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.
As more Americans are facing a retirement with inadequate savings or pensions, some are choosing to delay retirement past age 65—and some research has shown working longer could pay off financially. However, critics aren’t sure this is the best route to extending or building your retirement savings.
A study conducted by researchers from the Stanford Center on Longevity and the Society of Actuaries, which was released in 2019, found that retiring later is beneficial. The report states that “delaying retirement, even for a few years, can significantly increase the eventual retirement income.”
Researchers looked at 292 strategies for building retirement income and found the most effective to be delaying Social Security payments until age 70. The longer someone can wait to draw down their retirement and postpone Social Security payments, the more retirement income they’ll have, according to the report.
Here’s what proponents of a later retirement—and their detractors—say about putting off retirement and working longer.
More savings: While logic says that the more years you work, the more time you’ll have to save, there may be additional benefits to putting off retirement until age 70. Working in the second half of your 60s could be a time of higher earnings than in the past, and you may be able to save more if you’re old enough to have paid off your children’s college tuition, your mortgage, or your car loan. This could leave you with more money to put away for your impending retirement.
The rules for IRAs also benefit older workers. People who are working and age 50 and older can make catch-up contributions to their retirement accounts, allowing them to save more in their IRA or 401(k) at a time when their earnings are high: up to $26,000 annually in a 401(k) and $7,000 annually in an IRA. If you work for a company that matches IRA savings, you’ll add some free savings to your growing retirement contributions.
Some research backs this strategy. According to the Center for Retirement Research at Boston College, 86 percent of people who work until age 70 will be financially comfortable in their retirement.
Expanded Social Security benefits: Current rules allow workers to retire at age 66 or 67 and receive their full Social Security benefits. While claiming Social Security is allowed as young as 62, some experts say that working a few years past official retirement age can reap substantial benefits.
For example, your payments will increase by 8 percent for every year you are eligible for Social Security benefits but don’t take them. This incentive ends when you are 72, the required minimum distribution age, but let’s say you wait until age 70 to retire. Here’s how it would work: If your monthly benefit is $1,500 and your full retirement age is 66, waiting until age 72 to claim Social Security would increase your monthly Social Security payment to $1,980—a lifetime benefit.
Fewer retirement years to fund: According to the Social Security Administration, people are living longer, which means they will face a longer period of retirement. The agency estimates that men who are 65 will live, on average, to about 84 years, while 65-year-old women will live on average to almost 87 years. About one-fourth of all people who are 65 years old will live past 90.
As life expectancy lengthens, so does the expected period of retirement. That means that working a few years gives you more time to increase your savings without spending it and decreases the number of years your retirement savings will need to provide an income. Here’s an example: At age 65, say you have saved $500,0000. If your savings earn a 4 percent annual return (a conservative amount), when you are 70, your savings will have grown by about $62,000.
70 is the new 60? If you are generally in good health, putting off retirement until you are 70 shouldn’t be cutting into your remaining years of health. Modern medicine and life expectancy rates mean you that you likely will have many years after age 70 to enjoy your retirement.
In addition, working a few more years might actually be good for your health. Researchers have found that working keeps you physically and mentally sharp, and one study even concluded that people who work longer might live longer, too.
Some financial experts, however, disagree that 70 is a better age to retire. Many people retire in their early to mid-60s because of health reasons, or they are pushed out of their job and don’t have the option to work longer. Some simply don’t enjoy their job and don’t want to spend their sixties unhappy in their employment.
Considering a later retirement is fine, but don’t bank your savings plan on it by waiting until you’re 60 to start seriously saving. The earlier you can put away money, the better. This will help you build a retirement savings that will allow you to retire when you want—regardless of your age.
With 2019 over, there’s no better time to build up your retirement savings than now. The arrival of a new year is an excellent opportunity to review your savings plan, especially if you are nearing retirement age.
While it’s always wise to start saving as early as possible, putting away money for retirement is a good move no matter when you start. You can start taking advantage of compounding interest, building your retirement nest egg as much as you can. Many financial advisors stress the importance of these savings, as Social Security will not likely provide a viable retirement income by itself. A retirement savings plan will provide the needed income to cover monthly expenses in retirement.
Here are five smart moves you can make with your retirement savings in 2020.
Save early and often
While Vanguard reports that more millennials are joining 401(k) plans (some thanks to employers’ automatic enrollment programs), many aren’t checking in on their plan’s growth after they enroll. That means they also aren’t increasing their contributions, staying educated about what they’re investing in, or making sure that they aren’t paying high management fees that are taking away from their returns.
It’s smart to open a 401(k) plan when you’re young, but it’s equally important to keep tabs on your account and commit to regular contributions and, if possible, increase your contributions. Ideally, you will save between 10 percent and 15 percent of your income and maximize your employer’s 401(k) match. However, if that’s not possible right now, try a small increase in your contribution this year and increase it by 1 percent every time you receive a raise.
