Important Things To Factor For Having Enough Money In Retirement
A majority of people that are planning for their retirement soon tend to have a certain amount in mind that would let them live through their golden years without stressing about money. However, they need to be realistic and calculate if they can actually afford to retire when they want to or not.
To calculate this, there are many retirement calculators at your disposal on the internet. Many state that you will need about 70 to 80 percent of your current income for retirement.
However, some financial professionals say this is not the best way to plan things.
In this article, we will go over how you can come up with a reasonable amount to reach your retirement goal to live it comfortably.
The reason why experts say that the 70 to 80 percent rule isn’t really suitable is that many new retirees tend to spend just as they did when they were working, and some even more. And most importantly, the spending needs in your retirement depends on–well–you.
So to come up with a suitable number as to how much savings you need to retire, you will need to come up with a budget of how much you will personally need to maintain the life that you want in retirement.
A good start is to take into account all of the continuous expenses that you plan to have in retirement. Then you will need to address what savings you will have and what income you will have coming in, such as your pension and/or Social Security benefits. From there, you can determine where you stand when it comes to having enough money to support yourself through retirement.
Another thing to help with knowing if you will have enough income as a retiree is to figure out how long you will need your retirement income to last you.
Many have heard of the 4 percent rule of thumb, some of you may have not. This 4 percent is the withdrawal amount for a retirement that will last three decades with rising inflation and even a bear market in mind. Ideally, the retiree will take 4 percent of their retirement portfolio and adjust for yearly inflation by the previous year.
For instance, if you have $1,200,000 in assets, you would take 48,000 during your first retirement year.
However, this will not work if the amount you get from your 4 percent is not enough for you to live off of annually. Once you have a budget estimate, you will be able to see if the 4 percent rate for withdrawal will be feasible along with other income streams such as a pension or Social Security benefits. If you cannot cover your expenses, you may have to replant your retirement strategy to retire a few years later than initially planned or to contribute more to your portfolio.
For some, it may be paralyzing to find out the answer, but it will give you the power to determine what needs to be done to ensure you have enough money in retirement.
If you currently do not know exactly how much money you are spending on certain expenses such as food, entertainment, gas, among other miscellaneous items or services along with your necessary bills, it is time to sit down and figure it out.
It is recommended to look through your bank and credit card statements to see what it is you have spent on within the last year. Be sure to include taxes or HOA fees you may have to be from time to time throughout the year.
Be as specific and detailed as possible.
It is better to get a handle on your budget now before retiring, rather when you are on limited income flow.
Eventually, once you become a retiree, you will no longer have the contribution expenses to your retirement plan. If you can, it is recommended to pay off your home mortgage before retirement, so that is also one less thing your money will go toward. You can also count on your work plan health insurance expense to be gone, but that money will be redirected to your retirement medical care one way or another.
Really consider what you will be doing with your time in retirement. Many people in the first period of their retirement will do things that they have always wanted to do, such as traveling a lot. A lot of money tends to be spent than expected toward these adventures. Others put a lot of money toward fixing up their home or purchasing that boat or car they had always wanted. So be sure to have a really good idea as to what you want to do while you are in retirement.
Going back to health care, this can be a significant expense you will want to be sure you have enough funds for. According to the Kaiser Family Foundation, in 2016, the average person on Medicare spent $5,400 on services such as Medicare Part B, medicine, and other expenses with their own money.
To get an idea of how much you will be spending, you will need to choose whether you will enroll for Medicare Part B, Medicare Advantage, or a supplemental policy that covers expenses that traditional Medicare does not.
For those that are considering Medicare Advantage, these are plans that pay for medical expenses and prescription drugs through a private insurance provider l, which have their own network of physicians and specialists.
To know how much any of these plans will cost, you can check this out by going to Medicare.gov and going to Medicare’s Plan Finder. There will also be information on how much medigap policies are.
There are some Medicare Advantage plans that have dental coverage, but traditional plans do not have this option. So be sure to shop around for dental plans that are affordable so that you can avoid huge out of pocket expenses.
