1. Set Retirement Goals
It all starts with setting goals. Long-term goals define how much you want to have saved in various accounts by the time you retire. These goals have to do with how you want to live in retirement, where you want to live, and so on. It’s important to realize that even long-term goals will likely change as time and circumstances warrant.
KEY TAKEAWAYS
- Ensuring you are financially secure throughout retirement starts with setting financial and lifestyle goals, as well as what age you would like to retire.
- Make sure to understand the different retirement plans available to you, including how they are taxed.
- If you plan to work during retirement be aware of the potential tax consequences.
- Also plan with your spouse in mind, as well as exes if you are divorced—you may be entitled to some of their retirement plan savings or vice versa.
- Monitor your progress every step of the way and be aware that long-term goals can change over time.
Meeting these goals requires that you maximize savings while minimizing taxes, keep expenses in check, set age-appropriate goals, and monitor your progress every step of the way.
2. Pay Attention to Timing
Timing as it relates to retirement tends to revolve around what has long been considered normal retirement age—the upper 60s. That said, when you should retire is a highly individual thing.
As with financial goals, this is also subject to change. Everything from declining health to unexpected wealth (winning the lottery, for example) could alter your plans.
Important: The age for receiving full Social Security retirement benefits is now 66 or 67, depending on when you were born—but waiting until age 70 increases them by 8% each year you delay taking them.
One important aspect of timing has to do with the specific age of 59½, the first time (usually) when you can draw on your tax-advantaged retirement savings without incurring a penalty. There are financial and tax implications of drawing down your nest egg before and after age 59½ to consider.
If you don't plan to retire early or don't need to tap your retirement savings at 59½, it's best to let your nest egg grow and to continue contributing to it. Keep in mind that required minimum distributions (RMDs) don't kick in until you are 70½ for most retirement accounts.
3. Understand Available Retirement Savings Options
Understanding available employer-sponsored savings plans, including 401(k), 403(b), 457, SIMPLE IRA and SEP plans, provides the foundation for building your entire nest egg. You should also know the importance of having a traditional and/or Roth IRA as part of your overall retirement savings picture.
In addition, you should learn how a Health Savings Account (HSA) could save you money before and after retirement.
These retirement savings tools, together with effective and tax-efficient investment strategies, will provide you with the best insurance you can have when it comes to avoiding financial disaster.
4. Plan for Extra Retirement Income
Although retirement is often thought of as a time to kick back and relax, most people find themselves as busy as they ever were, though doing different things. For many, staying busy also means earning extra income. Some people buy and manage investment property. Others turn a hobby into a small business. Still others get a part-time job, both for the money and the social contact.
Managing extra income during retirement could have tax consequences. If for, example, you take Social Security benefits and continue to work those benefits might be lowered depending on your age and how much you earn. Working during retirement could also bump you into a higher tax bracket, particularly if you are subject to RMDs.
5. Don’t Forget Your Partner
Retirement for couples is a joint project and can be complicated. There are timing issues to ensure that you and your partner both gain maximum benefit from Social Security, including those specifically related to spousal benefits.
There are personal and emotional issues as well. If, for example, one of you keeps working while the other retires, how will household management change? On the other hand, the huge life changes of retiring at the very same time can also be unnecessarily stressful for a relationship.
In the event of a divorce, you may be subject to a qualified domestic relations order (QDRO), which could require you to split your pension or retirement savings with your ex-spouse.
6. Mind the End Game
For most people, age 50 is the beginning of the retirement end game. Ideally, you will start by fortifying your nest egg with catch-up contributions. You will also need to review your investment mix more frequently to make sure you have the right combination of securities to mitigate risk while ensuring sufficient growth.
In the last year or two before you retire, you will need to review both healthcare and home-repair needs and see that they are completed while there’s still a salary (and, one hopes, employer-sponsored health insurance) coming in.
This may also be a time to make charitable contributions that will be more beneficial tax-wise before your income declines.
Finally, you will need to pay attention to the early years of retirement, before RMDs kick in and your taxable income potentially sees an increase.
The Bottom Line
The road to retirement includes setting goals, timing, taking advantage of retirement savings options, understanding the impact of taxation and tax benefits, planning with a partner (if you have one), and staying on top of it all when you actually get there. You’ll need to monitor your progress every step of the way and make adjustments when needed.
If you take the six steps above, you should be able to head into the next stage of your life well prepared and funded.
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- Doug Myrick
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