Make saving a habit
Prioritizing retirement savings can be difficult, especially when you’re faced with monthly bills and a budget devoted to paying down expenses. However, to build a strong retirement fund, it’s imperative to save now so you won’t have to play catch-up later. One way to ensure that you’re putting money away each month is to treat your savings contribution as a monthly bill.
If you create a monthly budget, add a line for savings alongside your allocation for electricity, the mortgage payment, and the water bill. Your savings are equally as important, and adding this budget line will prompt you to allocate money each month toward your retirement before spending money on “extras” such as entertainment and vacations.
One way to ensure you’re saving is to set up automatic contributions to your retirement account. That way you’ll consistently contribute every month, and when you get a raise or a bonus, you can make extra or increased contributions.
Begin envisioning your retirement
While the prospect of sleeping in, not working, and having endless days off may seem blissful right now, in reality, many retirees quickly find retirement boring—and their retirement savings may not fund a revised plan that includes travel, shopping, or other expenses.
To make sure that your retirement savings match your retirement plans, think through now how you might spend your time in retirement. Do you want to travel the world? Spend part of the year visiting family and friends? Buy a cabin in the mountains? Take classes at your local community college?
Once you get an idea of what you’d like to do in retirement, you can put together a budget reflecting how much it might cost and check whether your savings are on track to match it. If not, you may want to increase your monthly allocation. Or, you can think of a more affordable way to spend retirement that still will make you happy. Either way, planning your retirement now will guarantee a more fulfilling retirement.
Invest your retirement savings well
Your investment strategies for your retirement fund should change as you age. You might consider investing less aggressively as the years go on, as there won’t be time to recover any losses if the market sinks close to the time you plan to begin withdrawals.
For example, if a lot of your money is tied up in stocks, you may want to move a larger portion of it to bonds. As a general rule to follow, about half of your stock portfolio should be invested in stocks at age 60.
Increase your accounts
While one retirement savings plan is good, more can be even better. If you plan to max out your contribution to your 401(k) plan in 2020, consider opening a Roth IRA account with your tax refund or 2019 bonus. Roth IRA contributions are made post-tax.
However, if you are in a higher tax bracket, a traditional IRA may be a better choice. This option allows you to fund the account before your income is taxed; instead, you’ll pay taxes on withdrawals, when you’ll likely be in a lower tax bracket. This option allows you to postpone—and potentially pay less—in taxes.
To avoid another government shutdown, Congress passed a bipartisan spending bill in December. Tacked to it was a bill called the Setting Every Community Up for Retirement Enhancement (SECURE) Act that Barron’s describes as “the biggest retirement legislation in a decade.”
Many financial experts were surprised that the SECURE Act, which was backed by the insurance industry and lobbyists, was included in the bill. Earlier in 2019, the House passed it with a 417-3 vote, but several Republican senators put a hold on the bill and discussion on it reached a stalemate. While some lawmakers have raised questions about the SECURE Act and offered amendments, it generally has enjoyed bipartisan support.
With President Trump’s signature on the bill on Friday, December 20, the SECURE Act was signed into law. The legislation will reform the way that Americans save for retirement. Here are five key changes you need to know about.
Minimum age raised for RMD
Currently, people who own IRAs must begin taking required minimum distributions, or RMDs, when they become age 70 ½. The SECURE Act raises that age to 72. That means people who turn age 70 ½ in 2019 will have to take out their first RMD by April 1, 2020. Those who turn 70 ½ in 2020 or after can wait two years to withdraw their RMD.
Some analysts believe this change will significantly benefit retirees. Postponing RMD allows an IRA balance more time to grow through compounded interest and through additional contributions.
Age cap removed for IRA contributions
The SECURE Act will change a rule that restricted people from contributing to an IRA after they turned age 70 ½ (this restriction did not apply to Roth IRAs). Under the SECURE Act, there are no age limitations for contributing.
This change could help people who work into their 70s or beyond, allowing them to continue to make contributions to their IRA as long as they work. Under the SECURE Act, people will have more time to increase or catch up on their retirement savings. Coupled with the new rule increasing the age for RMD, people could significantly increase their retirement savings in those additional work years. According to research from experts at Stanford University, Cornerstone Research, George Mason University, and Financial Engine, putting off retirement for one year will benefit you 3.5 times more financially than saving 1% of your income over 30 years.
Benefits expanded to include part-time workers and more
With this change, the SECURE Act will respond to a changing economy with an increasing number of people working “gig” and freelance jobs. The act will allow many more employees who work part-time to save for retirement through their employer.
