We all want to be financially secure during retirement. But doing something about it can seem impossible.
When we’re struggling to keep up with skyrocketing health care costs, runaway college tuition, mortgage payments, taxes and an endless stream of bills, building a sizable retirement nest egg seems more of a “would be nice” goal rather than a “must do now” priority.
Unfortunately, the clock is ticking. And unless you’re sure that a future windfall or inheritance will bail you out of a retirement savings shortfall, it’s up to you to ensure the security of your golden years. That’s why it’s important to connect the financial aspects of retirement with your vision of what you want your golden years to be like.
If this is too daunting to do yourself, a qualified fee-only fiduciary adviser can help. Meanwhile, here are five important issues to start thinking about when you’re planning for retirement.
1. Create your retirement ‘wish list’
It’s never too early to start thinking about how you’ll want to live during retirement, all of which will determine how much money you’ll need to support your lifestyle. You’ll want to consider:
- When you’ll retire: The longer you stay in the workforce, the more money you’ll be able to save for retirement through your 401(k) plan and IRAs.
- Where you’ll live: If you decide to move somewhere else, you’ll need to consider how much it will cost to live there in terms of housing, food, taxes and transportation costs.
- How you’ll live: If you plan to travel extensively, eat out more or engage in expensive hobbies, you’ll need more money than if you plan to live more simply.
2. Figure out where the money’s coming from
How much you will be able to spend each year will depend on how much money you have coming in. Depending on your work history, you’ll generally have several sources of retirement income.
- Social Security. You can start taking Social Security at age 62, but your monthly benefits will be significantly less than if you delay taking them until at least your “full retirement age” (FRA), which is age 67 for those born after 1960. If you can wait until age 70, you’ll get the highest monthly benefits, which may be significantly higher than your FRA benefits. You can use the Social Security Administration’s Quick Calculator to estimate your own benefits.
- Retirement plans and IRAs. You can start taking penalty-free withdrawals from pension plans, 401(k) plans and traditional IRAs at age 59½. But it’s better to keep these assets invested as long as possible, and then try not to withdraw more than the annual required minimum distributions (RMDs) you’ll have to start taking when you reach age 72. And remember that these withdrawals are counted as taxable income, so the more you take out the higher your tax bill could be. There are a variety of online calculators you can use to estimate your RMDs, including this one. And if you’ve contributed to a Roth IRA or Roth 401(k) you never have to take that money out, and when you do the withdrawals are tax-free if you’re over age 59½ and have had the account for at least five years.
- Other income sources: Don’t forget additional income you may receive from taxable bank and investment accounts or rental income. You may even want to take on a part-time job to bring in extra income.
3. Don’t forget about health care
The longer you live, the more likely that health care costs will consume a significant portion of your retirement nest egg. That’s why it’s important to plan for them.
By age 65, you’ll want to enroll in Medicare as your primary health care insurance provider. If you miss the enrollment deadline, you’ll end up paying significant late-enrollment penalties, some of which may last until the end of your life.
And don’t forget about long-term care, especially if there’s a history of dementia or chronic illness in your family. Nursing homes or assisted living facilities can cost more than $100,000 per year.
4. Save more, invest smarter
If your calculations show that your retirement nest egg won’t be large enough to fund the retirement you want, take matters into your own hands while you still have time.
- Increase your pre-tax contributions to your 401(k) plan as much as possible, even if you have to cut everyday costs to do it. You’ll lower your taxable income, and you’ll benefit even more from your company’s matching contributions (if they offer them).
- Try to make annual contributions to your IRAs as well.
- If you’re at least a decade away from retirement, allocate at least 60% of your retirement assets to stocks or stock funds. While stock prices are generally more volatile than bond prices, over the long term they’ve historically delivered better returns than bonds.
5. Hire a trusted expert to figure all this out
If all of these suggestions seem overwhelming, don’t take on the burden alone. An experienced financial planning professional can work with you to address all of these issues, from estimating future retirement income and expenses to recommending changes to your retirement savings strategy and managing your investments.
For a savings goal as critical as your retirement, you’ll want to work with a fee-only fiduciary adviser. While many financial professionals claim to be fiduciaries, only fee-only advisers can be trusted to act solely in your best interests, the foundation of the fiduciary standard. That’s because they’re paid directly by you. Unlike other financial consultants, they don’t earn commissions or sales bonuses for trading stocks or selling mutual funds or insurance, so they can serve you with undivided loyalty.
Need help finding a qualified fee-only fiduciary adviser? Wealthramp can can connect you with one in your area.
Pam Krueger is CEO of Wealthramp, a partner site for finding the best financial adviser.