Are you ready for retirement? When was the last time you thought about retirement? For most of us, it’s probably an afterthought. I mean, what else should you be doing except for those automatic contributions you’ve been making to your 401 (k) or Roth IRA?
Well, definitely keep doing that — but you also need to consider everything from where you want to live to healthcare costs. That may sound overwhelming. However, addressing these issues will ensure that you’ll be ready for retirement. And, to get you there, you can begin today by taking these 5 steps.
1. Define your retirement lifestyle.
There’s a misconception that retirement entails living it up. Preferably in a warm climate where you relax by the pool, play golf, and go on Viking Cruises. That might be the goal for some. But, that’s not how everyone envisions their retirement.
Andectodately, I’ll give you two examples.
About five years ago, my best friend’s parents retired. They worked their tails off and lived a frugal lifestyle. The reason? They wanted to travel and relocate to a thriving retirement community.
Then, there are other parents.
These parents also work hard — their idea of retirement might be paying off the mortgage and spending time with their grandkids. Because these parents have more modest goals — they may not save as much for their retirement. But you will want to encourage these parents to do a little better for themselves.
Neither is right or wrong. Each set of parents knew what they wanted their retirement to be. As such, each had different plans when it came to saving and preparing.
How do you want your retirement to be?
Before you get too far ahead of yourself, think about the lifestyle you wish to live in retirement. Are you content with staying in your current home and living modestly? That’s perfectly acceptable. But, if you dream of relaxing by the beach or embarking on a two-week European vacation, then you’re going to need more money to enjoy this lavish lifestyle.
Knowing the difference will help you determine how much you need to start setting aside. And, that may also influence how your investments play out. You want a diversified portfolio to grow your wealth, while also protecting it against market volatility.
One more thing. Take into consideration if you’re going to continue working.
For instance, my friend’s parents had no intention to work once they retired. The other parents, however, decided to continue to work some. Maybe a little side job for some extra income. But you don’t want to have to take a job or lifestyle that you don’t want in retirement. You’ve worked hard — and you want to be able to be in a position to make choices.
Again — none of the choices are wrong. But, according to Harvard Health, “There’s increasing evidence that the payoff of working past age 65 may go beyond income. Some studies have linked working past retirement with better health and longevity.”
2. Mark your calendar.
I’m not just talking about the day that you’ll get the proverbial gold watch. Instead, I’m referring to important deadlines for Medicare, Social Security, IRAs, 401(k)s, and other employer-sponsored retirement plans start to kick in.
Many do not understand that if they don’t sign up for these retirement plans, you’ll be fined. My dad told me that because he signed up late for social security — they have fined him $200 a month — forever!! You don’t want that. Find out what your dates are and sign up for your retirement on time.
“Understanding those dates and processes are crucial, both for people who are approaching that age themselves as well as for those whose parents may need some help navigating and staying on top of these deadlines,” explain the folks over at Merrill Ledge.
“The decisions you or your parents make during pre-and post-retirement years can be important in determining how much money will be available during retirement,” they add. Thankfully, they put together a handy year-by-year guide with the help of Debra Greenberg, Director of Retirement and Personal Wealth Solutions at Bank of America.
Important deadlines to know.
- 50: “You’re now eligible to make ‘catch-up’ tax-advantaged contributions to 401(k)s and other employer-sponsored retirement plans as well as to IRAs.”
- 55: “You may be eligible to take a distribution from your account in the 401(k) or other employer-sponsored retirement plan without paying an additional 10% tax for early withdrawal (on top of regular income taxes).” The catch? You’ve severed ties with your employer.
- 59 1/2: “Withdrawals from employer-sponsored retirement plans and IRAs are no longer subject to the 10% early withdrawal tax.” But, “you still may owe regular income tax on the distributions.”
- 62: You can begin receiving Social Security benefits. Also, “you’ll probably want to have determined your strategy — whether to start collecting Social Security, to keep working or to work and receive benefits, depending on your personal situation,” Greenberg says.
- 65: You’re now eligible for Medicare. Note that it comes in several segments, which can be complicated when signing up. Know the basics by visiting. Medicare.gov
- 66: For those “born between 1943 and 1954, age 66 is your ‘full retirement age’ for Social Security.” If you were born after 1954, “the full retirement age will increase by two to four months a year until the current maximum of age 67, for those born in 1960 and later.” (This age will likely increase every year — sorry millennials.)
- 70: There’s a reason why you might want to delay Social Security benefits; it could be 76% larger.
- 70 1/2 or 72: This is when you must begin taking the required minimum distributions.
3. Stop wasting money.
Are you struggling to save for retirement? You’re not alone. Since COVID hit, 63% of Americans are living paycheck to paycheck, according to Highland Solutions.
