If your target retirement age is less than 10 years away, it may be tempting to glide into your post-work life and hope for the best. However, without proper retirement planning, you may find yourself making a bumpy landing.
Here are seven steps to ensure that you’ll be financially prepared for retirement.
Consider Your Plans
As the reality of your post-work life draws closer, it can be helpful to envision what your days will look like. Will you be traveling around the world? Downsizing your house? Taking up a pricey new hobby? Will you volunteer or work part-time? All of these decisions will play into your retirement budget.
Most importantly, ask yourself if you have the money to pay for your retirement dreams. If you don’t, there’s still time to save. First, go over your current budget and look for items that can be cut. Do you need Netflix and Hulu? Could you cut out coffee runs and eating out? Any money you save can be invested in your retirement savings.
If your dreams outsize your financial reality, it may be time to reconsider what retirement will look like. Steps such as moving into a more affordable home or working a 10-hour-a-week job could positively impact your retirement budget. A downsized retirement budget, however, doesn’t mean a downsized retirement. Spending more time with grandchildren can be more rewarding than an expensive vacation to Europe.
Get a Handle on What You Have
This step can be intimidating, especially if you haven’t been on top of retirement savings. However, you need to face the truth to best prepare for the future. You need to know how much you’ve saved and how much you’ll likely receive in Social Security and pension payments so that you can calculate a reasonable retirement budget. If your retirement savings are in several different accounts, consolidating them could provide a better idea of how much savings you have.
A financial planner can help sort through your financial situation and build a strategy for retirement savings to maximize the time you have left to save. With an accurate assessment of what you’ve saved, you also can make decisions on whether you need to work more to increase income or cut back on spending to boost your savings.
Pack Your Retirement Savings Accounts
This is the time to increase your contributions to your retirement account to the maximum allowable, including making catch-up contributions permitted under IRS rules (the agency gives contributors age 50 and older extra time each year to contribute). Also, check with your employer about whether the company matches employees’ retirement account contributions.
Get a Plan
It’s easy to put off retirement savings and justifying spending what could be potential contributions to other items. However, it’s never too late to map out a retirement plan—even if retirement is just a few years away. A financial professional can help you maximize your savings, create a strategy, and chose the most advantageous options for claiming your employee pension or Social Security when the time comes.
Pay Down Debt
Retirement budgeting will be much easier with less debt, and it’s wise to pay off as many loans and outstanding balances as possible while you’re employed. That can mean making extra mortgage payments, paying off credit cards quickly, and limiting new debt. One wise move is to pay cash for larger purchases to avoid additional credit card spending. The overall benefit? Less of your retirement income will go toward debt interest payments.
Choose your location
Your retirement budget will largely depend on where you choose to live. Downsizing to a smaller house in a more affordable area could drop your mortgage payment. On the flip side, you’ll also need to consider your budget if you move to a more expensive house or location to be near grandchildren, which can increase your retirement budget.
Factor in Medical Costs
While it’s impossible to predict the state of our personal health at retirement age, it’s wise to consider how to cover potential increased medical costs without decimating your retirement savings. One option is to maximize your contributions to your health savings account now—if you don’t spend the money, it will grow tax free and be available to spend in your retirement.
Another option is to buy long-term care insurance, which will pay for home health aides and, if needed, assisted living facilities, which aren’t covered by Medicare. The earlier you buy the insurance, the lower the premiums will be. If you wait to buy, you’ll risk rejection from insurers if you are in poor health.
Finally, you can protect your retirement savings by investing in additional health insurance. When you turn 65, Medicare will pay for most of your routine health bills, but you’ll need supplemental coverage to fund non-routine medical issues.
If you want to leave your estate to beloved family members or friends upon your death, a life insurance payout can be key to helping them pay for expenses that could decrease the impact of your estate.
Dispersing an estate can take time—sometimes months or longer, particularly for complicated estates. In the meantime, beneficiaries can be left with bills for everything from funeral costs to debt payments.
To leave those you love in the best financial position possible, it’s important to include a life insurance policy in your estate planning. Here are ways that life insurance policies can be utilized when planning your estate.
Paying funeral fees
Even the most basic of funerals can cost thousands of dollars. Low-end caskets generally start at about $2,000, on top of fees for embalming, funeral home staff services, and a grave marker. Meanwhile, cremation costs can start at $4,000. A life insurance policy can provide immediate cash to pay these costs so that your beneficiary doesn’t have to spend their savings or go into debt themselves to pay for these expenses.
