To help you with those decisions, here are six retirement steps to prepare for the Big 60 and beyond:
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The Social Security Administration used to send out annual updates on your projected retirement benefits. Apparently, they decided that’s too expensive, and have largely terminated the effort. But you can still find out what your retirement benefits are by using the Social Security Retirement Estimator. It will show you what your approximate benefits will be at various ages.
This is one of the most important steps in preparing for retirement, because most people have little idea how much they can expect from Social Security. But if you do it by 60 or sooner, it will give you a chance to make adjustments as necessary.
The age at which you begin taking benefits can have a major impact on the amount of your monthly check. For example, if you were born in 1960 or later, your full retirement age (FRA) is 67. If you opt to begin receiving benefits any earlier, your benefit will be reduced by 6% per year. If your FRA benefit is $2,000 per month, it will be just $1,400 if you begin taking benefits at 62 (five years X 6%).
The opposite is also true. If you decide $2,000 per month won’t be sufficient, you can delay collecting your benefit for up to three years–at age 70–and increase the monthly amount. (There’s no benefit for waiting past 70.)
Your benefit will increase by 8% for each year you delay collecting benefits. If you delay benefits until age 70, the $2,000 monthly payment for your FRA will increase by 24% (3 years X 8%), rising to $2,480.
As you can see, by determining your estimated Social Security benefits well ahead of the fact, you’ll give yourself the option to control the amount you’ll receive.
Employer Pension Benefits
If you’re covered by an employer-sponsored retirement plan, you should be able to obtain your estimated monthly benefit either from your human resources department, or from the pension plan administrator.
Just as is the case with Social Security benefits, this is a number you’ll need to know well before you retire. Similar to Social Security, you may be able to increase your benefit by working a few extra years.
Only by knowing what your Social Security benefits and pension will be can you accurately predict what you’ll need to do in the next step.
Just as you need to know what your income from Social Security and your pension will be before you retire, you’ll need to do the same with your defined contribution plans.
As a rough estimate, you can use what is known as the safe withdrawal rate. The safe withdrawal rate holds that by investing your money in a balanced portfolio of stocks and bonds–usually with a 50/50 split–you’ll be able to withdraw 4% from your plans each year without ever exhausting them.
It’s more of a convention than an exact science, but various studies have shown it to be surprisingly accurate. The basic idea is that a portfolio equally balanced between stocks and bonds will provide enough return on your investment to both support 4% annual withdrawals and an additional return to cover inflation.
For example, the return on stocks–as measured by the S&P 500 index –averaged 10% from 1926 through 2018. Meanwhile, returns on certificates of deposit are currently averaging around 2%.
With 50% of your money in stocks, and 50% in CDs, you can expect an average annual return of 6%. If you withdraw 4% per year, that will leave 2% to cover inflation. Since the current rate of inflation is running just under 2%, the safe withdrawal rate should work for you.
For example, if you have $500,000 in retirement savings, the 4% safe withdrawal rate will be $20,000 per year. At $750,000, it will be $30,000 per year. And at $1 million, it will be $40,000 per year.
To know if your retirement plans are adequately funded, you’ll need to do some calculations.
That will start with calculating your expected annual living expenses in retirement. You’ll then need to add up your expected income from Social Security, your employer pension plan, and withdrawals from your defined contribution retirement plans.
For example, let’s say you determine you’ll need $80,000 per year to live in retirement. You and your spouse expect retirement income from the following sources:
- Combined monthly Social Security of $3,000, or $36,000 per year.
- One of you has a pension that will pay $1,000 per month, or $12,000 per year.
- $500,000 in defined contribution pension plans, that will produce $20,000 per year (4%).
- Total income will be $68,000 per year.
Based on those calculations, you’ll have a shortfall of $12,000 per year. You might be able to make up at least some of that by delaying your Social Security benefits and pension. But if those won’t be enough, or you don’t want to delay your retirement, you’ll have to increase your contributions to your retirement plans.
Options to Increase Your Retirement Savings
The increased retirement plan balance will need to be $300,000, which will produce the full $12,000 additional income using the safe withdrawal rate of 4%. And at age 60, you still have a few years to grow those plans.
If either of you participate in a 401(k) or 403(b) plan at work, you can make the maximum contribution of $19,000 per year, plus a $6,000 catch up contribution since you’re over 50. That’s a total of up to $25,000 per year. If both you and your spouse are covered by plans, the total goes up to $50,000 per year.
If that’s not enough, you can also contribute to an IRA–up to $7,000 each, or $14,000 for both. Depending on your income however, your IRA contributions may not be deductible. Since you’re covered by plans at work, the tax deductibility of the contributions may be limited.
If you’re married filing jointly, the IRA contributions will be fully deductible up to a modified adjusted gross income of $103,000. The deduction begins to phase out at that point, then disappears completely at $123,000. (For single filers, the deduction begins to phase out at a modified adjusted gross income of $64,000, and disappears completely at $74,000.)
So far we’ve been concentrating on the income side of retirement, which is absolutely necessary. But before you reach 60, you should either be debt-free, or heading decidedly in that direction.
