Although you will have various milestones in your life - buying a house, having children, getting married - one of the most substantial is your retirement. Assuming that you don’t want to have to work until you’re 80, you need to plan for this major step.
Unfortunately, too many Americans are unprepared, which means that they will wind up scrambling to figure out what to do when they retire. If you’re getting close to that age or you’re just wondering where to begin, let this article be your guide.
As a note, we’ll be talking about steps to take before and after retirement. Remember, retiring isn’t the end of the road; it’s the beginning of a whole new chapter. Don’t focus too much on what to do beforehand and then realize you don’t have an idea of what to do after.
No matter your age, the best time to plan for retirement is right now. Whether you’re 25 or 55, it doesn’t matter. However, the sooner you start, the better off you’ll be in the long run. Here are the top three goals you should have before reaching retirement age.
Increase Your Retirement Accounts
Individual retirement accounts, or IRAs, are some of the best options available for growing and managing your nest egg. There are two types of IRA’s, Roth and Traditional. We won’t get into too many details here, but here’s a brief breakdown of the primary difference between them (hint: it’s taxes).
This account is tax-deferred, which means that you don’t have to pay anything on the money when you put it away. Once you withdraw the funds, then you’ll have to pay taxes.
The primary benefit of a Traditional IRA is that you can deduct your contributions from your yearly earnings. So, if you’re trying to avoid getting into a higher tax bracket, or you just want to reduce your tax burden for the year, contribute as much as possible up to the maximum.
New rules mean that you can continue to put money into your IRA after 70.5. However, once you reach 72, you will have to take required minimum distributions (RMDs).
These are calculated based on some complicated formulas, but you don’t have a say in the matter. While you can put that money into a different investment account, it can’t stay in your IRA.
Unlike a Traditional IRA, you will have to pay taxes on the money when putting it away. However, this means that withdrawals are tax-free. So, if you want to save your tax burden in retirement, putting more money into a Roth can be a smart move.
The downside, however, is that you could make too much money to qualify for a Roth. People filing individually making between $124,000 and $139,000 (as of 2020) will have contribution caps. Anyone making over $139,000 can’t put money directly into a Roth. However, you can roll the money over from a traditional IRA, so keep that in mind (you’ll just have to pay taxes on it).
With both accounts, the maximum contribution limit in a given tax year is $6,000 in total (not for each IRA type) for 2020. If you’re over 50, you can put an additional “catch-up” $1000 per year. We highly recommend capping your limits every year, if possible. How you mix and match between Traditional and Roth IRAs is up to you, based on when you want to pay taxes.
Calculate Your Earnings and Expenses
Depending on when you start retirement planning, it may be challenging to figure out how much money you’ll be bringing in and spending during retirement. Realistically, you’ll have to start calculating these figures as you get closer since you’ll have a much better idea of the size of your nest egg.
That being said, you want to make sure that you take a comprehensive approach to planning. Here is a quick overview of which elements to include. Don’t worry if you don’t have numbers right now, or if they change later on. It’s better to have something in mind than nothing at all.
- Mortgage and Utilities - ideally, you’ll pay off your home mortgage at some point during retirement. If you rent, then be sure to consider yearly increases, as rent will continue to go up in the future.
- Average Living Expenses - you should have an idea of what you spend on things like groceries, gas, and other items. When you retire, you might pay less overall since you don’t have to commute anymore, but use your current cost of living as a baseline.
- Medical Expenses - as we get older, our bodies require more care. If your health insurance is tied to work, you need to have a plan for when you’re retired. Consider premium payments, co-pays, as well as any other out-of-pocket expenses.
- Assisted Living - if you wind up in a long-term care facility, those costs can eat into your nest egg quickly. Start looking at the average price for one of these facilities, so you have an idea of what to expect.
- Life Insurance - if you don’t have insurance now, you might want it in the future. Conversely, you may be paying for insurance but choose to drop it later on. Also, consider reducing your coverage if you don’t need as much of a death benefit.
- Taxes - owning a home means property taxes, which will increase as your home appreciates.
- RMDs - talk with a financial professional to see what your RMDs will be once you reach 72.
