According to a study by Ernst & Young, nearly three out of 5 retirees belonging to the middle class will run out money at their retirement if they continue with their current lifestyle.
Retirees are facing many challenges. Problems like decreasing pension, the overall increased cost of living combined with overall increasing life expectancy makes post-retirement planning important.
Many older Americans who are near retirement are nervous about their future. However, if you do some planning for your financial decisions, you could live a great life after retirement.
Instead of overextending your savings at retirement, it is better to rely on sustainable incomes such as social security, diversifying your portfolio, and managing your expenses.
It is advised to use a pro-active approach by managing your savings and investments. You must understand how these investments and savings could generate income for the future and what kind of risks are attached.
If you are planning a particular lifestyle, be realistic about whether you will be able to achieve this in retirement, and adjust accordingly. Maintain a healthy lifestyle to reduce or cut out medical expenses that might end up eating your budget as you age.
If you are unclear about your expenses or your post-retirement financial planning, here are seven achievable options to consider to supplement and stretch your retirement.
Claim Social Security Later
According to a recent survey done by TransAmerica, 66% of Older Americans relied on social security as to be their top principle form of retirement income. This number is peculiar since social security is known to replace around 40 percent of a person’s retirement income.
If you are eligible to claim your social security benefits, you could start at age 62. Still, to get full advantage and benefits of social security, you would need to wait until your retirement age.
Retirement Age: Retirement Age is different for people born between 1943 and 1954, i.e., 66. For people born between 1955 and 1959, the retirement age is set to be 67.
It’s understandable if you don’t want to retire at your specified retirement age, but it pays you. If you are willing to wait an extra year after your retirement age of 66 or 67 as per your birth year, you could end up getting additional 8% benefits every year between 66 or 67 depending upon your age.
Additionally, the calculations are different for a married person who did not work long enough to be eligible for Social Security. If you belong to this category, you may retire at full retirement age, with half of your spouse’s benefit.
In case they choose to retire at 62, the amount could be reduced up to 8.33% for each of the first three years and 5% for every year on top of that.
When should you collect your Social Security?
To decide when you are going to get benefited from social security, there are certain factors to be considered.
- How much long you are going to work before retirement?
- How much savings do you have?
- What are your expected expenses after retirement?
- What is your health status?
When deciding when to collect social security, observe your finances savings and expenses you are going to cover after retirement.
The main point to be discussed here is that the earlier you claim social security, the less you get. You lose 6.67 percent for the first three years if you retire between the age of 62 and 65.
After two years, depending upon your age, you will end you losing 5 percent for each year if you claim social security early.
Be Tax Savvy
It is not possible to altogether avoid taxes, but they could be reduced. It would help if you kept yourself informed on the impact of taxes on your portfolio to get positive results in the long term.
You can put the money into traditional IRAs and 401k plans to enjoy tax-deferred earnings as long as you don’t start withdrawing. In this way, you could maximize your retirement contributions.
Asset allocation is vital; choosing the appropriate mix of stocks, bonds, and cash investments is a crucial step to achieve your goals. You could also minimize your impact of taxes on your finances by placing tax-efficient holdings (like tax-managed, index, and tax-exempt funds) in taxable accounts.
This can be done while holding tax-inefficient investments in tax-advantaged accounts, such as IRAs or the employer plans.
Allocate your 401K properly-before and after retirement.
How beneficial a 401K is dependent upon what you decide to do with it after retirement. Two factors that determine this are the age of your retirement and the company you are working for.
You may start taking a qualified distribution, or you have the option to collect the earnings in your account until it is required to take distributions as per your plan.
Taking Qualified Distributions: If you decide to retire after the age of 59 and a half. IRS allows you to start taking distributions from your 401(k) without the 10% penalty. As per the company rules, you have the option of choosing regular distribution in the form of equity for a fixed period of your time or your lifetime.
People usually invest very little to none in the stocks. Stocks may be riskier then bonds, but if we see in the long term, they could prove to be a good asset. This could prove vital when you retire.
