It’s never too early to start planning for a successful retirement. In fact, for most Americans, it takes years of planning and forethought to retire comfortably. Unfortunately, many people don’t do enough to save for this portion of their life. According to Consumer Reports, under 30% of investors who are 55 or older are highly satisfied with their retirement savings.
The amount of savings that Americans have on average for retirement often only lets them live comfortably for a few years. For example, the average 56-61-year-old in 2013 had about $163,577 in savings when reaching that age. Unless you live very frugally in your golden years, that money will not go far.
Thankfully, there are steps you can take today that will increase your savings and help you create a successful retirement—and the earlier you start, the better.
When you start planning for anything, you should take some stock in your current situation. Consider your current assets and liabilities. Think about your income today and your current expenses. Are you going to have the same expenses and income in retirement?
For most people, they know that their income will significantly decrease, but they may not have thought about how their expenses will be affected. Some of your costs may actually go down. For example, you may have a good portion of your house paid off (or completely paid off), or you may pay off rental properties or vehicles. However, you may also have some additional expenses—whether it is an additional amount for medical care or more funds for travel.
Consider how your assets will affect your bottom line as well. Will you be selling assets? Is downsizing in your future? Are there certain assets you will have to pay to maintain?
Thinking about these aspects of your retirement will help you get a feel for what you will need to live comfortably. Someone who plans to travel the world in retirement, for example, is likely going to need more funds than someone who merely wants to engage in their favorite hobby of gardening in their retirement. Your retirement goals should play a significant role in your planning. It helps you determine what you need—and saving without a purpose isn’t very motivational!
As you get older, your health may become more of a concern to you. Of course, you always want to be as healthy as possible, but it’s particularly important in retirement, when you need to ensure you have funds for healthcare. Keeping up with regular doctor’s visits, doing preventative care, and keeping an eye on your overall health can go a long way—not just for your wellbeing, but also for the “health” of your pocketbook.
You will need to create a plan to address these costs in retirement. If your employer is paying the majority of your health insurance premiums now (and most do), what will do you when they no longer do that? Can you afford a plan on your own? Is planning to use Medicare or Medicaid a good idea for you? These are all things you should consider as you start your retirement planning.
Some people make the mistake of assuming that they can live in retirement on their Social Security income alone. For younger generations, getting any Social Security payments is questionable, and even for those who will receive benefits, those amounts aren’t nearly as much as you might think. The maximum benefit for someone who retires at full retirement age in 2018 is $2,788 per month.
In a 2018 report, the Social Security Board of Trustees stated that the current plans and projects predict that the Social Security benefit funds will be depleted by 2034. Although that does not mean that it will be out of money entirely, it does mean that fund are not guaranteed. For many people, this is terrifying—but it’s good to know long before retirement for planning purposes. For many, it’s better to simply ignore Social Security benefits in your planning.
If you want to use this type of planning, and many of those nearing retirement should, you need to consider what age you start to draw funds. In general, however, the longer you wait to start your benefits, the better. You will receive the full value of the benefits at age 67 today, but you can begin taking benefits by age 62.
You should have an emergency fund at any age, but it is especially important as you near retirement age. When you no longer have money coming in, you need resources to lean on if the unexpected occurs.
A good rule of thumb is to have three to six months of living expenses stashed away in an account that you can access quickly. Having this money now, even before you retire, will prevent you from tapping into your retirement funds. Pulling money from these funds sometimes results in penalties and unplanned tax consequences—and all of these are avoidable with some savings.
If possible, it’s a good idea to have the majority of your debt paid off before you move into the retirement stage. This isn’t an option for everyone, but if you can make strides toward this goal, it can go a long way to helping you have a successful retirement. Minimizing your expenses will help you need far less income in retirement, making your savings last longer.
If possible, you should contribute the maximum amount you can to your 401(k), IRAs, and other retirement plans. You are able to contribute up to $19,000 to your 401(k) in 2019. If your employer has a match program, you should try to put in at least enough to take full advantage of that match. You can also take advantage of catch-up contributions if you’re over the age of 50 as well. That allows you to contribute an additional $6,000 to your 401(k) for 2019.
As you near retirement age, you may want to consider consolidating all of your accounts into a diversified portfolio of investments. This not only helps you track your finances better, but it can also help you cut down on unnecessary fees and management expenses as well.
As you think through your income and expenses, you may realize that stopping work entirely isn’t an option for you. You may also simply decide that you don’t want to stop working or that you want to engage in some profit-making ventures that may not adequately address all of your funding needs. For example, if you have a side business that you love, but have never really gotten into full time, you may want to just engage in that type of activity in retirement. It may generate some income, but it may not be enough for you to retire comfortably.
For many, the reality is that they may need to work longer than age 62 (when they qualify to start taking distributions for Social Security). If you think you are in that boat, you are certainly not alone. But, it’s a good idea to get a handle on the concept of working longer now, so you aren’t shocked as you near what you thought was your retirement age.
Retirement means huge changes in your finances—from your assets to your liabilities. Talking to a professional about your accounts, tax planning, and risk management can go a long way to retire successfully.
The team at Dechtman Wealth Management can be a great resource for you. No matter where you are in the retirement planning process, we can offer realistic and actionable advice that you can use today. Give us a call to schedule an appointment.