The SECURE Act also will allow people to withdraw as much as $10,000 from their 529 plan to pay back student loans. This move helps graduates because they will pay less interest as they repay their debt quickly and make them more financially secure as they enter the working world and begin families. As the nation’s student debt burden has surpassed $1.5 trillion, employers are looking for ways to help their workers manage this debt.
Parents of newborns, either through birth or adoption, will also get help through the SECURE Act. The act makes new parents eligible to withdraw $5,000 from their IRA, without penalty, to help pay the cost of delivery or adoption.
The end of “stretch” IRAs
Stretch IRA rules have allowed families to pass IRAs through generations tax-free. Under these rules, inherited IRAs kept their tax-deferred status when passed to non-spouse beneficiaries (typically children and grandchildren), allowing the IRA to grow without paying taxes. Stretch IRA rules, which applied to any type of IRA, meant that when a young beneficiary inherited an IRA, taxes and required distributions could be put off for decades.
The SECURE Act gets rid of these rules, and now non-spouse beneficiaries of an IRA must disperse its balance within 10 years. There are exceptions for surviving spouses, minor beneficiaries, beneficiaries who are disabled, beneficiaries who are chronically ill, and beneficiaries who are within 10 years in age of the account owner.
The primary beneficiary of this rule change? The U.S. government. Called a “tax acceleration,” eliminating stretch IRAs is estimated to generate about $15 billion in tax revenue in the next 10 years. It also can significantly change estate planning, as it eliminates a shelter for inherited income.
More annuities in 401(k) plans
While investors have always had the option of including annuities in their 401(k) plans, right now employers are responsible for making sure they are a good choice for their employees’ plans. Under the SECURE Act, insurance companies will become the decision-makers on annuities. Critics say this is a boon for the insurance industry, which sells annuities and lobbied for the passage of the SECURE Act.
Supporters of this rule change argue that annuities can be a sound investment choice because they provide a guaranteed income over the life of the retiree. However, because annuities are complicated investment products, investing in the wrong ones could mean large financial penalties and fees.
The calendar year is almost over, and if you’re saving for retirement with an IRA, there are several smart moves you can make before the end of 2019.
Contribute the maximum amount
For the first time since 2013, the cap on the annual contribution to a traditional IRA has been increased $500 to a maximum of $6,000 for contributors younger than 50. Those age 50 and older are allowed to contribute an additional $1,000 as a “catch up,” bringing their total allowable IRA contribution to $7,000.
To contribute to an IRA, you must have earned income from work, and you cannot contribute more to an IRA than you earned. IRA contributions in 2019 are tax-deductible, and if you or your spouse do not have a 401(k) or other work retirement account, you can deduct your entire 2019 IRA contribution on your tax return. Make your 2019 contribution before the next tax filing deadline passes on April 15, 2020.
If required, take your minimum distribution
If you are age 70 ½ or older, you typically are required to take a minimum distribution, or RMD, from your IRA. Figuring out the amount of your RMD, however, can be difficult, and it’s best to go over your retirement account with a financial expert before taking any distributions (errors can be expensive). The amount of your distribution depends on your life expectancy and how much your IRA is worth – the IRS calculates it by dividing your IRA balance on the last day of 2018 by your life expectancy or the applicable distribution period.
You’ll be penalized 50 percent if you miss your RMD, a significant penalty for a retirement account. If you don’t need the money from an RMD but have to take it, you can donate the disbursement to a charitable cause through a qualified charitable distribution (QCD). In this case, the donation will go straight from your IRA to a qualified charity of your choice, and it will not be counted as personal income. QCDs are limited to $100,000 each year.
Review your assets
December is a great time for a year-end review of your investment policy statement (IPS). This document lays out how much of your money should be in cash, bonds, and stock, and when each category will rebalance. At the end of the year, you can evaluate whether your investments match the allocations on your IPS. If they don’t, which is likely, you may want to rebalance your account.
Financial experts recommend creating an IPS before the end of the year if you don’t have one. While it’s ideal to create your IPS in a calm market, if that’s not possible, make one right away, no matter the market conditions.
Avoid taxes on distributions
One significant downside of a traditional IRA is that distributions can be taxed and converting to a Roth account can eliminate some of these potential losses. Also, investors who donate their RMD to a qualifying charity or use the disbursement to buy a qualifying longevity annuity contract also can avoid disbursement taxes.
Converting to a Roth IRA may be an especially wise choice in years when your taxable income is low. The taxes you pay in a slow year will set a baseline for you to make good choices when your taxes could be higher. Investors between ages 59 ½ and 70 ½ likely won’t benefit from a Roth IRA conversion, however, as they aren’t required to take RMDs.
If you inherited a traditional IRA in 2019, you must take the RMD by the end of 2019 and pay the taxes on it – even if you are younger than 70 ½.