Paying estate taxes
A life insurance policy can be an excellent planning tool for protecting the wealth you plan to pass on. If you anticipate your estate will be subject to federal estate taxes, which heirs must pay within nine months, your life insurance policy can pay them instead. If your estate is primarily real estate, this strategy will prevent heirs from having to sell property or liquidate assets to pay estate taxes.
It’s not uncommon for decedents to leave unpaid debt and monthly payments, including credit card bills and utility bills. A recent study by credit company Experian found that 73 percent of Americans who die leave debt behind.
While creditors likely won’t try to get payments out of surviving family members, they often will from the estate. The collections process can send an estate into probate, which can stretch out for years as creditors try to collect from it. Life insurance policies, however, aren’t subject to probate laws. That means beneficiaries can receive the entirety of the policy quickly.
Building financial wealth
A life insurance policy, especially one with a large payout, can change your beneficiaries’ lives and your or their family’s legacy. For example, life insurance payouts can be used to pay off a beneficiary’s mortgage or student debts. Without this costly debt, they can invest or save their money, building wealth for future generations.
Replacing family income
If you are the primary earner in your family, life insurance can replace vital income if your spouse does not work or is underemployed. A life insurance payout will provide survivors will financial stability while they reconfigure their lives in your absence. Financial experts recommend that a life insurance policy cover between seven and 10 years of your income.
Life insurance also can become very important for families with young children or children with special needs. In these cases, surviving parents or guardians may not be in a position to cover the children’s financial needs on their own. Life insurance benefits, however, can pay for everything from medical bills to education.
Protecting family real estate
Family-owned property can become an immediate financial issue for heirs, who must make decisions about who will own the property. In some situations, heirs may decide to sell the property and divide the proceeds, but preparing the property for the market and waiting for a sale can take time. In the meantime, the mortgage must be paid.
In these cases, a payout from a life insurance policy can help. Beneficiaries can use it to make mortgage payments or, if they decided to keep the property in the family, pay off the mortgage.
Giving to charity
Life insurance can be an excellent way to make a significant gift to a charity of your choosing. Any charity can be designated as the beneficiary of a life insurance policy.
As you integrate life insurance into your estate planning strategy, there are many factors to consider when deciding how much and what type to invest in. You’ll need to look at whether you are the primary income earner in your household and how many people depend on you financially. You’ll also need to factor in your debts and other financial obligations (including your mortgage), whether your estate will be subjected to federal estate taxes, and whether you’d like to leave any of your estate to charity. Life insurance will provide liquidity and readily available funds for your beneficiaries.
Estate planning professionals can help you determine how life insurance can benefit your estate, regardless of your age or income. It can be a key tool in providing peace of mind that your family will be financially protected and your estate preserved as you pass it on to your heirs.
The coronavirus pandemic has wreaked havoc on many aspects of people’s financial lives. Despite this, many people report that they have not stopped contributing to their children’s 529 college savings plans.
In early May, Savingforcollege.com released survey results showing the pandemic’s economic impact on families saving for college. About two-thirds of respondents reported seeing a decrease in their 529 plan’s value since January. Approximately one fourth said that someone in their household had lost a job or was making less money. However, most also said they hadn’t changed their strategy for saving for college.
As the situation developed, though, and economic hardship continued, more families (although not a majority) did report an impact on their college savings. A CollegeBacker survey in May reached out to 1,200 American adults. About 16 percent said they had paused their college savings contributions. Additionally, 17 percent planned to withdraw money from their college savings accounts, and 13 percent had decreased the amount they were contributing.
The June 2020 State of Savings report from Ascensus, which analyzed 529 plans with fewer than 500 participants between early 2019 and May 31, found about a 21 percent decrease in the amount of one-time contributions between the end of March and the end of May. However, Ascensus’ analysis showed hardly any change in automated contributions during that time period.
“There are many families facing a tougher situation so you do see some occasional monthly reductions in their contribution rates, but overall it hasn’t been as dire as you might expect,” Jordan Lee, founder and CEO of CollegeBacker, said in a press statement. Here’s what you need to know about 529 plans during the pandemic:
This Is How 529 Plans Work
The value of a 529 plan is that it allows adults, primarily parents or grandparents, to save money for a designated beneficiary. The account will grow tax-deferred, and money can be withdrawn tax-free for qualified expenses related to education.
The money can be withdrawn for other expenses (financial planners recommend this option only be used as a last resort) if times are hard. However, the plan’s earnings would then be subject to a 10 percent penalty, and the account holder would also be charged federal income tax on the withdrawal.