- Passive Income - if you have any investments that pay dividends, or you own a business, you can count on that income throughout retirement.
- Social Security - start calculating how much you’ll make each month. Also, consider whether it’s better to wait until you’re older, as your benefit payout will increase until age 70.
Ideally, your income will cover your expenses, meaning that you can use any saved funds for vacations and other one-time costs. If you have limited money coming in, be sure to calculate how long you have before your accounts run out.
Once you retire, it’s time to celebrate. However, so many people are looking forward to not working that they forget to come up with an alternative way to spend their time. Not only that, but you want to consider various goals to help your nest egg stretch farther, just in case.
Here are the top goals to achieve during your golden years.
Typically, individuals look to increase the size of their homes as they get older. Whether it’s for expanding your family or moving to a nicer area, a larger property does sound appealing. However, during retirement, it may be more than you bargained for.
Yards need to be maintained, rooms have to be cleaned, and taxes need to be paid. If you don’t require so much space during your later years, is it worth paying extra for it?
In some cases, you might want to leave the house for your children as part of your legacy planning (more on that later). However, if regular maintenance and upkeep are costly, you can consider moving to a smaller dwelling for a time to save on monthly expenses. As we’ll get into later in the article, you can even use your home as a revenue stream, so keep that in mind.
Find Your Fulfillment
Now that you’re retired, what are your goals for the next 20 to 30 years? For many people, now is the time to travel, but you’ll want to think about alternatives as well. Presumably, you won’t be jet-setting around the world 12 months a year.
Some options for getting more out of retirement than free time include:
- Volunteering - help out with local charities and donate your time and energy. Find a charity that shares your passion for an even greater reward.
- Cross Off Your Bucket List - now that you’re not working, it’s time to check off those feats you’ve always wanted to achieve. If you don’t have a bucket list, create one. Don’t forget the smaller items, too - not everything has to be life-changing.
- Teach a Class - having decades of experience means that you have plenty of knowledge to share. It’s never been easier to build an online curriculum, or you can teach at a local community center.
- Learn a New Skill - on the flip side of things, you can take this opportunity to learn something you’ve never tried before. Whether it’s juggling, playing an instrument, or something more substantial, it’s never too late to add to your resume.
Wealth is more than simply having money. Wealth offers choices and freedom. It can empower you to invest in anything that supports your values, purpose, and goals. Learn more about how to create your own rich life.
Develop a Passive Income Stream
Even if you’re not worried about running out of money in retirement, having passive income is always a good idea. You can put the funds toward an expensive trip or purchase (i.e., an RV), or you can save it for your kids. Here are a few ideas to generate extra money without having to punch a clock.
- Rent Out Space - if you have extra bedrooms in your home, consider renting them to tenants. You will have to fill out some paperwork, and you may need to do some light renovation, but you can get a monthly check to cover property taxes or personal expenses.
- Use Sites Like Airbnb - if the idea of a long-term tenant doesn’t sound appealing, what about someone on vacation? You can rent rooms temporarily whenever you need some additional cash flow. Also, there are sites you can use to rent the whole house if you decide to downsize or you’re on an extended vacation.
- Invest in a Rental Property - while it’s easy enough to rent a room in your home, you may decide to buy a whole other unit to serve tenants. If you can’t buy the property outright, you can pool your money with others to make it happen.
- Sell Crafts Online - if your retirement hobby is related to arts and crafts, you can earn income by selling those items on sites like Etsy. Or you can donate them to charity if you like.
Consider Your Legacy
Death and estate planning should also be on your mind during retirement. What are you going to leave behind for your children? What about your spouse? Now is the time to start making moves regarding where your assets will be placed and how they will be distributed. Consider creating a trust to avoid probate, and be sure to talk to your loved ones so that they know what to expect.
Also, now is the time to think about your end-of-life expenses. Discuss your wishes as well so that there is no confusion or guilt. It may be a dark subject, but it’s better to talk about it now than later.
Contact NextGen Wealth Today
When it comes to managing your retirement funds, let the pros help. We can assist you with all aspects of retirement planning, from choosing the right accounts to building an investment portfolio. It’s never too early or too late to get started.