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Retirement Basics

By: Financial Hotline
Summer 2021 (Vol. 39, No. 2)

It’s never too early or too late to start preparing for retirement. Here are some practical tips to keep you on track:

Set realistic goals. Project your retirement expenses based on your needs, not rules of thumb. Think about how you want to live in retirement and how much it will cost. Then calculate how much you need to supplement Social Security and other sources of retirement income.

Make a retirement budget. A general rule of thumb is for your retirement income to equal at least 80% of your current income. But that can vary depending on lifestyle. For example, if you plan on downsizing, your cost of living could be lower. If your ideal retirement involves a lot of traveling, you may need to budget more.

Don’t miss any opportunity. Even if you are just getting your first job out of high school, ask about company retirement plans and other investment opportunities. Opt in at the earliest opportunity and maximize any company matching. Some employers offer matching in Health Savings Account (HSA) plans as well. Even the smallest investment today can turn into a nice nest egg in the future.

If your employer doesn’t offer benefits or you are self-employed, open an Individual Retirement Account (IRA). There are two types of IRAs. A traditional IRA offers tax-deferred growth, meaning you pay taxes on your investment gains only when you make withdrawals. The second is a Roth IRA. By contrast, it doesn’t allow for deductible contributions but offers tax-free growth, meaning you owe no tax when you make withdrawals.

Diversify. Stocks, mutual funds and bonds all have their pros and cons. A good portfolio has a mix.

Network now for employment opportunities later. If you plan on working part time in retirement, it doesn’t hurt to watch the employment trends and prepare for location and other requirements a year or more in advance. You can start researching the market now for products or services in your skill set that might turn into extra income.

Consider your emotional needs too. Working keeps you socially engaged and reduces the amount of your nest egg you must withdraw on an annual basis once you retire.

Think about retirement when you make big decisions like a new home or changing jobs. Will you need to downsize when you retire? Will this job change lead to part time employment opportunities in retirement years?

Don’t forget about taxes. A tax and accounting professional will evaluate your financial situation (i.e., income and expenses), evaluate your tax situation, and help you figure out how to structure retirement accounts.

Prepare for the unexpected. Have a back up plan in case you are forced to retire earlier or later than you expected.

Prioritize debt payoff while you are still working. If you are within ten years, its time to stop the borrowing and start paying down.

Don’t forget to plan for Health Insurance. Americans are eligible to enroll in Medicare at age 65 but it doesn’t hurt to get familiar with what will be available at least a year before your eligibility date. You will also need to sign up a few months ahead of time to give the coverage time to kick in. Even with Medicare you will need to plan for co-pays and out of pocket expenses.

Consider funding an HSA. Contributions are tax deferred, they grow tax free and the withdrawals are tax free if you need money for unexpected medical expenses in your retirement years.

Decide when you will take retirement benefits. Unless you have extenuating circumstances, the general rule is to wait until at least your full retirement age to take Social Security. Your full retirement age is determined by your birthdate. Anyone can start taking their benefits at age 62 but your payment amount will be reduced by as much as 30% depending on your full retirement age. For example, if you were born between 1943 and 1954, your full retirement age is 66. If you took early retirement at 62, your monthly benefit amount would be reduced by 25%. The same goes for all retirement accounts. You can start taking 401(k) or IRA distributions penalty-free at age 59 ½ but the longer you can hold off, the more your investments can grow.