Should You Consider A Roth Conversion Before You Retire
The main benefit of a Roth IRA is the ability to withdraw earnings and contributions tax-free in retirement. If you have taxable funds to cover the fees and won’t need your traditional IRA for living expenses, converting to a Roth IRA before you retire could make senseespecially if you expect to be in a higher tax bracket in retirement or want to leave your savings to an heir tax-free. Other reasons to consider a Roth conversion include tax diversification of retirement accounts or irregular income streams with lower than usual income in the given year.
Once you retire, you can no longer contribute to a Roth. So if you’re not sure how it fits into your plan, consider talking to a financial advisor to be sure.
The main benefit of a Roth IRA is the ability to withdraw earnings and contributions tax-free in retirement. If you have taxable funds to cover the fees and won’t need your traditional IRA for living expenses, converting to a Roth IRA before you retire could make senseespecially if you expect to be in a higher tax bracket in retirement or want to leave your savings to an heir tax-free. Other reasons to consider a Roth conversion include tax diversification of retirement accounts or irregular income streams with lower than usual income in the given year.
Once you retire, you can no longer contribute to a Roth. So if you’re not sure how it fits into your plan, consider talking to a financial advisor to be sure.
Retiring Before Age 65
Until Medicare kicks in, health coverage options include health plans through the Health Insurance Marketplace, COBRA, private insurance, employer retiree insurance , insurance from your spouse’s employer, and faith-based health care ministries.
Another option? Continue to work full- or part-time to keep health benefits. While most employers don’t offer health benefits to part-time employees, a few do.
Until Medicare kicks in, health coverage options include health plans through the Health Insurance Marketplace, COBRA, private insurance, employer retiree insurance , insurance from your spouse’s employer, and faith-based health care ministries.
Another option? Continue to work full- or part-time to keep health benefits. While most employers don’t offer health benefits to part-time employees, a few do.
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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The Reality Of Quitting Work Can Be Far Different From The Fantasy Here’s What You Need To Know
by John Waggoner, AARP, Updated June 17, 2022
En español | Even if you love your job, there are times when you’d rather be alphabetizing the spice shelf than riding a packed train alongside hundreds of sniffling fellow commuters. And as you sway in the car next to a man who has biked four hours to the station, you might be thinking about early retirement.
Unfortunately, early retirement isn’t for everyone. In fact, it isn’t for most people. Just 11 percent of today’s workers plan to retire before age 60, according to an Employee Benefit Research Institute survey. For many of those who do take the plunge, the reality of early retirement can turn out to be far different than the fantasy. Here are a few things to consider before you decide to retire early.
Test Practice Retiring Before Making It Official
Most soon-to-be retirees have been reliant on a company or regular income to pay their expenses for the past 40 years. So, before you retire, see if you have the assets and fixed incomes to meet your expenses. This financial audit allows you to take notice of your everyday cash flow and make changes that prepare you to retire.
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Adjust Your Portfolio For Income
Adjusting your portfolio to allow withdrawals, while managing the remaining funds so that they last throughout your retirement years are critical steps to ensuring you don’t run out of money. Some questions you need to ask yourself include:
- Which retirement withdrawal rate will you use to make sure you dont outlive your assets? 3%? 4%?
- Which investments will you sell each year to achieve that withdrawal rate?
- And are your assets allocated so that you wont have to sell investments at a loss for retirement income in a down market?
If you need help answering these questions, dont be afraid to spend money getting a few hours of advice from a professional financial planner. You dont have to hire someone indefinitely, and you dont have to turn over your assets for an advisor to manage.
While your portfolio needs a margin of safety, beware of playing it too safe.
Your retirement portfolio needs to sustain you for perhaps three decades, which means theres no need to sell all your stocks the day you retire. And if you think average returns during your retirement years will be lower than historical returns, you definitely dont want to have too much of your retirement portfolio allocated to cash or bonds. Your returns wont be high enough to sustain your portfolio long-term.
