Affording retirement can be a challenge even in the best economic times. But in our post-recovery world with its steady stream of fiscal uncertainty, full retirement can seem the stuff of legend.
Surely, retirement is a more complicated proposition these days: A good 401(k) balance combined with Social Security just won’t cut it. Today, retirement planning needs to be more aggressive and focused, funds need to be more broadly sourced, and retirement itself needs to be more flexibly defined.
If you’re planning to retire in spite of current economic uneasiness, the following strategies can help make your dream a reality:
Before you retire
Feed your 401(k). For secure retirement, employees need to max out their 401(k) contributions, leveraging the trifecta advantage of a lower taxable income, company matching funds, and tax-free growth of contributions. For 2013, the annual 401(k) contribution limit for participants under age 50 is $17,500. If you’re 50 or older, the government allows “catch-up contributions,” which bumps up that limit by $5,500.
Of course, as with any investment, it’s essential to understand your comfort level with risk, gravitate toward more conservative funds as you near retirement, pay close attention to your quarterly statements, and protect the integrity of your balance by not borrowing against it.
Don’t forget about Roth IRAs. Though IRAs have a lower annual contribution limit than 401(k) plans — $5,500 for those under age 50 and $6,500 for those 50 or older — Roth IRAs are becoming an important part of retirement planning. With a Roth IRA, investors contribute money that’s already been taxed, and that money grows tax-free and isn’t taxable upon withdrawal.
Many economists and financial experts agree that taxes are bound to rise eventually. As a result, investors young and old are fully funding their Roth IRAs and choosing to take the tax hit now to avoid the roulette wheel of future rates.
Optimize your Social Security benefits. Few people realize the degree to which their Social Security benefit amounts are under their control. By boosting income during your working years, working longer, delaying the age at which you begin claiming benefits, and clearing certain types of debt before benefits begin, you can maximize your monthly payments. Check our post “13 Ways to Get More Social Security” for more details.
Anyone can learn more about their current estimated benefit from Social Security by setting up an account and accessing the information through SSA.gov. Review the earnings figures for each of your employed years, look for mistakes and have them corrected. This information is the basis for your future benefit and its accuracy is important.
Defund your refund. Getting a fat tax refund at the end of the year might feel like a win, but often it means a flub in financial planning. That accumulated money has served as an interest-free loan to the government throughout the year. That means it hasn’t had the chance to work for you and help fund your retirement plans. If your withholding tax consistently generates a refund every year, it’s time to review and revise your W-4.
Pay off your mortgage or strategically downsize. If you’re a homeowner, use the years that lead up to retirement to aggressively pay down your mortgage. Since housing is typically our largest single expense, there’s a real tactical advantage to owning your home outright by the time you retire. If you’ll be mortgage-free well before retirement, modify your budget and redirect those funds into a Roth IRA or other retirement investment.
If your home is too large or too expensive to maintain in retirement, consider a strategic but comfortable downsize. Less room and less land typically equal lower spending and lower property taxes. Pocket any profits from the sale of your previous home and use it to help fund your retirement.
Don’t be consumed by consumer debt. Voluntarily taking on long-term consumer debt as you look toward retirement is like gaining weight and shedding muscle in preparation for a marathon. Avoid all consumer debt that can’t be paid off in full within 30 days. Combined with a hiccup in employment or an unexpected major expense, interest on consumer debt can derail even the best-laid plans and most carefully calibrated retirement calculations.
When you retire
Consider “para-retirement.” A happy retirement doesn’t necessarily require a hammock and a beachside retreat. Saying goodbye to full-time employment can free you to pursue part-time roles, freelance opportunities, or employment in another field where work doesn’t feel quite so much like work. Para-retirement lets you dabble in all sorts of income-producing work and still provides a sense of freedom that’s the hard-won reward of decades of labor. Consider leveraging your skills in new ways to take some of the financial pressure off your retirement investments.
Keep it simple. Often, retiring in a tight economy means embracing a less complicated lifestyle than the one you enjoyed during your working years. If retirement is your priority and choosing when, where and if you work seems like the greatest luxury of all, understand that both your lifestyle and financial overhead may need to be simplified. Focus on the smaller pleasures of life and look for economic advantages that more free time can offer. What conveniences no longer seem quite as important, now that your schedule is flexible? Can you go from two cars to one? Do you have more time to cook meals at home instead of eating on the run?
Guard your health. A successful retirement involves body and mind, not just money. Replace your 9-to-5 work world with passions and projects to keep you physically and mentally fit. Dust off those decades-old ideas, hobbies and interests and use them to fuel the next phase of your fully engaged life.
Cherish your community. A close-knit group of friends, family, colleagues and neighbors is the silent wealth that no one seems to mention when they discuss retirement planning. Cultivating our relationships not only adds to the richness of life in retirement, it can help us face new logistical challenges, compensate for more modest means, and provide security as we grow older.
Flex your green thumb. Though it may sound quaint, planting a garden is a simple way to integrate several of the points we’ve covered here: Cultivating a garden can help keep us fit in retirement. Adopting a diet that includes fresh fruits and vegetables can promote better health. Producing a portion of our own food can take some pressure off our budgets, and gardening can build a sense of community and bring neighbors together.
Of course, everyone’s retirement picture is unique and some strategies may not work for every reader. But the take-away is this: Retirement today definitely takes more planning, may take some creative downsizing, and probably won’t be the same type of retirement that your parents or grandparents had.
The good news is that retirement is still very possible and, with a clear blueprint, those years can be rich, full of reinvention, and financially secure.