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Source: Senior Living | https://www.seniorliving.org/retirement/planning/
Planning for retirement can be exhilarating and a bit terrifying. As you prepare to live on a fixed income, putting a detailed retirement plan in place is essential. In this article, we’ll explain essential factors to consider as you approach retirement. You’ll learn how to establish financial stability in the years ahead by creating a budget, evaluating your assets, and maximizing your savings.
Discuss Your Vision for Retirement With Your Spouse
Communication between partners and spouses is key. Keri Dogan, senior vice president of retirement income solutions at Fidelity Investments, cautions, “Spouses often don’t have the same vision for retirement.”
Avoid this communication breakdown by talking openly and honestly about your retirement plans. You may dream of traveling across the country in an RV, while your significant other is envisioning staying home and spending more time with family and friends. Work together to map out your life of leisure (and how you’ll pay for it).
10 Retirement Planning Questions
As you discuss your ideal retirement lifestyle with your partner, talk through the 10 questions below.
- When do you want to retire?
- Where do you want to retire?
- How much retirement income do you anticipate earning? For example, earnings can come from Social Security, a 401(k), or pensions.
- What does your retirement lifestyle look like?
- How much do you need in savings to realistically fund that lifestyle?
- Are you able to make catch-up contributions if you’re below your needs?
- Do you plan to claim Social Security before you reach your full retirement age?
- Do you plan on working part-time during retirement to supplement your savings?
- What are your current and future health care needs?
- Do you have life and long-term care insurance?
Estimate Your Expenses
If you’re losing sleep over running out of money or needing to cut spending significantly during your retirement, you’re not alone. The State of Retirement Planning Study by Fidelity Investments reported this as one of the top worries for all generations of adults. Dogan at Fidelity shares, “Many people don’t have a good sense of exactly what they’re spending day in and day out.” Because of this, it can be challenging to estimate expenses in retirement. “Our rule of thumb is that we usually expect people to spend somewhere between 55 and 80 percent of their preretirement income,” says Dogan.
Think About Health Care Costs
Our health care needs evolve as we grow older. Unexpected expenses such as copays, deductibles, and insurance costs can eat away at our hard-earned savings. According to Fidelity’s State of Retirement Planning Study, the average cost of out-of-pocket health care expenses for a couple retiring at age 65 is $295,000. As you work through your retirement plan, consider the impact of your future health care needs on your overall retirement savings. Having an idea of the type of health care coverage you’ll have, and the associated costs, will give you a better estimate.
Take a Hard Look at Retirement Housing Costs
Housing will most likely play a starring role in your retirement budget. Whether you’re considering staying in your current home, downsizing, or moving to a retirement community, retirement housing costs can take up a large percentage of your savings.
Five Retirement Housing Options to Explore
- Aging in place
- Independent living retirement communities
- Assisted living retirement communities
- Continuing care retirement communities
- Nursing homes
There are plenty of great housing options to check out in retirement. For a closer look at your options, view the video below on the different types of senior housing.
Create a Retirement Budget
Putting your retirement dreams into reality can be overwhelming. No two retirement budgets are alike, so your first step to enjoying your retirement years is to create your own plan. This ensures your budget is customized to your goals, needs, and wants.
Essential items are considered “needs,” such as food, shelter, and clothing. Health care and life insurance also fall under the essential items category.
Discretionary items are your retirement “wants.” These certainly vary from person to person. You may want to live in a beachfront community or travel the world, but do you have a savings plan in place to do so? It’s important to sort out your needs versus wants and determine how you’ll cover these costs.
According to Dogan at Fidelity, “Doing a planning exercise and having a target in terms of what’s spent each year is critically important.” Don’t expect your money to last forever. “The biggest risk is for people who don’t plan and just start spending,” says Dogan. “It’s hard to recover from overspending further in your retirement years,” she advises.
Retirement Planning Budget: Essential Items
- Use the checklist below to build your budget for essential items.
- Rent or mortgage and property taxes
- Medical insurance, including Medicare, Medigap, and supplemental insurance
- Dental and vision insurance
- Home and auto insurance
- Utilities, including electric, gas, and water
- Cable, phone, and internet service
- Groceries
- Transportation costs
- Life and long-term care insurance
- Outstanding debt
- Home modification costs to age in place, such as a stair lift, an adjustable bed, or durable medical equipment
- Federal, state, and local taxes
Retirement Planning Budget: Discretionary Items
After you’ve covered the essentials, consider which discretionary items you have room for in your budget.
- Optional home improvements or upgrades
- Luxury goods, services, and housing
- Dining out
- Travel and entertainment
- Hobbies
- Gifts
- Charitable donations
- Tobacco and alcohol
- Nonessential personal care services
- Unwarranted new vehicle or home furnishing upgrades
Understand Where Your Retirement Investments Come From
Retirees often draw income from several areas. A portion of your earnings will most likely come from retirement accounts. It’s vital to keep track of where your money is invested and understand how and when you can draw upon it. Common accounts include the following:
- A 401(k)
- A 403(b)
- A 457(b)
- A Thrift Savings Plan (TSP)
- A traditional and Roth IRA
- Pensions
Assess Your Retirement Risks
You’ve been saving for retirement for years. The way we invest our money isn’t a “set it and forget it” action. Take time to thoroughly review your retirement accounts to evaluate if investments are overly conservative or aggressive.
As many look forward to a retirement lasting 30 years or more, proper investment is key. Dogan at Fidelity notes that it’s important to make sure asset allocations meet your lifestyle, goals, and expected lifespan.
Play Catch-Up to Maximize Your Retirement Savings
Many people underestimate how much to save for retirement. Only one-quarter of the people surveyed for Fidelity’s State of Retirement Planning Study knew they needed 10 to 12 times their last full year of working income by the time they reached retirement.
If you’re behind on your retirement goals, there’s excellent news for those ages 50 years and over. In addition to your standard retirement contributions, the IRS allows annual catch-up contributions to your IRA, SIMPLE 401(k), 401(k), or 403(b).
Dogan at Fidelity encourages people to take advantage of employer-matching retirement plans, which are essentially free money. Another investment priority should be maxing out any tax-advantaged account, such as a 401(k), IRA, or HSA.
Reduce or Eliminate Debt
Part of your retirement plan should include setting a goal to pay down or eliminate debt. Paying off your mortgage, credit cards, or car loan frees up precious retirement funding. If possible, make extra payments now to pay down your debts faster. Tackle any high-interest debt first to make the most of your payoff plan.
Don’t Make These Five Retirement Mistakes
Knowledge is power throughout your retirement journey! Even the best-laid plans can be undermined if you don’t
- Diversify your portfolio.
- Have adequate life insurance.
- Know how much Social Security you’ll receive.
- Take advantage of catch-up contributions.
- Have a comprehensive retirement plan in place.
Source: Senior Living | https://www.seniorliving.org/retirement/planning/