Friends And Social Connections
Many working people find most of their social relationships at work. These are the people they share coffee breaks and lunches with. They know each others families, their heartaches, and their joys. These connections will be hard to maintain without the constant interaction of working together. Once retired, it will take a lot of time and effort to build new and equally close friendships.
To God, our identity is primarily that of being made in his image and redeemed by Christ.
Another consideration for many followers of Jesus is that, except for their friends at work, they may have no friends who arent believers. The workplace is their primary arena for living out and sharing the gospel evangelistically.
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Evaluate Income And Tax Strategies
In retirement, sources of income can vary from person to person and might involve a pension, retirement savings such as a 401 or individual retirement account, Social Security, taxable savings and investment accounts, health savings accounts, or business and trust income.
“Many people have a few different types of assets, so they want to be smart about which they tap into,” Rogers said.
For instance, not all sources of income are taxed the same. Withdrawals from traditional IRAs or 401 plans are taxed as ordinary income, but for Roth IRAs or Roth 401s, the withdrawals are tax-free. If you have a taxable investment account, you may have to pay capital gains taxes on some of the withdrawals.
How People Normally Retire
Saving for retirement conventionally is usually done by those who are employed full-time. Full-time employees may have a 401 that they pay into and their employer matches the amount which prepares them for retirement.
When they reach a certain age, and they retire from the company, then that 401 can provide them with income.
Many people supplement this by saving their money, investing or other activities that give them the money that they need for retirement.
Of course, not everyone has an employer with a 401 set up. Some people have two part-time jobs and do not qualify for full-time benefits.
There may be other reasons why they do not have an employer-sponsored retirement plan. But there is a government plan that you pay into each month that will provide you with benefits when you retire. This is called Social Security.
In addition to paying into Social Security, you can save your own money that will allow you to supplement any income you get from Social Security.
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Dont Pay Off Your Mortgage If You Have Other High
Carrying high-interest debt? Youre far from alone. Baby boomers have average credit card balances of nearly $6,000, a recent LendingTree study found. Credit Karma data pins debts even higher, reporting in May an average credit card debt of $7,285 for those born between 1946 and 1964.
Always pay down high-interest debt first, says Williams. High interest rates compound and create a significant drag. David Edmisten agrees: You absolutely want to get high-interest debts paid off before you touch your mortgage.
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.
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Increasing Your Retirement Savings
There are several ways to increase your retirement savings as well. For one thing, you should put it into an account where it is going to accrue interest. Thats the very least that you should do.
This might be a certificate of deposit or it might be a regular savings account.
If you have a retirement plan through your workplace and your employer will match you up to a certain amount, then consider paying more in then you currently are. If your employer is going to match your funds, then you should try to pay and is much as possible because you will be doubling your money every time you do.
There is also an IRA that can be a big help for retirement savings.
But the main thing that you can do to increase your retirement income is smart investing. Of course, no investment is perfectly safe, but if you have a wide and varied portfolio and either you or your broker are making really smart investment decisions, then the chances are good that you are going to arrive at retirement age that you are going to have more money than you invested in a significant nest egg for retirement.
It all depends on the market of course, as well as which decisions you make along with your broker and how much you invest, but most people find that this is a viable retirement plan.
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Six Things To Consider Before Retiring
Many people aim to retire at the age of 60 in the hopes that theyll still be fit and healthy enough to enjoy an active retirement. While theres a lot to be said for retiring early, its important to keep in mind the potentially extensive retirement period you will need to fund for, and the multitude of eventualities you could be faced with over what could well be a period of 40 years.
Here are six things to consider before retiring.
1. Your post-retirement income
2. Your sources of retirement income
3. Investment risk
4. Whether you can afford to retire
5. Boredom
6. Retirement accommodation
If youre retiring at a relatively young age, its possible that the family home is still adequate for your needs and that you are physically able to attend to its maintenance and upkeep. Realistically, however, your retirement accommodation needs are likely to change as you transition through the various stages of your retirement. With the high cost of decent retirement accommodation coupled with long waiting lists it is advisable to begin thinking about your future retirement accommodation sooner rather than later.