Don’t overdo it
While saving for retirement is generally encouraged, can you contribute too much to an IRA? Yes, and there are consequences. For example, if your income is better than usual for one year, and you make a large contribution to your IRA, you may have to pay a 6 percent penalty on your extra contributions until you fix the error. If you have over-contributed, there are remedies:
- Withdraw the excess contributions before April 15, 2020.
- If your tax return already is on its way to the IRS, you can remove the extra contribution and send in an amended tax return by the deadline in October.
- If you apply the extra contribution amount to 2020, you will still have to pay the 6 percent penalty on it for 2019, but you’ll get a “head start” on next year’s contribution.
While these are fixes, the best approach is to not make excess contributions at all.
Looking forward, IRA contribution rules will not change in 2020 – the maximums will remain at $6,000 and $7,000, depending on your age, for combined contributions to Roth and traditional IRAs. The window for 2020 contributions begins Jan. 1 and ends April 15, 2021.
Long-term care insurance, which covers the cost of nursing homes, in-home care, and assisted living, can help tremendously if such a need arises when you retire. According to the AARP, out-of-pocket costs for long-term care average $140,000 (and these types of expenses typically aren’t covered by Medicaid), and by the time you reach the age of 65, there is about a 50-50 chance that you’ll have to pay for long-term care at some point. The U.S. Department of Health and Human Services has stated that 70 percent of people who are turning 65 will need long-term care.
Why, then, do so few people not plan for their long-term health care needs? Only about 7.2 million Americans have long-term care insurance, according to the AARP, and for many people, it’s a problem that they aren’t prepared to handle. Long-term care insurance policies can be costly, and the premiums typically become more expensive as you grow older. When you’re still relatively young and healthy, the need seems less pressing. As a result, long-term care insurance can be an easy expense to postpone. Here’s why you need, at minimum, a plan for financially managing long-term care issues, even if you’re perfectly healthy right now.
Assess Your Situation
First, it’s helpful to look at your life circumstances. Do dementia or other debilitating diseases run in your family? If that’s the case, you may need assisted care later in life. Consider how you’d pay for this care. Will your savings cover it? Would your children be able to help? Could you use your home equity? In some situations, financial advisors say that you could comfortably do without long-term care insurance, such as if you are using less than 4 percent of your savings for annual living expenses. If you have few assets, then you may qualify for Medicaid.
However, most people will eventually have to face the reality of how to cover long-term care. According to LifePlans, an industry research firm, long-term care insurance premiums cost an average of $2,700 a year. The average stay in a nursing home is about two-and-a-half years, and prices tend to increase each year. Genworth Financial has tracked the price of care for 16 years, and its 2019 data shows that the costs for assisted-living facilities and in-home care have increased, on average, between 1.71 percent and 3.64 percent each year since 2004, an increase that’s often greater than the U.S. inflation rate. For in-home care, that’s an average increase of $892 each year, and for a private room in a nursing home, it’s an increase of about $2,468 annually.
Benefits of Long-Term Care Insurance
Some believe that Medicare will pay for long-term care, but this coverage typically only covers short-term nursing home care or a percentage of at-home care costs. Additionally, patients must be in specific situations in order to qualify for this type of care. Most of the time, families must pay for the care themselves. This is why long-term care can be so valuable, as it covers the cost of residential or in-home care, regardless of the diagnosis. Premiums are based on how much coverage the policy holder would like to have on a daily basis. Policies are typically available from private insurance companies or through employer-sponsored insurance plans. Some companies offer their employees group long-term insurance plans, which are often cheaper. One drawback is that once you no longer have a job, then you lose the insurance plan.
If you do want long-term care insurance, it’s never too early to purchase it. Waiting until you are sick or older may seemingly save you money in terms of the premiums. However, your age and health can work against you if you try to purchase coverage late in life. Conditions such as multiple sclerosis, metastic cancer, dementia, and Parkinson’s disease—all progressive health conditions—are often reasons why applicants are not approved for long-term care insurance. In 2010 (when the most recent data became available, according to the American Association of Long-Term Care Insurance website), 23 percent of people in their 60s who applied for long-term care insurance were rejected, and 14 percent of applicants in their 50s were declined. According to the American Association of Long-Term Care Insurance, the prime time to apply for long-term care insurance is when you are in your mid-50s.
Considerations to Keep in Mind
In addition, there are some considerations to keep in mind if you’re thinking about purchasing long-term care insurance. The number of carriers offering long-term care has shrunk significantly. According to one expert, 10 years ago more than 100 insurance companies offered long-term care policies; now, only about 12 do so. Questions remain about how much longer these policies will be available, even for those who have already purchased them.
If you’re in “The Big Middle,” a term that SCAN Foundation Chief Bruce Chernof coined for those who are not wealthy enough to pay their own long-term care costs and not poor enough to qualify for Medicaid, the choice remains about whether to invest in long-term care insurance.