Planning for retirement is a strange business. The average person doesn’t think much about how to save for their retirement, and even when they do it can seem impossibly complicated to work out how much you will need to save to be comfortable after you retire.
Indeed, it is often those people who are most dedicated to their work who think the least about retirement, if only because they are so busy living their life that they don’t have time to plan for the future. For professionals like this, the biggest fear of retirement can be finding a way to occupy themselves.
Of course, it’s important that all of us think about our financial future, and that we plan so that we can have the lifestyle we want in retirement. In this article, we’ll show you how.
1. What lifestyle do you want?
The biggest mistake that a lot of people make when they start planning for retirement is thinking that their lifestyle will be the same after they retire. This is very unlikely to be the case, however.
Even if you love where you live, after you retire you are probably going to take up new hobbies and interests, and these may require extra income. On the other hand, you may find that the commute to work was costing a lot more than you thought it was.
For others, the financial changes brought about by retirement may be much larger. Retiring abroad is an increasingly popular choice, for instance, and partially because the cost of your desired lifestyle could be a lot less outside the US.
On the other hand, plenty of people plan to use their retirement to travel the world, and this can quickly get expensive.
All of this is a way of saying – it’s important to plan what kind of retirement lifestyle you want, and to do this a few years (or even decades) before you reach the point of retirement.
Don’t assume that you will need the same income you have now, and take into account any extra expenses.
2. Identify Your Income Sources
With a clear idea of what kind of lifestyle you’ll want after retirement, you can start to plan for it. At this point, it’s important to identify all the possible sources of income you’ll have in retirement, and not just your standard retirement plan.
If you’ve had a long and varied career, it’s likely that you’ll have a wide variety of income sources in retirement, and you should start to identify and organize these years in advance of your retirement date. They could include:
- IRAs and 401(k)s
- Regular bank/savings accounts
- Health savings accounts (HSAs)
- Social Security benefits
- Life insurance
- Business interests, especially if you’ll be selling
You should carefully check the rules that govern all of these income sources for your retirement, recognizing that each source of income may only allow you to withdraw a certain amount of money each year.
Ideally, you should have an idea of where your money is coming from for each year (if not each month) of your retirement.
3. List Your Expenses and Debts
When many people think of retirement, they imagine this as a time of rest and relaxation, and one in which they will no longer have to pay back their debts.
In reality, things might not be so simple, especially if you are refinancing your house in order to release some of the equity you’ve invested over the years.
Just as you should think about your daily needs and income during retirement, you will also need to plan for your projected expenses.
These could include keeping a vehicle running, or supporting children and grandchildren through college. Listing these known, planned expenses allows you to work out how much you can spend on the lifestyle you want.
4. Check Your Taxes
Similarly, many people imagine retirement as a time when they will be free of the necessity to pay taxes. However, there are still plenty of taxes that apply to retired people, and you’ll need to plan for this as part of your income calculation above.
Ultimately, you need to make the same kind of calculation for all of your assets – is this asset taxed as ordinary income, as long-term capital gain or is it tax-free? Your accumulation plan should include tax-diversified sources of retirement income. Remember that it’s not just what you earn; it’s what you get to keep after taxes.
If you have a lot of diversified assets, this can become a very complicated calculation, and it can be worth getting independent advice.
5. The cost of care
Another difficult subject to think about is the fact that your retirement is likely to bring some of the largest bills you’ll ever face. It’s ironic, in fact, that just at the time people stop earning money, they are more likely to face medical bills.
Statistically, close to 70 percent of people who turned 65 today will need long-term care at some point in their life — making it something you need to plan for.
Similarly, it’s worth planning for the significant cost of assisted living. The median yearly cost for assisted living, for example, is roughly $52,000 a year. Nursing home care can range from $93,000 to over $100,000 a year.
Offloading that liability to a third party is where traditional long-term care insurance (LTCI) comes in. LTCI can help you mitigate the risk of draining your retirement savings due to a chronic illness or medical problem.
Take it slow
Finally, it’s important to recognize that your retirement is not just one phase of your life, but a few distinct phases. For this reason, it can be useful to plan like this.
Think of phase one of retirement as taking you from 65-75, when you’ll have sources of income begin to come in, such as pension income, Social Security and required minimum distributions from qualified retirement plans and IRAs. Once you start hitting your mid-70s, it’s time for phase two, when you start to access your longer-term investments as well.
If managed carefully, however, there is no reason why you can’t maintain your lifestyle in retirement.