If there’s a silver lining, it’s that this has made people rethink their spending habits.
“According to respondents, 63% have cut back on spending during COVID-19 due to many reasons, including feeling the need to be more cautious with their finances (60%), experiencing a reduced salary or income (49%), and staying home more often (40%),” writes Jon Berbaum, President of Highland Solutions who conducted the survey.
What are you wasting money on?
If you’re fortunate enough not to have been impacted by COVID, you still should evaluate your spending habits. After all, on average, Americans spend at $18,000 a year on non-essentials, such as:
- Food and drinks. For example, $210 at restaurants, $174 buying lunch, and $21 each month! A simple fix? Cook more at home.
- Phone upgrades. No. You do not have to upgrade your phone every year. For instance, if you keep your iPhone for 3 or 4 years, you’ll be saving between $400 to $1000 annually, depending on the model.
- Clothing and apparel. We spend $1,866 a year on new clothes and apparel. Either wait for sales or buy used.
- Lottery tickets. The chances of winning are slim. So, put that $86/month towards your savings.
- Extended warranties. They’re a waste when it comes to items like electronics.
- Cable. On average, people are spending $100/month on this. Look for more affordable alternatives, like Sling. Just watch out for overdoing the subscription services. I might get into trouble for this, but my friends and I share a login. One friend pays for Netflix, another has HBO Max, and I have Hulu bundled with Disney Plus.
- Impulse purchases. While this is a broad topic, these types of purchases occur when at the grocery store or when you get a flash sale notification. Restrain yourself!
Now that you’re aware of your frivolous spending cut back and put that money towards retirement.
4. Make a health care plan.
“One of the largest costs you’ll have in retirement will likely be health care,” writes Marcy Keckler, CFP, CRPC for Kiplinger. “The Center for Retirement Research at Boston College calculates that the average retiree will spend nearly $4,300 a year throughout retirement on out-of-pocket health care costs,” adds Keckler.
Even more concerning? “That doesn’t include the expense of long-term care, which surpasses $172,000 on average over a lifetime.”
“You’ll want to have a plan in place for both of these expenses,” she advises. “Taking advantage of a health savings account if you’re in a high-deductible health insurance plan is a good way to save for the out-of-pocket health care expenses that won’t be covered by Medicare or your private health insurance.”
Just for future reference, you’re allowed to “fund this up to $7,100 for families ($8,100 if you’re 55 or older),” she writes. “Your contributions are made on a pre-tax basis, your account grows tax-free, and withdrawals are tax- and penalty-free if used for qualified health care expenses.”
While you certainly need to consider this, there’s no need to lose sleep over this. Ideally, this is an area to focus on five years before retirement.
“Five years out is also when, if you believe you want long-term care insurance, you should consider purchasing it,” says Keckler. “Even a plan with just a minimal level of coverage for a 60-year-old costs 30% less, on average, than buying the same plan at age 65.”
Don’t neglect your health right now.
In the meantime, take measures today to take care of your health to lower these costs tomorrow.
“Schedule your checkups and preventive exams now, from an annual physical to teeth cleaning. At each appointment, work with your provider on a plan to improve or maintain your health,” advises Donna Fuscaldo, AARP. “Commit (or recommit) to eating healthy, exercising, and getting enough sleep.”
In addition to that, find ways to stay “mentally sharp with brain games, puzzles, and books,” states Fuscaldo. “Staying in close contact with family and friends will help you maintain your health both physically and mentally and may aid in fighting off any blues that may arise once you are retired.”
5. Plan for bumps in the road.
Even if you’ve properly planned for your retirement by doing the above, have you also factored into the unexpected? Case in point, the coronavirus.
“Those who plan to retire this year are faced with answering some important questions,” Craig Cecilio, CEO, and founder of DiversyFund, told Bankrate. “Is now the right time to retire? How will the pandemic impact my current investments?”
You might want to meet with your financial advisor to answer these questions.
“COVID and working from home have been a good trial run for many people considering retirement,” adds Sharon Duncan, CFP with Selah Financial Services. “If you found yourself home more during COVID, think about what would be different if you retired now.”
Duncan also states that this has helped people realize that they can continue to work instead of retiring.
What’s more, the turbulent economy has meant that people were burning through their emergency savings. And, for more than one-quarter of respondents (26%), to the Edelman Financial Engines “2020 Financial Insights Study,” they also had to dip into their savings or retirement accounts.
Obviously, you can’t anticipate every worst-case scenario. But, you should have a solid emergency fund just-in-case. Even if it’s just $1,000 could make all the difference in the world since this prevents you from using a credit card or withdrawing from your savings.