As is evident from the above, retirement planning is multi-faceted and all-encompassing and should be undertaken with the guidance of a retirement planning expert to ensure that decisions are made timeously, sequentially and appropriately.
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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.
Is Your Health Deteriorating
A 2009 study examined whether a persons health improved or deteriorated prior to and after retirement. 14 714 employees from across multiple French national gas and electricity companies were surveyed.
The study found that if a person had ideal working conditions, retirement made no difference to their overall health.
If a person worked in a poor work environment and already experienced poor or declining health, they saw the most significant improvement to their health if they retired. This improvement was maintained throughout the seven years after retirement.
If your health is deteriorating and you dont work in good conditions, this could be one of the signs youre ready to retire.
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Study Your Investments Before You Retire
Understand your investments and guide your strategies accordingly. It is best to consolidate your assets as much as possible and create an investment policy statement. A few suggestions include rolling old retirement plans into an IRA, working with a financial planner, and making sure you stay resolute in your planning.
Taxes: Required Minimum Distributions
The Secure Act raised the age where you must take required minimum distributions from 70 ½ to 72. As I write, Congress is working on the Secure Act 2.0, where RMDs will gradually more to age 75. Both sides of the isle like the higher RMD age and passage is likely.
People worrying about RMDs at a young age might be focusing on the wrong issue, as a result. Yes, contributions into a traditional retirement account feels like taking out a loan sometimes, since you later have to pay tax back on all the distributions, your original money, plus gains. With RMDs getting pushed to higher ages, you have more years to maneuver your finances for lower taxes.
As easy as the RMD concept is, it is really very complex. The interplay between LTCG rates and traditional IRA distributions taxed at ordinary rates, requires a seasoned hand in the planning process. This is where your tax professional comes in. Your facts and circumstances will determine your optimal tax and financial course.
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Other Options Available To You
Coming out of retirement may seem like the only way to make ends meet, but this isn’t always the case. You may be able to remain retired if you’re willing to make some changes to your budget. You could eliminate plans for travel or discretionary purchases and just focus on the essentials.
If that’s not enough, you may be able to get some additional support from government benefits. For example, blind, disabled, and low-income seniors are eligible for supplemental security income from the federal government. This is a monthly check similar to Social Security that you can use to pay your expenses. You can find out if you’re eligible by using the Benefit Eligibility Screening Tool.
Look into benefits available to you at the state and local level as well. There may be programs that can assist low-income individuals and seniors with housing, medical care, and food costs. Together with your savings, this could be enough to help keep you retired.
Returning to work is a big decision, and while it’s one you can undo, you probably don’t want to go back and forth that many times. So before you make your move, weigh the factors listed above. If you decide to get a job, consider looking for something that offers you some flexibility or is more in line with your interests so going to work doesn’t feel like such a chore.
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Check Risk In Your Retirement Accounts
If you have a 401 or IRA, make sure your investment mix makes sense for your retirement income plan.
Exactly how much of your portfolio should be dedicated to stocks which are riskier but typically deliver the best returns over time will depend on how much you need to generate in income during retirement and how much risk you’re able to stomach.
“We’ve had people come in who have been in the same investments since they were 24,” Rogers said. “You want to evaluate the allocation of your entire portfolio to make sure the stock and bond composition is appropriate.”
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When Will You Start Claiming Social Security
You may not know exactly when you will start claiming your Social Security benefits, especially if you havent yet determined when you will officially stop working. Perhaps you want to retire a few years early because you have substantial savings or your health isnt what it used to be. In that case, you could start Social Security payments as early as 62. However, starting Social Security early has its downsides.
One of the biggest downsides is that your payments will be reduced. Conversely, payments are increased if you delay them. Eric Phillips, CFA and Sr. Director at Human Interest, calls this a 401 bridge.
This means using 401 funds as a source of retirement income that helps you delay electing Social Security, Phillips says. As Phillips notes, you can increase your Social Security payments by as much as 8% annually if you delay payments until age 70.
