For most people, the path to retirement is a multi-step process that lasts an entire working life. To that end, here are six ways to plan for and ensure a sustainable retirement.
1. Set retirement goals
It all starts with setting goals. Long-term goals define the amount you want to have saved in various accounts by the time you retire. These goals have to do with how you want to live in retirement, where you want to live, etc. It’s important to realize that even long-term goals will likely change over time and with circumstances.
Key points to remember
- Ensuring your financial security throughout retirement starts with setting financial and lifestyle goals, as well as the age at which you want to retire.
- Make sure you understand the different retirement plans available to you, including how they are taxed.
- If you plan to work during your retirement, be aware of the potential tax consequences.
- Also, plan with your spouse in mind, as well as your exes if you’re divorced – you may be entitled to a portion of their retirement savings or vice versa.
- Monitor your progress at each step and be aware that long-term goals may change over time.
To achieve these goals, you must maximize savings while minimizing taxescontrol your spending, set age-appropriate goals, and monitor your progress every step of the way.
2. Pay attention to the timing
As with financial goals, this is also subject to change. Everything from declining health to unexpected wealth (winning the lottery, for example) could alter your plans.
The age to receive full Social Security retirement benefits is now between 66 and 67, depending on your date of birth, but waiting until age 70 raises them by about 8% each year you delay taking them. take.
An important aspect of timing has to do with the specific age of 59½, the first time (usually) you can tap into your tax-efficient retirement savings without incurring a penalty. There are financial and tax implications of taking your nest egg before and after age 59½ to consider.
If you don’t plan to retire early or don’t need to dip into your 59½ retirement savings, it’s best to let your nest egg grow and keep contributing to it. Keep in mind that Required Minimum Distributions (RMD) do not come into play before age 72 for most retirement accounts.
Required minimum distributions for traditional IRAs and 401(k)s have been suspended for the 2020 tax year due to the CARES Actadopted in March 2020 in response to the COVID-19 pandemic.
The 2019 SECURE Act pushed back the age at which pension scheme participants must start taking RMDs, from 70½ to 72 – for account holders who had not reached 70½ by the end of 2019. For those who already had it, the 70½ threshold still applies.
3. Understand the retirement savings options available
Understanding the employer-sponsored savings plans available — including 401(k), 403(b), 457, SIMPLE IRA, and SEP plans — provides the foundation for building your entire nest egg. You should also know the importance of having a traditional and or Roth IRA as part of your overall retirement savings picture.
Additionally, you should learn how a Health Savings Account (HSA) could save you money before and after retirement.
These retirement savings tools, combined with efficient and tax-efficient investment strategies, will provide you with the best possible insurance to avoid financial disaster.
4. Plan for additional retirement income
Although retirement is often seen as a time to unwind and relax, most people find themselves as busy as they’ve ever been, even if do different things. For many, staying busy also means earning extra income. Some people buy and manage investment properties. Others turn a hobby into a small business, while others get a part-time job, both for the money and the social connections.
Managing additional income during retirement could have tax implications. If, for example, you take Social Security benefits and continue to work, those benefits could be lowered depending on your age and income.Working in retirement could also propel you to the next level tax bracketespecially if you are subject to RMDs.
5. Don’t forget your partner
Retreat for couples is a joint project and can be complicated. There are timing issues to ensure that you and your partner both get maximum Social Security benefits, including those specifically related to spousal benefits.
There are also personal and emotional issues. If, for example, one of you continues to work while the other retires, how will household management change? On the other hand, the huge life changes associated with retirement at the same time can also be unnecessarily stressful for a relationship.
In the event of a divorce, you may be subject to a Qualified Domestic Relations Ordinance (QDRO)which could require you to share your pension or retirement savings with your ex-spouse.
6. Watch out for the end of the game
For most people, 50 is the start of life. end of retirement game. Ideally, you’ll start by fortifying your nest egg with catch-up contributions. You will also need to review your investment mix more frequently to ensure you have the right mix of securities to mitigate risk while providing sufficient growth.
In the last year or two before you retire, you’ll need to look at both your health care and home repair needs and make sure they’re met as long as there’s a salary (and hopefully insurance) left. illness sponsored by the employer).
This may also be the time to make charitable donations that will be more tax efficient before your income drops.
Finally, you will need to be careful in the early years of retirement, before the RMDs kick in and your taxable income potentially increases.
The path to retirement includes setting goals, timing, using retirement savings options, understanding the impact of taxation and tax benefits, planning with a partner (if you have one) and control of everything when you get there. You will need to monitor your progress at each stage and make adjustments if necessary.
If you follow the six steps above, you should be able to approach the next stage of your life well prepared and funded.