Extensions Were Granted to Return Money Refunded as a Result of the Pandemic
Federal regulators offered one break, however, for 529 plans during the pandemic. In some cases, families paid for college expenses for spring 2020 out of their 529 plans and may have received a refund for tuition or room and board due to schools closing their physical campuses and going online for much of the semester.
In a typical year, account holders would be required to reinvest the refund into their 529 plan quickly or be penalized. This year, the Internal Revenue Service allowed families 60 days (the deadline was July 15) to return the money without a penalty.
529 Plans Are Good Investments
The pandemic has forced many families into tough situations, as working members of families have faced layoffs, furloughs, and other economic hardships. However, 529 plans remain an excellent investment, as rules for how the money can be used have been relaxed over the years. Qualified expenses can include everything from tuition for vocational and trade schools to paying off student loans to some costs associated with K-12 education.
Federal laws restricting gifts to $15,000 each year are less stringent for 529 accounts. This means that grandparents or other adults who want to invest in a child’s education can give as much as $75,000 in a single contribution. In addition, if the account’s recipient decides not to go to college, another family member can use the money.
Your Budget May Be More Flexible Than You Think
Experts advise families to keep making contributions to their 529 plans—and even increase them if possible—during the pandemic. Some financial planners point out that typical budget items, such as eating out and vacations, may not be spent and the money could instead be allocated to college savings.
Families also should regularly review their budget and financial planning outlook. The current economic situation is changing rapidly due to ongoing questions about employment and the market. However, college will still be an expense in most cases, and a 529 college savings plan remains an excellent way to save for college even if you find yourself in financial hardship.
Plans May Be Uncertain, but 529s Are Flexible
The pandemic has forced many to change their plans, and your student may even be considering putting college off or choosing a different route all together. Restrictions on indoor gatherings have required many American colleges to remain online, an educational format that is less appealing to many students.
The good news is that 529 plans are designed for flexibility. This means you can continue saving while your student’s educational future unfolds, and the plan likely will cover other educational expenses if your student decides to pursue a nontraditional educational opportunity. And if your student foregoes education entirely to work or travel, the 529 plan can be transferred to a qualified relative whose education can benefit from the savings.
Retirement planning advice—which is not in short supply—can linger long past its time. Advice that may have worked 20 years ago, for example, may not be as applicable today, when the economy is different and people are making different choices about their retirement. It may be time to reconsider the following common retirement advice.
You Must Pay Off Your Debts, Including Your Mortgage
In reality, this advice is unachievable for many Americans. Becoming debt-free for many may be impossible or so difficult that it pushes retirement back many years. Following this guideline, then, would mean trading enjoyment in your senior years for more years of work.
In some cases, it’s OK to carry debt into your retirement; the key is determining which debt is manageable. Paying off high-interest debt, such as credit card balances, is important—interest rates on credit card debt can be 15% or higher, which means your debt can quickly build. Growing debt and a fixed retirement income aren’t compatible, and in this case, it’s a good idea to pay off all high-interest debt before retirement.
Other debt, however, may be tolerable—and even beneficial—during retirement. If you can comfortably make the payments on low-interest debt with your retirement income, there’s no reason to postpone retirement. In other situations, your money may be better spent on investments rather than paying off low-interest debt. For example, if your mortgage interest rate is 4% and your investments are generating a 6.5% rate of return, it makes more sense to invest your money rather than use it to make additional mortgage payments.
The 4% Retirement Withdrawal Rule
This rule was developed in the 1990s. It essentially says that you’re ready to retire when your savings will last for 30 years if you plan to withdraw 4% of your retirement savings the first year and a similar amount, adjusted to inflation, over the remaining 29 years.
However, many financial planners say this formula doesn’t fit all retirement situations and doesn’t take into account a fluctuating market. Retirees also don’t spend consistently over the course of their retirement—they tend to spend more in the early years when they are traveling and marking off experiences on their “bucket list.” Spending may drop as retirees settle down or increase if health issues arise.
A better strategy is to consult with a financial planner about a safe withdrawal strategy based on your circumstances and plans for your senior years. For example, a plan could be built around your required minimum distributions, or you could calculate what you need to cover basic living expenses and then factor additional money into your budget for travel and other expenses.
You Need $1 Million in Savings
Saving $1 million has been the longtime gold standard for retirement, but more recent estimates from the Bureau of Labor Statistics have increased that estimate to $1.5 million per family. Reasons for the increase include a drop in pensions, which previously could be relied upon to supplement retirement savings; inflation; and longer lifespans. Many people are in retirement for three decades or more.
