Do these 8 things in the couple years before you retire and you might just end up retiring happy and wealthy.
When I was in my 20’s and 30’s retirement seemed like a far off fantasy that I was very much removed from. I imagined it would happen to me one day, but I couldn’t ever picture it. As a result I didn’t think about it much. Sure I contributed to my 401(k) plan and then added an IRA to plan for it, but I never maxed out my contributions or gave any serious thought to how much money I would need in the last quarter of my life.
As I got older, my feelings started to change. I started to think about retirement more and more. I began to picture how I wanted my life to be at that stage. I wanted to be able to live happily and financially secure.
I also started to worry that I wouldn’t be able to afford to live the lifestyle I wanted in retirement and apparently I’m not the only one. Americans in general feel pretty pessimistic about their ability to live well in retirement. A study done by Employee Benefit Research Institute found that about half of the people surveyed doubt that they will have saved enough money to retire comfortably when the time comes. That number is the highest level ever recorded by the 23 year old annual survey.
As life transitions go, retirement ranks way up there among the most challenging. It’s a huge change. Before you decide you can’t afford to retire and give up on the idea altogether, make these changes. The following six money moves are designed to help people who are only a few years away from retirement and worried they might not be able to afford the kind of life they dreamed about all those years ago.
First off, let’s talk about your income in retirement. Most people expect social security to be a major source of income in their twilight. Therefore it’s prudent to ensure you’re getting the highest monthly allotment you’re entitled to.
See what most people don’t know is that there is a trick to getting higher social security checks every month. About half of retirees begin collecting social security as early as they can, at age 62. But according to the government full retirement age isn’t reached until age 66. Those people that begin collecting four years early then have to take a haircut in their monthly checks and the haircut is a big one. Retirees who begin collecting social security at age 62 receive about 25 percent less money every month.
But every year you delay after reaching full retirement age (that varies depending on the year you were born) you ratchet up the amount of benefits you can receive. If you wait until age 70, you could receive about 33 percent more money every month than someone who started receiving benefits at age 62.
Someone who earned $75,000 annually would receive about $2,412 a month once they reach full retirement age. If that same person started receiving social security benefits at age 62, that would reduce their monthly checks to $1,815. By waiting until age 70, the beneficiary can expect to get a monthly check of nearly $3,200. That’s a difference of over $1350 a month!
Now some people will argue that taking benefits early is smarter because they don’t expect to live as long. But most people are living longer now-a-days. If you start collecting at 70 and die in your early 80s, you would receive about the same total benefits as someone who began collecting at 62. But if you expect to live well into your 80s or longer, then delaying your benefits makes more financial sense.
The other major source of income people rely on in retirement is their investments in the form of 401(k)’s or IRA’s. Most financial planners agree that a person can withdraw four to five percent a year without affecting the principle. But that line of thinking implies you are making that much in interest every year. That gets hard to do when most of your investments are in safer investment vehicles like bonds and CD’s.
It’s important to remember that although you are transitioning from accumulating funds to withdrawing funds, you still need your retirement portfolio to generate income for you. To do this make sure you still have a fair amount of stocks and other aggressive income earners in your portfolio. Just because you retired doesn’t mean you still can’t earn significant gains over the next twenty to thirty years left in your life.
Income and budget go hand in hand. The higher your income, the higher your budget is. Most people expect that they will be able to live off less once they retire. They think about all the things they won’t have to spend money on like commuting and buying work clothes. But that isn’t always the case. While some categories of spending go way down or away completely, others increase significantly, like travel and healthcare.
It’s hard to anticipate how much money you are going to need twenty years down the road. In the last few years before you retire keep a detailed accounting of how you spend your money. This will give you a glimpse into expenses that aren’t likely to change in retirement like food, car repairs and home maintenance. If you plan to live on less money, try out the reduced budget for two to three months to make sure you can do it.
One thing that can have a significant effect on your budget in retirement is debt. Debt payments, whether from credit cards, your mortgage, car or other loans can really deplete the amount of money you have to spend on the activities you want to enjoy in retirement. In the years before you retire make paying off these debts a major priority. If at all possible don’t retire until all of your debts, including your mortgage, are paid off.
One of the biggest expenses in retirement is healthcare. It’s also one of the biggest reasons why people are afraid they won’t be able to afford to retire. Making things even more frightening is how knowing how complex Medicare is and deciding when to enroll.
If you miss signing up for Medicare at the right time, you may have to pay higher premiums and delay receiving benefits. Medicare has four parts and four different enrollment periods. Part A covers hospital stays, hospice care and home health care. Most people don’t have to pay for this part providing they’ve worked enough years to earn this benefit.
Part B of Medicare is medical insurance, it covers things like doctor’s visits, lab tests, and outpatient care. Medicare has a seven-month period in which you can sign up for Part B. This period begins three months before the month of your 65th birthday, includes the month you turn 65 and ends three months after your birthday month. If you are already signed up for Social Security before you turn 65, you will automatically begin receiving Part A and Part B at that time.
If you continue working past age 65 you can postpone applying for Medicare without losing any benefits or paying higher premiums. Take note of these important enrollment times when deciding at what age to retire, you don’t want to delay benefits or end up paying more than you have to.
A common pitfall of Medicare is assuming it pays for long term care needs like nursing homes. It does not. In the years before you retire you should review your insurance policies. For most people long term care becomes necessary while other policies like life insurance become obsolete. Life insurance is intended to help out someone who would be put in a financial hardship should you die. Usually when someone retires income is not affected when one person dies. Oftentimes, provisions like these become unnecessary and can be reduced. Review your life, health, homeowners and auto insurance policies to make sure they still make sense for your new lifestyle.
As you prepare to enter retirement, there are several issues you need to consider. Many decisions carry financial and life-planning implications. Start making these moves five or so years prior to when you expect to retire to ensure your transition is a successful and profitable one.
Keeping Money in Your Pocket,