Whether you would like to retire early or plan to work up until the typical retirement age of 67, financial freedom or retirement is nearing.
I regularly talk with people in their 60s who are so close to the freedom of financial independence, and retirement, they can almost taste it. Many of them love what they do and only want to be told that they can retire when they choose. At the same time, there are others who only want to know how soon they can stop working. Those individuals are quite literally counting the weeks, days, hours and minutes until they can shut the office door for the last time. Whatever your attitude, it is important to think about what your dream retirement will look like. Equally important is determining whether or not your finances are up to the task of providing that retirement for you.
If you are in your 60s, your friends are probably retiring all around you. Don’t let financial angst dampen your golden years. Here are five tips to help get ready to leave the full-time workforce and sail away to retirement.
1. Have a Plan for Retirement Activities
Do you want to travel the world? Explore passions and hobbies or volunteer? The happiest people I know have things they like to do such as spending time with family and friends and cruising the world. Some have even managed to see what seems like every movie ever made. Of course, those interests and hobbies may change overtime.
The important thing is to think about how you want to spend your days when you won’t have to spend a third, or more, of your time working. There is no right or wrong answer here, but be conscious of what some of these hobbies and interests may cost you. First class travel around the world costs a whole lot more than volunteering or babysitting.
2. Have a Holistic Financial Plan for your Retirement
You are likely in the home stretch of retirement planning and want to avoid worrying about money. Financial stress is not fun and going broke is worse. You probably have an idea of where you want to live, some of the things you would like to do and, in a perfect world, how much money you would like to have.
Think about what you will need, financially, to support your lifestyle in retirement. Between investment income, pensions (if you are lucky) and Social Security, what type of income will you have to cover the basics? That includes things like housing, food, healthcare and any debt you may have going into retirement. Hopefully you will only have a mortgage and maybe a car payment or two. Once the basics are covered, add in your spending for fun items such as travel and entertainment. That would include anything beyond basic necessities. Once everything has been added together, will you be in good shape or struggling to pay bills?
If you are flush, great! Keep working until you feel compelled to stop. If it looks tight, consider working a little longer or scaling back some of your expenses. If things are tight when you initially retire, they will only worsen as inflation drives up the cost of things you love to do, like eating. Consider saving more and making catch up contributions to top off your retirement accounts. That will allow your retirement income to grow and potentially help you avoid barely making ends meet once you are retired.
If you are way behind and there is no way your savings will give you an adequate income in retirement, you may need to look at even more drastic changes to help you have a secure retirement. You may need to further delay retirement, which will give you more time to save money, grow your assets, pay down debts and increase social security benefits. You may also want to consider moving to a locale with a cheaper cost of living or perhaps right-size your housing expense. You may even want to consider sharing costs (and quality of life) with a Golden Girls type of arrangement.
3. Top off your Retirement Savings
Take advantage of all your tax favored accounts. Contribute to your 401(k) and make catch up contributions. If you are eligible, max out a Roth IRA account. The more you save now the less income you will need to replace in retirement. You want to accumulate as much net worth as possible to help generate income in retirement.
Once you are 50 years old, you can make catch up contributions. For example, if you already invest the maximum amount allowed ($18,500), you could put in an extra $6,000 for a total of $24,500, per year. For Roth and Traditional IRAs, you would be able to contribute an extra $1,000 for a total of $6,500, per year. In general, you should strive to save 10-20% of your income, per year, assuming you started early. If you are behind, you may need to save even more to hit your target retirement date. If you need to save even more or perhaps need some Long Term Care coverage check out the Rich Person Roth – click here for more info.
4. Maximize your Social Security Benefits
Hopefully, you won’t be relying solely on your Social Security benefits to fund your retirement. Regardless of your situation, consider contacting a fiduciary financial planner and working with that person to maximize your Social Security benefits . At a minimum, get an estimate of the benefit amount you will receive at the age you plan to retire. I live in Los Angeles and the average Social Security check won’t cover the rent for an average one bedroom here.
Your Social Security benefit will be determined by a combination of your earnings over your career and the age that you choose to start receiving benefits. Spousal benefits are based on your spouse’s earnings and your age. The longer you delay retirement, the more your Social Security benefits will increase. Conversely, retiring earlier will decrease your benefits. You can start as early as 62 and delay as long as 70.
Visit the Social Security Administration to use calculators that will help you estimate your benefits at various ages. I’d also recommend you visit my Social Security to create or sign into your account and view your estimated benefits. After signing into your account, you should see three numbers: the amount you’ll receive at full retirement (likely age 67), the amount you would receive if you retired early at 62 and the increased amount you could receive if you waited until age 70.
The smaller your nest egg the more important it will be to get back every penny you earned from Social Security. Remember, this income will last the rest of your life. Lastly, keep in mind that cost-of-living adjustments will also be larger the longer you wait to start receiving benefits.
5. Prepare you Portfolio to Maintain Financial Freedom for the rest of your life
There are so many rules of thumb out there about investing and retirement planning. Strategies that at one time provided great returns are barely paying anything in today’s market. Certificates of Deposit (CDs) are a great example. Your grandmother may have had CDs that paid 9% interest but those types of interest rates haven’t been around for more than a decade. She also likely had a pension (lifetime income), Social Security (lifetime income), savings and a paid-off home mortgage. I will expect that most people reading this will have a harder time funding the retirement they worked hard for and looked forward to.
Work with a fee-only fiduciary financial planner to make sure you are holding an appropriate portfolio that will provide income for the rest of your life. Plan for the various curve balls life with inevitably throw your way. You may think I’m just a few years from retirement, I can’t stay invested in the stock market. That may be true for a portion of your portfolio, but keep in mind that this money may need to last 30 years or more. Knowing this will allow you to work towards the appropriate portfolio. One that will generate enough income for your needs and grow over time to keep up with inflation.
I don’t know about you but I plan to live to 100 so Al Roker can say happy birthday to me on national TV. Of course, he will be like 200 at that time. All joking aside, I often hear, “I want to bounce the last check I write.” That would be great if we knew the date of your last day on Earth. Being cash poor at 95 really doesn’t leave you many options to adjust your plan or earn an income.
Whatever your dream retirement looks like, it will take a little financial planning to make it reality. The sooner you make the appropriate adjustment, the easier it will be to fund endless trips to the beach to sip cocktails and watch sunsets.
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