Retirees Spend Less
Retirement doesn’t necessarily cause your spending to decrease. Traditional guidelines state that retirees should plan to spend between 75% and 85% of their current budget, but that estimate doesn’t always hold true.
The best way to map out retirement spending is to make a retirement budget, estimating what you’ll spend each month when you stop working. You may delete some budget items, like commuting costs, but you may take on new expenses with more travel or new hobbies. Creating a retirement budget will help you avoid an unexpected surprise if your spending in retirement doesn’t drop.
Social Security Withdrawals Should Begin at a Certain Age
Conventional wisdom has advised everything from withdrawing benefits immediately when you become eligible at 62 to delaying until you reach 70. In reality, the ideal age to begin claiming Social Security benefits depends on your individual situation.
The best time for you to claim benefits will depend on your retirement budget. For example, if you begin withdrawing at age 62, your monthly benefits will be reduced because you haven’t reached your full retirement age, which will range between 66 and 67, depending on your birth year. If you wait until your full retirement age, your monthly check will include a bonus.
Retirees with comfortable savings may choose to withdraw early for extra spending cash, while people who know they will need help with income later in retirement may want to hold off so their monthly check is larger. Your health may also be an issue—people in good health who think they will live a long time may want to delay claiming benefits, while those who are in declining health may benefit more from larger checks now.
Regardless of your situation, it’s wise to consult with a financial planner about your retirement plan to make the most of the options available.
During economic crises, it can be instinctive to change course with your finances as uncertainty and perhaps even panic set in. However, it will benefit you financially to avoid making quick decisions about your money, particularly during a recession. Financial stability, especially during the COVID-19 pandemic, will reduce stress on your family and keep you moving toward your financial goals.
Here are some sound options for managing your finances during the pandemic.
Pad your emergency savings
While the pandemic has hurt many aspects of the American economy, personal savings rates have soared. CNBC recently reported that the US Bureau of Economic Analysis showed a personal savings rate (the percentage of disposable income that people save) of 33 percent in April, the highest it’s been since the 1960s, when the agency began keeping track. Nationwide stay-at-home orders have encouraged savings, as people have drastically reduced their spending on travel, shopping, and entertainment and eating out.
If you continue to have a steady income, this is an excellent time to build an emergency fund for situations ranging from job loss to an unexpected medical bill. Financial experts recommend saving between three and six months of living expenses to make sure that you can weather unforeseen hardships, including the pandemic if it stretches out.
A good place to start would be saving any lump sum of money you receive, such as a tax refund, work bonus, or a commission. You could also decrease the amount you contribute to your 401(k) temporarily and move the difference into your emergency fund.
Adjust your budget
Millions of Americans have been affected by COVID-19 shutdowns, whether they have been furloughed, laid off, or experiencing a reduction in wages. The economic fallout is far from over, so even those who have yet to be impacted by COVID-19 could as companies examine their long-term revenue and adjust their plans in the coming months.
Regardless of your job situation, this is a good time to make adjustments to protect yourself against job loss or wage reduction. You can think through your long-term income potential and job security and consider ways to insulate your family from income loss as the impact of COVID-19 unfolds over the coming months and years. You may also want to make your budget more conservative, increase your savings, and reduce non-essential spending.
Look at payment reduction options
While your income may seem stable now, that may not be true a few months down the road as the economic crisis stretches out. To be prepared for financial difficulties, familiarize yourself now with programs that allow for payment deferment or reduction on key debts.
Mortgage payments: If a time comes when you can’t make your mortgage payment, call your bank. Many states will allow property owners to take a “holiday” from mortgage payments if their cash flow has been impacted by COVID-19. Lending institutions may allow you to postpone payments without incurring late fees, extra interest, or a negative impact on your credit score.
Credit card payments: In the wake of COVID-19 financial hardship, many credit card companies are offering relief to their clients in the form of lower interest rates, reduced fees, and delayed monthly payments. Contact your credit card company for details about their COVID-19 relief plan.
Federal student loan payments: The US Department of Education currently has reduced the interest rates on federally-backed student loans to 0 percent for a minimum of 60 days, and graduates can also take a break from payments for at least two months if they call 1-800-4FED-AID and request it.
Reconsider your real estate
Your biggest monthly budget item is likely your rent or mortgage. Financial setbacks, such as a job loss, can become severe if you can’t pay it. If you’re a renter and you’re anticipating or experiencing a financial hardship, ask your landlord for a temporary reduction in your monthly payment or if you can apply your security deposit toward rent. In a more extreme scenario, you may need to get out of your lease early and move to a more affordable rental.
