and put the money back in your RRSP within a certain period or you will have to include it as income and may have to pay tax on it.
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Decide How Youll Save And Invest
Putting your retirement money in the right place is just as important as knowing how much to save. Heres what we recommend:
- Save at least enough in your employer-sponsored account401, 403, 457 or Thrift Savings Planto get the full company match, if your employer offers one. If you have more than one 401, find out if a rollover is right for you.1
- Use a Health Savings Account Tooltip An account that lets you set aside tax-free dollars for qualified medical expenses. Most HSAs also let you invest your savings. To be eligible, you must be enrolled in a high deductible health plan . to put money away for future health care costs, if youre eligible.
- If youve maxed out your employer-sponsored account or dont have one, consider a traditional2 or Roth IRA3 to boost your savings.
- If youve maxed out your IRA,Tooltip Individual retirement accounts are personal retirement savings plans that have tax benefits. Most IRAs offer a choice of investments. Types of IRAs include traditional, Roth, rollover, education, SEP and SIMPLE . consider a brokerage account Tooltip A taxable account that you open with a brokerage firm. It allows you to invest in stocks, bonds, cash, ETFs, mutual funds and other investments. to save even more.
Next Steps To Consider
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
Recently enacted legislation made a number of changes to the rules regarding defined contribution, defined benefit, and/or individual retirement plans and 529 plans. Information herein may refer to or be based on certain rules in effect prior to this legislation and current rules may differ. As always, before making any decisions about your retirement planning or withdrawals, you should consult with your personal tax advisor.
The change in the RMD age requirement from 70½ to 72 only applies to individuals who turn 70½ on or after January 1, 2020. Please speak with your tax advisor regarding the impact of this change on future RMDs.
A qualified distribution from a Roth IRA is tax-free and penalty-free, provided the 5-year aging requirement has been satisfied and one of the following conditions is met: age 59½ or older, disability, qualified first-time home purchase, or death.
Be sure to consider all your available options and the applicable fees and features of each before moving your retirement assets.
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If This Is An Increase In Your Yearly Income For The Foreseeable Future
In other words, is this windfall youre receiving in the form of a raise that will increase your weekly and/or annual pay for as long as you hold down your job? Maybe its an annuity or some kind of payment from a trust fund that will be doled out over a long period of time.
Whatever the reason might be, if your annual income is going up for the foreseeable future, you need to take different steps than if you were receiving a lump sum.
First and foremost, do not inflate your lifestyle! This is the most important thing you need to do if your income goes up. Do not immediately adjust your spending to absorb that new income!
Instead, what you need to do is continue to live on your previous income. Dont change your spending one little bit. Dont spend more on cars, on housing, on food, on anything. Just keep rolling along as before.
- Related: Keeping Lifestyle Inflation at Bay
The reason for that is that you already know how to live day-to-day on your previous income, but its also likely that your financial house isnt perfect. Maybe you have some debt hanging around a student loan, a credit card debt, a car loan, or a mortgage. Maybe youre not really saving for retirement. Dont feel alone: This situation describes the vast majority of Americans. They get by in a day-to-day fashion, but there are holes in the foundation of almost everyones financial house.
Your goal should be to use that increase in income to start patching up all of those holes.