A general allocation method you could choose is to minus your age from 110 and determine the percentage of your portfolio that you should invest in the stocks.
The saying, “Don’t put all of your eggs in one basket,” works well when we discuss diversification of investment portfolio. Financial advisors, bankers, and economists always suggest diversifying your portfolio.
If you’re heavily relying on one source of investment, you are at risk of losing your investment.
It is advised to diversify your portfolio. You could divide the portfolio in the form of stocks (has high risk but pay-offs are big) and bonds that usually include treasury bills that have less risk, but the payout is lesser than usual stocks.
It is subjective to suggest the percentage of your saving you need to invest. Age is a common factor; it is better to start investing early in different options. You can do basic math and end up deciding the percentage you want to invest in both the bonds and stocks.
You shouldn’t just stop investing in stocks and bonds. It would be best if you kept looking for less risky investment opportunities. Investing in unrelated markets like the pharmaceutical and telecom industry could prove useful for your investments.
The internet has now made the world a global village and business mainly exist online. You should keep yourself updated about all the trending markets and make decisions accordingly.
To live peacefully and have your dream post-retirement life, you must control your expenses. With no more regular monthly paychecks, managing your expenses could be difficult. If the expense is unnecessary and uncontrolled, you’ll end up having very little for necessary conveniences like decent living and health.
Here are a couple of simple tips for managing your Expenses:
Create Proper Income Strategy: After retirement, the sources of income will change, you should start from scratch and note down all the sources you are getting money from. Then make a strategy according to that. Chalk out where and when you are going to spend your money. Make a monthly budget as per your expenses and life expectancy. If there are some savings, you should consider investing it.
Maintain Proper Budget: You don’t need too many details and knowledge to maintain a budget. Take out a pen and paper and write down your needs and any wants and assign a proper budget to each task. If there is something that needs a high amount of budget, write it down separately and allocate appropriate resources accordingly.
Pay off Debts before Your Retire
Even if you have done every kind of financial planning and budgeting, but if you under debt, things could go wrong for you. It is essential to pay off debts. 30 to 40 percent of Americans consider debt as their topmost concern after retirement.
Many retirees who are happy in their post-retirement life can meet their expenses, but the debt they are under may put them in trouble and unnecessary stress.
If it seems that you will be under debt after you retire, it’s better to use a pro-active approach where you assign a proper budget to clear off debts. Your retirement plan must include the cash sources from which you are going to pay your debt.
Financial planning without sorting out debts first could become a problem in the future.
Consider a Reverse Mortgage
Up till now, we have discussed various ways that could help you in life after retirement. One of the best ways to make your experience better is signing up to reverse mortgage.
A reverse mortgage is one of the top options where instead of planning and managing things on your own, most of the work is done by the lender.
Your daily life expenses might end up someday, but the expenses you will carry after you retire could be managed if you consider a reverse mortgage. In older age, one of the most reliable assets a person has is their home.
With a reverse mortgage, you can live in your house, and almost nothing changes, with the added benefit of you receiving the cash flow, based on the equity in your home.
When you are in debt and fail to manage your budgets properly, you might start considering selling your house. This could be one of the questionable but understandable decisions one could consider after retirement.
Instead of getting rid of the asset you spent years to obtain, keep it, and use it not as just a store of value but an income-generating asset.
Why is Reverse Mortgage your best option?
A reverse mortgage is specially designed according to the needs of older Americans who look for a stable income that takes less investment. Many citizens don’t have the required amount of money to live the lifestyle they want after retirement.
A reverse mortgage can help with the cash flow you need for your retirement.
To live a comfortable retirement, it’s all about obtaining a precise balance between individual needs and wants. You must sort and know how much you require for needs and how much you could afford on the wants.
According to research by the Employee Benefit Research Institute, 47 percent of workers say their spouse has tried to calculate how much money they will require to live comfortably after retirement.
It is indeed a scary part of retirement when you think about having so many years ahead of you with a limited amount of cash in savings.
If possible, utilize the equity in your home to help you add a stream of cash flow to your retirement strategy.