Debt raises your cost of living in retirement. That’s actually what it does throughout your working life, but it’s more significant when you retire since you’ll be living on a fixed income. That’s why it has to go. By eliminating debt, you’ll also get rid of monthly payments, which lowers your cost of living. That’s one of the most effective strategies for making up for a retirement income shortfall.
At a minimum, you should have any unsecured debt paid in full. That includes credit cards and student loan debt. But you should also make sure any installment debt, like loans for furniture or even business debts, are fully paid.
Auto Loans and Mortgages
More difficult are auto loans and mortgages. Auto loans have become almost synonymous with owning a car, and it can be a hard habit to break even in retirement. But from a financial standpoint, keeping a car loan in retirement makes little sense.
Let’s say you have a $30,000 car loan for five years with a 4% interest rate. The monthly payment is $552. The payments over 12 months comes to $6,624. That would represent an annual rate of return on an equivalent amount of retirement savings of 22%. Since that kind of return is impossible to get over the long-term, paying off the car loan will be worth more than investing the money in retirement savings.
Paying off a mortgage of course is more challenging, because it involves a larger amount. But if you’re not in a position to pay off your mortgage, you can also consider either trading down to a smaller home–that will not require a mortgage–or moving to a less expensive location.
That can be a tough choice, or it can be an option you’ve already considered and are looking forward to. Whatever motivates the move, it can be one of the most effective ways to lower your overall cost of living. For most people, the monthly housing payment is the single biggest expense. The lower you can make it, the easier your retirement life will be.
For many people, simply getting out of debt is the single best way to lower your living expenses. But if you’ve already paid off all your debt, and your cost of living is still too high for the retirement income you expect, you’ll have to take a close look at other areas of your budget.
We’ve already discussed trading down to a less expensive home. That strategy alone can be sufficient to reduce your cost of living to an acceptable level. Even if your home is paid for, if it’s large or expensive, it will still come with high carrying costs. A high-priced home comes with high real estate taxes, property insurance, utilities, and repairs and maintenance costs. Trading down to a smaller home, or one located in a less expensive area, could cut your housing expense substantially.
And though it isn’t a frequent topic of retirement planning discussions, you might also take a close look at your car. If you can pay off any loan on it, that will be the single biggest step to lowering your carrying cost. But even apart from paying it off, you may also want to consider downsizing.
The more expensive the vehicle is, the more you’ll pay for insurance, repairs and maintenance, and registration fees and ad valorem taxes. By buying a less expensive car, you’ll reduce those expenses.
We’ve been focusing on lowering your living expenses by trading down on your house and car. That’s not to pick on either possession, but rather to recognize the reality that it’s usually more effective to cut two or three major expenses than it is to go on a full-on financial diet. By keeping the major expenses low, you’ll have more money for everything else when you retire.
Now, let’s tackle what could very well be your biggest single expense in retirement.
Health Insurance Coverage
When it comes to retirement, health insurance is a topic all its own. If you plan to retire at 65 or later, you will of course be able to go on Medicare. But since Medicare doesn’t cover everything, you’ll need to add a Medicare supplement. Prices for supplements depend on the carrier as well as your geographic location. You should start shopping around for available plans now, so you’ll have an idea what they’ll cost when the time comes. This will also help you to properly project your retirement living expenses.
If you plan to retire before 65, you’ll need to make other provisions. If you have an employer sponsored pension, and it’ll also cover part or all of your health insurance, you’re in good shape. But if you won’t have an employer-sponsored health insurance plan in retirement, the situation suddenly becomes more complicated–and expensive.
Unfortunately, there are no secret cheap health insurance plans anymore. You’ll have to get a plan under the Affordable Care Act. You can check prices using the Healthcare.gov Plans and Prices page. You can use the page to get an estimate of health insurance premiums at whatever age you plan to retire.
But be ready for sticker shock. A decent health insurance plan for a couple 60 or over can easily run $2,000 per month. You’ll need to build that into your early retirement planning.
When it comes to retirement planning, most people focus on crunching the numbers. But you’ll also need to think carefully about what you plan to do with all your extra time. After all, once you retire, work will be gone, and you’ll need to find other ways to add purpose to your life.
One area to concentrate on is health. Health is more of an open question as you get older, but there’s much that can be done in this area. The idea isn’t just to prolong your life, but also to improve the quality of your life. And if you haven’t done so already, you’ll want to begin moving in that direction now. Better health is all about good habits, and those can take a long time to embrace.
You also want to consider taking on new activities and adventures. Some of them may take time to develop, or require additional income. That’s why you may want to get started on them now.
Some examples include:
- Doing volunteer work
- Starting a new business venture or post-retirement career (either may definitely require advanced planning)
- Extensive travel (which will require building up additional income sources)
- Taking up creative activities, like music or sports
If nothing else, you’ll want to have at least a loose itinerary of activities you’ll have when you retire. The alternative may be retiring to an empty life, then needing to figure it all out once you get there. But if you start preparing now, not only will you have a jump on whatever those activities are, but you’ll be giving yourself more to look forward to.
Think of reaching the Big 60 as coming in for a landing just before retirement. Make all the right moves now, and you’ll arrive safely and well prepared.