Retirement has, in some ways,become an avoided topic. We see the word, we understand it’s importance, but a great majority simply look the other way to evade any discussion. According to the Employee Benefit Research Institute, nearly 46 percent of Americans have less than $10,000 saved. Even worse, 29 percent of the workforce has less than $1,000. Regardless of your age, retirement planning should be recognized as one of the most important endeavors of your life.
It’s Not Your Parent’s World Anymore
Retirement planning is not going to be as easy as it was for your parents. I’m not even sure if companies give out gold watches anymore, and guaranteed pensions are far and few between. Without a feasible plan for a monthly income, running out of money is a very real possibility. So where do you start? Begin with your debt.
- Make a list of all your debts
- Eliminate all non-essential spending. Those routine $5. coffees, $20 dinners, and $12+ cocktails add up.
- Rank your debts by the interest rates.
- Start paying the minimum required on all your debts and then focus the rest of your available money on the one with the highest interest rate.
- Once those debts with the highest rates are paid off, go down the list and repeat again
The one thing you shouldn’t do is pay off those smaller loans first. It’s a popular strategy, but any debt with a higher interest rate is eating up more of your money, so those are the ones to kill off first. Of course, it will probably require you to adjust your lifestyle a bit, because instead of free-spending money, it will now go towards your debt.
Spend Less Than What You Make
30 percent of Americans have more credit card debt than emergency savings. People spend more than they make. It’s time to get realistic about your spending habits. Not just the big items, but the smaller, everyday expenses that you probably overlook. This is one of the most important steps on your retirement planning journey.
Although you cannot always perfectly predict the future, you can make logical choices. Three to five years before retirement, you should have an idea of how much you will receive from your pension, social security, annuity, 401k, and any investments.
Consider all of your sources of income and then take a look at your expenses. If you have student loans that you know will be apart of your debt for some time, make an honest plan going forward. Perhaps consolidate to lower the monthly payment. Doing this will help you create a plan that is fluid enough as your needs change over time.
Assess your needs for insurance because, during retirement, you’ll probably pay higher insurance premiums. Do you have a need for disability coverage? How about long-term care insurance? If you have these needs, you should sign up for a policy before you retire.
The Impact Of Taxes On Retirees
Most baby boomers forget about the impact of taxes, and consulting with a tax professional can help you understand how to benefit from tax advantages. For example, residing in certain states like Florida is more tax advantageous for retirees than living in New York.
Additionally, contributing to retirement plans now, like 401k and IRAs are tax-deductible, which means that the amount of tax you need to pay each year can be funneled into your retirement plan for that year. While no withdrawals are made, those contributions are tax exempt. And Roth IRA contributions are not subject to tax deductions, so that money accumulates tax-free.
Eventually, taxes must be paid, but by the time you make withdrawals, you’ll be a retiree, and already part of a lower tax bracket.
Tying Up Loose Ends
The most ideal way to enter retirement is to be debt free and mortgage free. If there are too many debts left unpaid when you retire, chances are you will start paying them off from your retirement fund(s), which places an unnecessary burden on your budget. It also means you have to cut down on some of your planned post-retirement activities that will undoubtedly take some of the fun out of your retirement.
If you still have outstanding debts one year before retirement, start aggressively paying them off, so the one large debt left will only be a mortgage payment.
Retirement is one of the most challenging life transitions, and you must plan carefully to meet your goals of living comfortably.