According to Fidelity Investments, they believe that about 15 percent of your retirement money will be spent on medical expenses. For those that have a disability or serious illness, this percentage can be increased.
Be sure to really go over the taxes you will be liable for when retired. The good news is that tax credits and breaks for retirees exist. Those that are age 65 and up can claim $1,300 this year for a standard deduction. Those that are married and are at the minimum age limit can file jointly for a $2,600 deduction. If you are not married and are not a widow or widower, you can receive an additional $1,650.
On the other hand, if you have a lot of money in a traditional 401(k) or IRA, you will be liable to pay taxes on your withdrawals at the ordinary earnings rate. A majority of pensions will also face taxes at the ordinary rate as well. A part of your SS benefits can be taxed federally as well if you bring in a certain amount of retirement income.
At the state level, some states do not tax retirement income or offer some exemptions. However, there are also states that will tax all of your income.
Be sure to research what kind of taxes you will have to abide by in the state that you plan to retire in.
For retirees that have tax-deferred and taxable retirement accounts, it may be in your best interest to work with a financial professional as they can provide insight as to what will be the most money efficient way to withdraw money from these accounts, along with an estimate of how much taxes you will be expected to pay.
For your retirement budget, be sure that you count inflation into the equation. It is recommended to count a 2 percent rate for inflation on normal costs of living. However, consider using at least a 10 percent rate for medical expenses as Healthcare costs have been known to skyrocket every year.
Those that are apart of a long term care insurance plan, some rates have been known to spike up more than 50 percent on plans that were started before 2005. Fortunately, insurance providers have been pricing current policies much more accurately to avoid such high increases. However, it is smart to adjust for an increase of at least 20 percent for every decade.
When planning for your retirement, be sure to plan to have money stashed away for emergencies. It would be prudent to save a few hundred dollars each month toward an emergency fund for unexpected expenses such as auto insurance deductibles, new tires, or having to assist an adult child financially from time to time.
After the beginning period of retirement, where a lot of people spend the same amount or even more, this spending tends to taper around the mid-70s. Less money is wasted as they tend not to be as active or on the go as before. Many find themselves downsizing their homes and spending quite less money on groceries. The Employee Benefit Research Institute shows that people that are 65 to 74 have an average expense of up to $4,900 on food. This number goes down to $4,000 once they become 75.
However, during the later years of retirement, the spending goes up once again, normally, due to medical expenses.
Many seniors have a fear of running out of money in retirement. They can invest in an immediate annuity as a prevention method.
So, what is an immediate annuity? It is an insurance policy where you put down a lump sum, and in turn, the insurance company provides you a steady income stream for an agreed amount of time or until your passing.
With the estimated retirement budget you made, you can break into what your monthly costs will be and then purchase an annuity that will cover that amount. With those expenses taken care of, any other money you will receive at that time can go towards what you want to spend it on.
The bad news is that this is not the best time to purchase an immediate annuity. This is because the payments are linked with the 10-year Treasuries’ interest rates, which are the lowest they have ever been.
It may be wise to hold off on buying an immediate annuity. If you do not wish to do so, a laddering strategy may be something to consider, which consists of making multiple annuity purchases in smaller amounts throughout a period of time. That way, as interest rates go up, you can purchase an annuity with a higher rate. Also, annuities purchased at an older age will still have higher payouts as these payments are higher for older purchasers.
For a majority of Americans, they will be able to receive Social Security payments throughout their retirement. It also normally gets a cost of living adjustment every year.
Some people will start their benefits at the minimum age of 62 but will have them receive smaller payments as opposed if they waited until their full retirement age, which can be 66 to 68 depending on the year they were born.
If a person delays their benefits after their full retirement age, they will receive an 8 percent increase every year until the age of 70.
To get an idea of how much Social Security benefits you will get, there are Social Security retirement calculators available on the internet.
And it is highly advised that you do not have Social Security as your only source of retirement income.
And very importantly, make sure you review your retirement savings every year to make sure you are on track with your spending by making necessary adjustments.
