Finances & Debt

Ask Yourself These Questions Before You Retire

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Everywhere you look, advice abounds for retirement planning. Some strategies are achievable, others appear to be quite simple and others are downright aggressive. But don’t let that turn you off. There are lots of different ways to plan for life after you leave the workforce.

Guidance comes from many different sources – from books to the internet and investment banks to your neighbor down the street. But the reality is that nearly half of all U.S. households won’t be able to maintain their standard of living after retirement. Don’t start panicking just yet, there are lots of ways to make sure you can enjoy a financially stress-free retirement.

Here are some big picture things you should keep in mind while considering your options.

Key Retirement Considerations

  • Life expectancies change and you could be in for a long stretch – even if you don’t take early retirement and wait to leave the workforce till the average age of 62. 
  • Retirement income should be flexible, with growth potential and guaranteed income.
  • Income should be sourced from multiple places with a diversified income stream.

Though Social Security will probably still be around, younger Americans may not be able to rely on it the way previous generations did. Even when the program was introduced, it was never meant to serve as a household’s sole source of income.

On your marks

So, where’s the best place to start? There are a few questions to ask yourself before you decide which retirement benefit options will suit you best.

How much money will I need to maintain my lifestyle and live comfortably?

This is important to answer, as it’s recommended that you aim for having 70% of your pre-retirement salary. Other things to think about include medical costs associated with growing older. For instance, did you know that most health insurance plans for mature adults don’t cover dental?  If you plan to go all out in your golden years with luxury cars, designer clothing and first-class vacations, you’ll need to be putting away far more money and saving it much earlier than you think. And it never hurts to have money set aside for setbacks like home repair or family emergencies.

What are your goals?

If you plan to have your debts paid off before you quit working, you may want to pay more toward them now instead of sticking with low or minimum payments.
You should also look at how long you’re anticipating your retirement to last and when you would like to retire. This will help establish which retirement strategy may be the best fit for you.

When, where and how should you start saving? 

The short answer is that you should start saving as soon as possible, but in reality it’s a bit more complicated than that. There are plenty of websites out there than can help you calculate roughly what you’ll need in your retirement savings, but you’ll also want to have an emergency fund – so looking beyond just monthly costs is a good idea.

Aim to put away 10-15% of your annual pre-tax income every year, if possible. With time, tax breaks and compound interest all working in your favor, future you will be thankful.

Savings strategies

But how will you know which investment type is right for you? There’s always the stock market, savings accounts and the old hoarding-money-under-the-mattress trick. Here we’ll focus on the two most common, retirement-specific investment options: the 401(k) and the IRA.

  • 401(k)s and 403(b)s are usually offered as an employee benefit and you should look into your company’s offerings if you’re not sure you signed up. If your company has a matching program, take advantage of it – and know how long it will take to be fully vested (that is, have complete ownership of the funds your employer has contributed) so you’re not giving up free money. In 2019, a cap of $19,000 was placed on personal contributions to a 401(k).
  • IRAs come in two different forms: the traditional and the Roth. The difference is that a traditional IRA means tax breaks now and payment later, while the Roth is the reverse. Both have a limit of $6,000 investment in 2019. To get yourself started, consider rolling your tax refund into an IRA, if you receive one.

The contribution caps on both of these go up after age 50, so you can do some catching up as you get closer to retiring – but by then you’re missing out on years of compound interest.

Why is it important to know your options? Well, 56% of Americans don’t know how much they’ll need to save for retirement and 66% of millennials don't feel on track.

It all sounds a bit intimidating, but retirement strategies don’t have to be that way. If being prepared seems out of reach, just keep these simple tricks in mind.

  • Automate the savings. An automatic paycheck deduction comes with less dayto-day management and stress and is deducted from your pre-tax earnings.  
  • Keep your hands off. Retirement funds are longterm investments that will ebb and flow with the market. If you’re still a few years from retiring, just sit back and let the investment do its thing. This is especially true if it’s part of a target-date fund where the fund manager will do any rebalancing for you.
  • Increase contributions yearly, or when you receive a raise. Keep your longterm goals in mind before splashing out on impulse purchases that will only serve a purpose in the moment.
  • Watch out for savings options with higher fees. These can really add up over the life of your account, even more so if you’re decades away from retirement.

Heading into the home stretch

As you get closer to the end of your working days, reevaluate your investment options to make sure you’re getting the most out of them with as little maintenance and risk as possible to deal with later. Make sure you can enjoy your work-free years enjoying all that free time, not worrying you’ve got enough money to see you through.

If you can, add more to your yearly IRA and 401(k) contributions after age 50, since that’s when the cap goes up. You should also consider delaying your social security payments until full retirement age, as drawing on them earlier actually means lower payments. Also, try to avoid taking out money from your investment accounts until after retirement. While you can draw on those funds for some things, you may face taxes or penalties – and you’ll be losing out on that money earning interest over time.

To leave less work for yourself, you may want to combine your 401(k) accounts when you leave the workforce. Only having to track one account’s information may be easier and it could potentially lower your fees. Remember that the year you turn 70 and a half, you will have to start taking the “required minimum distribution” from your investment funds.

The information presented above merely scratches the surface of securing your financial future for retirement. To make sure you’re on the right track and have all your documents in order, consider speaking with an attorney or financial advisor.