Retirement planning can inspire a lot of contrasting emotions. There’s the excitement of making travel plans, sleeping in on Mondays and saying goodbye to the boss. And there’s also the fear of outliving your money, boredom or making a huge financial mistake that could lead to a gigantic tax bill.
The best way to deal with your retirement fears is to face them head on. The sooner you make a retirement plan, the better. A 2020 TransAmerica survey found that only 18% of retired people have a written plan for dealing with life after labor, and only 9% of retirees frequently discuss retirement planning with their family and friends.
If you are planning for retirement now you’re already ahead of the curve. To help your process, check out this handy checklist of 13 things to think about for your retirement plan. 1. Know the Numbers, Ignore the Numbers
The world of retirement is full of very important-sounding numbers. They’re useful in the broadest terms—sometimes just for their shock value. For instance, they can tell you if you’re far behind in saving.
There’s no question that you need to know about stuff like the 4% rule or the 80% rule. The latter suggests your spending will decline by roughly one fifth in retirement compared to your final year of working.
Then there’s the 25x rule : Multiply your annual budget amount by 25 and you’ll find “the number” you need to retire comfortably. Figure you spend around $75,000 every year? The 25x rule says you’ll need around $1.9 million saved before you retire.
It’s good to calculate figures using these rules on the back of the proverbial envelope, to have a sense of whether you’re on pace to have enough stowed away before you stop working. But you shouldn’t get attached to these figures. Individual circumstances vary so much they aren’t always very useful when you make a real retirement plan.
The 4% rule is the most suspect number of all, since retirement-friendly investments like Treasury bonds are yielding so little these days. Meanwhile, low-income retirees often spend more than 80% of their working income in retirement. Those in good health entering retirement tend to spend less on health care during their golden years.
Get a high-level view of your retirement with these numerical guides, then move on and get more intimate with your own real-life situation. 2. Take Stock—and Bonds, Cash and Social Security
Begin by calculating your net worth : Take stock of all your assets and liabilities, and get a solid understanding of your own personal balance sheet.
This advice sounds obvious but you might miss something, like how much your available income will change based on when you decide to take Social Security . Or how dramatically your returns on your investments can change in five years. Or how much inflation and property taxes might eat up “the number” you come up with. 3. Deal with Your Debt
Here’s an uncomfortable truth you’ll need to face: Retired people stop getting biweekly paychecks but they still face monthly payments. TransAmerica’s survey found that 46% of retired people have non-mortgage debt to pay. That’s a potential disaster to retirement planning.
Once upon a time, even holding mortgage debt in retirement was considered a major mistake. With the advent of easy, low-cost refinancing —plus the supersized mortgages these days—being mortgage-free by age 65 is perhaps out of reach for many people.
For many retirement plans, it makes sense to continue working until the car loan, student loans, and credit cards are paid off. When your income is fixed, compounding debt starts to eat up a larger and larger portion of it. 4. Develop a Spending Strategy
Many people underestimate the higher first-year costs of retirement —think of them like start-up costs. You’ll probably spend more on travel than you expected, you might have some elevated costs when switching to Medicare , and if you downsize your home there are closing costs.
It’s a normal part of retirement, and you can prepare for the costs by developing a spending strategy. Here’s one number to keep in mind. Bureau of Labor Statistics (BLS) data shows the average American aged 65 to 74 spent nearly $48,000 in 2020. Using the 25x guideline we noted above, the average American would need $1.2 million to support that kind of cash flow. 5. Have a Draw-Down Strategy
One of the trickiest parts of retirement is maximizing your income while minimizing Uncle Sam’s cut. Most people have a variety of tax situations in retirement, like required minimum […]
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