With the events of 2020, it’s fair to say that the topic of retirement has fallen down the list of priorities in recent times. However, the problem is that, while the pandemic continues, so too does time. With this in mind, there’s no better time to bring retirement back into the conversation, and it starts with some tips here today. Here are some things that current retirees wish they knew!
1. Try to Remove All Debt
Who wants debt in retirement? For most people, debt isn’t included in ‘dream’ retirement plans. For those who retire with debt, they quickly realize why it’s a problem. Especially with credit cards and other high-interest debts, it’s always best to remove this from the picture before you finish working. Since interest rates on loans are currently low, we recommend refinancing wherever possible. Use a personal loan to pay off a credit card or refinance your mortgage – it’s time to pay off the actual loan rather than just interest.
2. Visualize retirement
This might sound obvious, but there’s a difference between planning retirement and actively imagining how life will be after work. How do you expect to develop a good plan if you don’t have a vision? Do you have grand plans for a safari trip to Africa? Will you finally take up an expensive hobby? If so, consider this in your financial planning. It’s better to think about this now while you’re young enough to save for all these things.
3. Consider Social Security
Thankfully, Social Security has been helping retirees to meet the financial demands of retirement for many years. But the amount you receive each month will depend on when you start claiming. Although you can effectively claim at 62, we recommend waiting if you’re expecting to live a long and healthy life. The longer you wait, the higher your monthly payments (because the money is spread over a shorter period until death!).
4. Budget, Budget, Budget
If you’ve set goals and thought about the life you want in retirement, the next step is to budget. How much will you need during retirement? You may not be paying for childcare any longer, but new expenses will arise like healthcare. Unless you have a health issue, plan until at least your early 90s and consider how much you’ll need each year.
5. Consider healthcare
Although most retirees lean on healthcare, it’s something that often goes under the radar when planning. You might say that you have Medicare, but the problem here is that it doesn’t cover everything. Instead, we recommend complementing Medicare with some form of health insurance.
6. Be Healthy
If you’re still young, put your health at the forefront of everything before it’s too late. Go out for that walk, change your diet for the better, and make healthy decisions. The more you do at a younger age, the healthier you should be in later life (and thus, the less you will pay for healthcare!).
7. Save and Cut Expenses
Everybody should make saving a habit. If a certain amount of your paycheck goes directly into a retirement account, it won’t be long before you completely forget about this missing money. The younger you are, the more time you have to save – we recommend using one a retirement calculator online to review your required saving habits.
Of course, we would never recommend saving beyond your means. If you can’t meet your savings goal now, do as much as you can and try to meet your goal in the future. One way to do this is to cut unnecessary expenditures. Don’t give up things you enjoy or reduce your quality of life but assess your spending to see if there’s something you can do to cut back. For example, perhaps there’s a magazine subscription for a hobby you no longer enjoy. You’d be surprised at how much you can save after reviewing your finances and eliminating unnecessary expenditures.
8. Review Your Retirement Account
Many employers will contribute to a retirement account – you may even have an employer that matches contributions. If so, this is fantastic. However, for those without a 401(k) or another retirement plan, we recommend opening an IRA. There are two main options to consider:
• Roth IRA – You will have to pay tax now, but withdrawals in the future are tax-free.
• Tax-Deferred IRA – Funds will build free from tax, but there is taxation with withdrawals in the future.
If you think you’ll be in a high tax bracket during retirement, it might be better to pay the tax now, while in a lower bracket. If you need help, don’t be afraid to contact a financial advisor.
9. Create a Withdrawal Strategy
We know what you’re thinking, ‘why do I need to think about withdrawal strategies when I haven’t even finished saving yet?’. However, knowing your withdrawal strategy allows you to consider taxation and therefore saving requirements. As we’ve just seen, whether or not you’ll pay tax with withdrawals depends on whether you have a Roth IRA or a tax-deferred retirement account.
One of the most common strategies is to withdraw 4% and then adjust for inflation every year after the first. Unfortunately, there are problems with this one-size-fits-all approach. Therefore, some retirees choose a tailored plan that allows them to spend more in the early years (to allow for a bucket list) and then less in the later years.
10. Minimize Investment Fees
Finally, another tip we’ve learned from existing retirees is to minimize investment fees as much as possible. If you aren’t sure what fees you’re paying, get in touch with the plan administrator, and they should offer a breakdown. Nobody should pay over 1% of total assets in annual fees. If you are, consider transferring your money to index funds and other low-cost investments. If it’s an employer-sponsored plan, talk to your employer to see if you can add more affordable investments.
With this, you have ten things retirees wish they knew about preparing for retirement and retirement itself. If you notice things wrong after reading this list, don’t panic. Ultimately, a retirement plan is an evolving strategy. Keep reviewing your position and make adjustments whenever required!