There is nothing in personal finance quite as simple and yet complicated, as retirement. Simply put, retirement is the period in a worker’s life when they can voluntarily choose to leave the workforce. In the United States, this is usually defined as when someone reaches the age of 65.
However, different people have different financial situations and would, therefore, also have different paths to retirement. Some may be thinking of retiring early—perhaps at age 50 or even younger. Some will follow a traditional path and retire at the US average (which is at around 62-66 years old). Others may also be dreading retirement even as they hit 65.
What is Retirement Readiness?
Retirement readiness is the measure of the degree to which a person is ready to retire. For many financial experts, this means having a retirement income, which is at least 2/3 or 3/4 the amount of pre-retirement income.
Among the most important things to consider is the ability of someone to maintain the same standard of living in retirement as they did while still working.
Can You Afford to Retire?
The Federal Reserve conducts a Survey of Consumer Finances every three years to understand the financial situations of families throughout the United States and see the effects of changes within the economy. With the survey for 2019 still ongoing, let us take a look at the 2016 survey and take in some worrying statistics.
Median net worth increased across the board except for households headed by someone aged 65-74, which declined by 6%. 49.8% of those in this age group had individual retirement accounts (IRAs).
Still, median values of retirement accounts (IRAs, pension plans, and employer-sponsored accounts such as a 401(k) and 403(b)) saw little change.
The conditional mean value is at $156,000 for the middle-income percentile, but those in the lowest income bracket only have around $60,000 saved.
While 79.1% of households headed by someone aged 65-74 owned their homes, this is a decline from 85.8% the previous three years. Furthermore, 38.8% still had a mortgage, and over 70% carried some form of debt.
Considering that the life expectancy in the US is 79 years and climbing, that means a retiree would have to plan to cover at least 17-18 years of retirement. With the figures provided above, we can see that most people do not have enough savings to retire.
Saving for Retirement
In the US, there used to be a so-called “three legs of the retirement stool:” private savings, pension, and Social Security. However, only about 15% of Americans have or will receive a pension, and Social Security is underfunded by around 32%. This means the new three legs is now you, you, and you.
The first thing to do is to make sure you have enough money to see you through your years of retirement. This means one thing: saving.
Before you start, create a goal. Consider your likely retirement age, the income you want to maintain while in retirement, how much your spending will be, the value of your savings and investments.
Then decide where to place your nest egg to preserve capital against inflation and how much you can expect to get as part of employer pension and Social Security, among others. If this is too complicated, then simply aim to save at least 15% of your pre-tax income.
When you have an emergency fund with 3-6 months of expenses saved, get ready to start amassing your nest egg.
1. Maximize your 401(k) contributions.
For 2019, the maximum has been raised by $500, to $19,000. If your employer offers a matching or profit-sharing, make sure to contribute as much as you can up to that amount. Otherwise, you are leaving free money on the table.
2. Contribute to an IRA.
The limit is $6,000 per year ($7,000 if 50 and over). In traditional IRA, contributions are deducted now, and taxes are paid upon withdrawal. For Roth IRA, you pay taxes on contributions now, and it is tax-free at withdrawal. Roth IRAs are generally better if you are younger and likely still on a lower tax bracket and so that your nest egg is tax-protected as it grows.
3. Create a realistic budget and stick to it.
Be critical about expenses that can be reduced, if not removed entirely. On the other side of the equation, find ways to earn more income—negotiate at work, find a side hustle, work another part-time job, or slowly start a small business. Every extra fund goes into your savings.
4. Learn to invest.
You can invest in paper assets (stocks, mutual funds, ETFs) or real estate. This requires more time and knowledge, so make sure to consult reputable sources, but will yield great results in the future. Investing means you can earn passively, even in your sleep. However, make sure to diversify, manage risks, and be strategic with asset allocation.
5. Get rid of debt (including mortgage!).
Instead of looking forward to your future, carrying debt means you are living in the past, still paying for things or experiences you have already passed. Create a debt repayment plan so you can focus on building wealth instead.
If you are not familiar with Reverse Mortgages we highly recommend you look into a reputable Reverse Mortgage Lender that can give you all the correct details for your situation.
Why not put time into a method that could increase your retirement cash flow and potentially allow you to live in your home mortgage payment free!
Take a look at our Reverse Mortgage Guidance page for more details.
Protect Yourself and Your Assets
While maximizing savings and investment, do not forget to safeguard yourself against unforeseen events that can derail your progress. Make sure you have life, health, and disability insurance to make sure that you are covered in case something bad should happen.
Having enough insurance makes it so that you do not prematurely pull out of your savings and investments (which can carry huge penalties).
Talk to a financial expert to know how much coverage you need to be carrying. In advanced age, you should even look into long-term care insurance to help with nursing or homecare costs.
Additionally, make sure to protect your assets by having home (or renter’s) and car insurance.
Be Strategic About Social Security
The average Social Security monthly benefit is $1,366, or $16,392 per year. For above-average earners, the maximum can be up to $2,788 at full retirement, or about $33,000 a year.
To increase benefit, remember that the formula for benefit is based on the 35 highest-earning years, adjusted for inflation. Therefore, you may want to work for 35 years, or even more. If you’re on track to retire in less than 35 years but are still able, then you may want to continue to increase your benefits.
If you’re married, you can also strategize with your spouse and see which one would have a smaller retirement benefit. They can start collecting earlier so that the one with higher benefits can delay theirs for later than full retirement age and maximize the benefit amount.
If planning to work after retirement, keep in mind that $1 is deducted from your benefits for every $2 earned above $16,920.
Have a Plan for Life in Retirement
Of course, retirement is not just about finances. You also have to look out for your physical, emotional, psychological, and social well-being. Before retiring, have goals and plans in place to address these other areas as well.
1. Get/remain fit.
Do not wait for retirement before you start exercising and sticking to a fitness regimen. Staying active will not only prevent health problems (and the costs associated with being sick). It will boost energy, motivation, and mental health. Make sure also to eat healthily and get enough sleep.
You may not realize how much socialization you get from work—from officemates, clients, vendors, etc.—until you no longer have them. Aside from family members, have a close social group by being engaged in community activities.
It’s also a plus to spend time with people in multiple age groups. You can look into mentoring programs for young professionals. Or you can look after grandchildren on the weekends or school vacation.
3. Continue to learn.
Even as you ceased working, never stop cultivating a learning mindset and engaging your curiosity. You can go back to school or sign up for classes in different hobbies. For example, you can learn to cook different cuisines. Joining a book club also offers a network of learners. Perhaps you’d like to know how to keep an organic garden?
4. Keep yourself busy.
While the image of retirement can just be spending time at home with nothing to do, the truth is almost always the opposite. You should plan a bucket list of things you wish to do now that you have the time and resources.
Perhaps you’d like to travel more? Would you like to volunteer at your local church or food bank? Keep engaged with activities to look forward to.
5. Live with a purpose.
All of these things combined show the non-financial elements of a happy retirement. Have a clear goal to strive towards that is not about money earned or accomplishments gained.
Doing so will keep your body and mind active. It will foster healthy and nurturing relationships. It will keep you learning, creative, and purposeful.
Embarking on a retirement plan is very challenging. You are required to forego current enjoyment for future rewards. This means you have to be disciplined, focused, and hardworking. Learn the value of delayed gratification.
It is better to work hard while you are young, healthy, and capable than have to continue working when you are old or sick. By being financially responsible now, you can maintain independence in the future and have the retirement of your dreams.