Most people who work for a living dream of retirement. However, for many workers, the idea of retirement comes with its own worries. Will there be enough money? Will I be healthy enough to enjoy it?
It should come as no surprise that money and health are the two biggest worries about retirement. There are other unknowns: where will we live? How long will we be able to travel? What’s all this about paying estimated taxes, and how does Medicare work? Getting prepared for retirement will be less stressful if you follow these steps:
Start with a budget. The chances are that you don’t know how much money you spend every month. You’re working, money comes in and it goes out. However, if you know how much money you are spending, and what you are spending it on, you’ll be able to have a handle on how much money you’ll need for retirement. You’ll also be able to see where your discretionary dollars are going and make a conscious decision, as to whether those are dollars that should be going into long-term savings for your retirement.
Remember that while some expenses may go down—like commuting—others will stay the same. You won’t be going to the office every day, but you will want to enjoy yourself. What will your leisure and entertainment activities be, and how much will they cost? How will you handle health care costs? You should also remember that there will be quarterly taxes to be paid.
The more information you can pull together about your spending, savings and unavoidable costs like taxes and health care, the better you’ll be able to plan for this next phase of your life.
How much income will your retirement accounts provide? We tend to focus on how much we need to save, but we should really focus on how much income our retirement savings will generate. How much will your IRA or 401(k) provide on a monthly basis?
Let’s say you’ve saved $500,000 in time for retirement. If you use an annual 4% withdrawal rate, which is the going rule these days, you’ll only have $20,000 a year generated for annual income. If you add Social Security to that amount, you may find that it’s not enough to enjoy the lifestyle you’ve anticipated for retirement. You may find that part-time employment can fill the gap, or you may need to work for a few more years.
Be smart about Social Security. Despite your years of saving, you will likely come to rely on Social Security to pay some of your bills. The smarter you are about your filing strategy, the better positioned you’ll be to maximize your Social Security benefits. If you wait until your Full Retirement Age, you’ll get the full monthly benefit you’re entitled to. If you can hold off claiming your benefits until age 70, you’ll max out as the monthly benefits increase every year you delay claiming.
One of your key resources, as you move towards your retirement years, will be your estate planning attorney. The process of creating an estate plan will also answer some of your questions about what retirement will bring and planning for aging now will give you a lot more confidence about enjoying your early years of retirement.
Reference: The Motley Fool (September 23, 2018) “3 Ways to Approach Retirement More Confidently.”