People are living longer. When your dad retired, he was expected to live less than than 10 years. People retiring now should plan on living 30 years or more. The problem with a long life is outliving your money. Even if you plan carefully, there’s always a possibility that you’ll spend your entire nest egg before you die.
Before you retire is the time to determine how much money you’ll need for retirement.Most companies no longer offer pensions or provide insurance after you leave their employment. And Social Security is not the guarantee it once was. So the life you want to have in retirement takes much planning.
Whether or not you run out of money depends on a few factors: how much money you have saved, how long you want your savings to last, and how your money is going to be spent. If you can answer these questions prior to your retirement, you’ll have a good foundation on which to build your nest egg.
Most of us are building that foundation right now. We’re in the accumulation phase of retirement planning. Below are some tips to make the most of this phase:
Adjust your spending habits – Only you can determine if you need a minor or major change. But saving even a small amount of money can really add up.
Reduce your debt – Begin a plan to pay off debt prior to retirement.
Save – Sock away as much money as you possibly can during your working years. Take advantage of tax-favored retirement savings tools such as a 401K plan or IRA. These types of investments grow tax-deferred, giving you the potential to accumulate a sizable portfolio.
Manage your investments – It is important to ensure your level of risk, choice of investment vehicles and asset allocations are all appropriate considering your long-term objectives. An investment advisor can assist in analyzing your current financial preparedness for retirement and let you know if modifications are required to meet your goals.
Study Social Security options – Determine the best age to begin receiving social security.
Plan on working longer – This is not a very popular option. However, because of today’s economy, it may be required in order for you to enter retirement at your comfort level.
So…. how do we take all this money after retirement and turn it into income for the remainder of our lives? What do we do during the distribution phase of retirement? Here are some suggestions:
Monitor your investments – Continue to invest for growth and not just income. Your portfolio needs to keep up with inflation. Basic rules of investment still apply during retirement, so continue to meet with your investment advisor on a routine basis.
Don’t assume that you’ll be able to live on the earnings from your retirement account for the rest of your life. At some point, you will have to begin withdrawing from your principal.
Be tax smart – A general rule is to leave tax-deferred accounts such as 401Ks and IRAs alone as long as possible. Dip into taxable accounts first. (There are exceptions to this rule, such as RMDs when you reach age 70 1/2)
Manage IRA distributions carefully – Follow the 4% rule. It states that your money should last through retirement if you withdraw only 4% of your account on an annual basis.
Planning for retirement is not easy. There are some things that can affect your plan, such as Social Security overhaul, national healthcare or the need for long-term care. However, the sooner you decide upon a strategy, the better off you will be. If you plan appropriately, you will be able to kick back, put your feet up and allow your savings to take you through your retirement years.