If you’re a homeowner, call your bank and ask for mortgage relief, such as deferred payments or temporarily paying interest only on your mortgage. With interest rates extremely low, this may be an ideal time to refinance your mortgage to decrease your payments or shorten your loan terms so that you can pay it off more quickly.
Is it time for more investments?
While your inclination may be to save right now, you may be missing out on excellent investment opportunities. Many stock prices are low, making it a good time to enter the long-term investment market or temporarily increase contributions to your 401(k). Bear markets have rebounded above average for several years, a historic trend that could play out again when the COVID-19 recovery begins.
As with any risk, however, caution is always advised. Before you step further into the market, make sure you have a generous emergency savings fund, stable expenses, and job security.
Retirement, unfortunately, does not always coincide with the time we’re tired of our jobs, ready to start sleeping in, and looking forward to more time for hobbies. Choosing the right time to retire is largely dependent on our financial situation, and that doesn’t always match up with our mental readiness.
Retiring too early or without a sound financial plan could tarnish your golden years. Here are four factors to consider as you plan your retirement date.
Your debt level
Managing a lot of debt payments on a fixed retirement income can be difficult, especially if your budget is tight. Unexpected expenses will leave you with little wiggle room and could lead to difficult circumstances such as losing your house.
If you are in this situation, a better choice is to work for a few more years and focus your income on paying down debt, especially high-interest loans or credit. This may mean cutting back on extra expenses to pay more toward high-interest debt such as credit card balances. You may also want to downsize or pay off your mortgage altogether, reducing the monthly payments you’ll have to make in retirement.
If you’re not sure whether to dedicate income to your retirement account or debt payments, look at what your retirement portfolio is earning compared to the interest rate you’re paying on your debt. If you’re earning 7 percent in the market and paying a 3.5 percent interest rate on your mortgage, a better choice is to invest your money. If the situation is flipped, paying down your debt would be the wiser choice.
Whether you can pay your monthly bills
It’s generally accepted that you’ll need about 80 percent of your pre-retirement annual income for a financially stable retirement. If you’re already struggling to pay bills while you’re working, retiring with a lower monthly income will only make your situation worse.
Your monthly budget will change in retirement. You’ll receive income from your retirement savings, pensions, and Social Security, and your budget lines for work-related expenses such as community and lunches out will likely drop. However, these changes may not be enough to cover your budget comfortably if you were already living month-to-month. Before you stop working, think through your retirement budget and whether a few more years on the job and decreasing your expenses would put you in a better position to retire.
Your retirement plan
Estimating your financial needs in retirement can be a moving target, as you don’t know how long you will live and what your expenses will be as the years go on. Today, Americans are living longer—if you are nearing retirement age and are in good health, it’s likely you could live to 90. In that case, you’d need to plan for savings that would last as long as 25 years.
If you’ve thought about what retirement will be like but now how exactly you’ll fund it, you’re probably not ready to retire yet. After defining your retirement goals and lifestyle, you’ll need to estimate your retirement living expenses, plus annual inflation. Retirement budgeting can get complicated, as you’ll need to figure out how much Social Security you’ll receive depending on what age you’ll retire and factor in new expenses such as healthcare costs and travel plans.
Retirement also can bring large, unexpected expenses, such as pricey home repairs and vehicle replacements. If you’re not sure whether your retirement income would cover these costs, it may be best to take care of them now instead of factoring them into your retirement budget.
When you have a plan in place, whether you draw it up yourself or work with a financial adviser, you’ll have a better idea of how many years you’ll need to work to have the retirement you want.
Your anxiety level about quitting your job
It can be hard to stop working, even if you’re financially prepared. Plus, you may love your job and not really want to leave it. Work gives our days structure and purpose, and the thought of days on end with no concrete plans may be stressful. This can lead to spending over your retirement budget as you try to fill the time.
If you’re in this situation, you have several options for managing retirement. You can keep working and saving, which will be financially beneficial when you retire. You also can take a part-time job or a regular volunteer shift with a local organization as you ease into retirement. If you’re worried about your retirement budget, you can try living on your retirement income and see if it’s enough for you to manage comfortably.
If you find that you’re not ready to retire, you’ll reap the many benefits of extra years of work. Along with increased savings and more time to pay off debts, you can stay on your work’s healthcare plan and spend a few years preparing for living on a retirement budget.