If you’re concerned about whether or not you will have enough money in retirement, you should be. Research has shown that men and women are living longer, which means we could well have a good 30 years of life even while in retirement.
Experts say that today’s retirees can expect to live 40% longer than those who retired 70 years ago. Will you have enough money? Here are three ways to ensure you won’t run out of money in retirement: start planning now, create multiple streams of income, and withdraw, or don’t withdraw wisely.
It’s never too early to start planning for retirement. Many people start planning several years before they plan to retire. In my opinion, the early you start planning, the better. Living comfortably in retirement requires thoughtful planning and adhering to that plan, no matter what. Here are some things you can do:
That can’t be stressed enough. Start saving — now. The sooner you start saving, the more time your money has to grow. The longer you wait, the harder it will be to ensure not running out of money in retirement. It’s a good practice to save at least 10% of your gross income, but if that’s not possible, save whatever you can and then increase it a percent or two every year.
There’s a reason why we plan for retirement. If you’re saving money, make sure you know how to manage it. Emergencies will arise, but your retirement account is not for that. Emergency accounts are for emergencies. Keep a close eye on your retirement account and deposit into it consistently.
It’s not realistic that you will be completely out of debt in retirement, but it is possible to eliminate any major debt that you have. Consider the biggest debt you have, and develop a plan to be rid of it before you retire. Carrying substantial amounts of debt into retirement will eat away at your money quickly.
None of us know the condition of our health in older age. However, we do know that retirement life will be less stressful financially if a long-term care plan is in place when we need it. According to the U.S. Department of Health and Human Services, 70% of people need some type of long-term care — and those costs are not cheap.
Long-term care expenses can range from $51,000 to over $100,000 a year, and most people are never prepared for it. Just planning for healthcare alone is a sure way of ensuring not running out of money in retirement.
If your savings is significant enough, you will have the funds you need should you need them for long-term care. If you don’t have significant savings, you may want to plan on securing long-term care insurance.
You want to replace at least 80% of your pre-retirement income in retirement. If you can do that, it’ll almost feel like you’re still working, which is a good thing since the money comes as a result of your hard work. So, start thinking about where this 80% will come from.
Social security may make up some of it, but what about the rest? Only when you’re able to determine where your money will come from will you ensure not running out of money in retirement.
Having multiple saving mechanisms is a smart way to save. Try maxing out your contribution to your retirement accounts, like your 401(k) or IRA. When you reach the age of 50, each year, you can contribute $1,000 more to an IRA and $6,500 more to a 401(k) account as a catch-up provision.
Investing is always risky, and you never know what the market will be like when you retire. History has shown, though, that people who retire during or right before a bear market stand to lose a substantial amount of their retirement income. A bear market is when the economy is receding, and most stocks are at a decline.
Consider those who retired in 2007, right before the great market crash of 2008. Stock portfolios fell at about 50% of their value. That means if you had a one million dollar portfolio, you likely lost half of that. A loss of that magnitude affects how you withdraw your money to ensure you don’t outlive it.
One way to avoid that risk is to put a minimum of two years of retirement expenses in a safe, liquid savings account. This way, any potential loss from a bear market won’t be as devastating to your bottom line.
Another strategy to avoid the risk of downside in the market is to purchase an annuity. Most annuities can be purchased through an insurance company. They are a great way to get you a steady stream of income over a period of time, and in most cases, for the rest of your life.
Fixed-rate annuities are a good option, as they require fewer fees and lower commissions than other types. Just know that with annuities, there is a penalty for early withdrawal.
Consider investing in dividend stocks. When invested in the right company, dividend stocks are long-term investments that can become a great source of additional income. Most dividends are paid out quarterly, and you can even re-invest it back into the company until you really need it.
What you want to do is find companies that are doing excellent in their business, with stable incomes and strong track records when it comes to their dividends. It’s always best you research this yourself before deciding on the company to invest in, but some great companies to consider are:
Interest-paying bonds are also another option for steady income. Bonds are an entity’s way to borrow money from you, but they pay you back in interest payments with an agreeable date to return your money to you. The two ways to make money from investing in bonds are: to hold the bond until its maturity date and collect the interest on it. Interest is usually paid out twice a year.
The other way to make money is to sell the bond at a higher price than what you initially paid. To do this second option, you would need to be keeping an eye on the market to know when the value has increased. There are three different types of bonds:
Passive income is income you earn regularly from work you’ve already done on the front end. That is the perfect income to have in retirement since most of us may not be up to working extremely hard.
In retirement, you have other fun stuff you plan to do. Here are some cool ideas you can start doing now for earning passive income that will still be coming to you in retirement:
While passive income is income you earn from doing something one-time, earning additional income could also consist of working only when you want to. Here are some great ways to do that:
Retirement savings accounts are the best way to ensure you not running out of money in retirement. For this to work for your benefit, some general rules apply.
Among those is the penalty of withdrawing too early. If you withdraw from your retirement savings before you reach a certain age, you will be penalized with a fee, along with taxes. In the end, it’s a double whammy to your pocketbook and a loss of retirement income when you really need it.
The other side of that is when you are of age to withdraw penalty-free, you don’t want to withdraw too much at one time. Again, with the potential to live an additional 30 years after you retire, some basic guidelines are in place for your good.
A very broad general rule of thumb is to withdraw 4% from your retirement savings annually and then adjust that for inflation every year. That is so that you won’t run out of money over those 30 years.
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