It’s the biggest gift you can give yourself
Does your New Year’s Resolution have you dreaming of a new car? Or a fabulous seaside vacation? How about a stunning home remodel? There’s nothing wrong with those dreams, but imagine this: being in your 60s, not working, not having any debt, and getting to spend your time doing exactly what you like. If you listen to current retirees, they’ll tell you that last one is the dream to shoot for. The alternatives are bleak.
Consider spending this January identifying your retirement fitness goals (you can think about it while you’re back at the gym working on those body fitness resolutions). Think about the millions of scenarios you can choose to make your personal reality. Then, make a plan to take the small steps needed to achieve it, just like any other goal.
You don’t have to learn the entire financial system all on your own. Just like your personal trainer at the gym, who learned what all of the muscle groups do and how they interact, your financial expert will know all the best ways to lower your tax responsibility, increase your savings, and match your savings work with investment choices to firm up your bottom line.
Where do I start?
If your New Year’s resolution of a dream retirement scenario is a bit fuzzy, start somewhere. There are a couple of different ways you can look at saving for retirement that will help you ease into your routine. Some financial advisors suggest the 80% rule: plan to have 80% of your current salary to finance a comfortable retirement. So, for example, if you make $100,000 per year, then you would need $80,000 per year for roughly 20 non-working, retirement years, for a total of $1.6 million.
Another often-used rule of thumb is to save 10% of your income throughout your working career, strictly for retirement. Saving for things you want or for your emergency fund are separate efforts. Alternatively, some advisors recommend that you save 12 times your annual salary.
A simple goal for many is to choose a ‘magic number’ of $1 million dollars. However, because of the recent sky-high inflation, some advisors have upped that number to $2 million. Retirees who had $1 million in their accounts last year have the equivalent of $120,000 less this year because of reduced purchasing power caused by double-digit inflation.
Everyone is hoping that 2022 is an anomaly. From 1960 to 2021, the average U.S. inflation rate was 3.8% per year. No one has a crystal ball, but it’s essential to acknowledge that the dollars you have today will be less valuable in your future dream retirement, so save a little extra. So, how can you put your resolution into practice?
Personalize your goal
If you have a reasonably sharp picture of your retirement, you can use monthly budgeting tools to fine-tune your needs. It’s interesting to look at where your money will be needed in your retirement compared to your life now.
Housing: Your biggest expense is almost always housing, regardless of what stage of life you’re in. But, this can be the biggest positive impact on your retirement: a paid-off place to live. Housing accounts for about 35% of your retirement income, so if you can eliminate your mortgage, you’ve given yourself a huge retirement gift. If you can pay more every month toward the principle of your mortgage, do it. If you get a chunk of money from a bonus, inheritance, or investment, pay it on your house.
Other factors in the housing category include utilities: No matter where you live or if you’re paying a mortgage or rent, you’ll always have monthly bills for heat, water, and other utilities. If you own your home, you already know that there are always maintenance costs. You’ll have insurance, homeowners association fees, or rent, depending on your housing situation.
Health care: Another big bill for many people will be health care. An average retired couple age 65 in the U.S. in 2022 may need approximately $315,000 saved (after tax) to cover health care expenses in retirement, according to the Fidelity Retiree Health Care Cost Estimate.
If you are counting on Medicare to cover your health care bills, think again. There are rules, trends, and gaps in Medicare that catch many retirees unaware. For example, people are living longer, health care inflation continues to outpace the rate of general inflation, and the average retirement age is 62 for most Americans — which is three years before you are eligible to enroll in Medicare.
A great way to address this reality is to save money in a Health Savings Account (HSA), and use that tax-free money to pay your health care bills. Your financial advisor will explain how this account fits into your overall savings plan.
Transportation and travel: If youe resolution is to travel more in your retirement, make this expense part of your personalized plan. Getting to and from exotic places, visiting far flung family, or racking up pins in the map are all great retirement goals, but you’ll need to pay for travelling.
Even if you plan to stay close to home, it takes money to get around: Retirees report spending around $568 a month, or $6,819 per year, on things like gas, bus rides, car insurance, maintenance, and more.
Entertainment: When you finally have time – and, hopefully, the energy – to go out and do more, you’ll need to pay for those great restaurant meals, movies, plays, concerts, or a fun opportunity that just came up.
Fill-in-the-blank: Your personal interests will cost something. Whether you’re into car racing, pottery making, or something in between, plan now to fund your fun later.
Day to day: Review what you now spend on everyday living expenses like food, clothing, pet care, etc., and add that into the retirement fund.
Lifestyle: This is the most personal of all the components that go into setting your retirement fitness goals. Do you want to enjoy your family home or set sail around the world? Are you enjoying ice tea on the patio or cocktails on a beach? Are you happy with your SUV or must you drive the newest Corvette? Every dream is valid, if you take the steps to fund it. Otherwise, you may be living in that Corvette in the parking lot at the beach.
You’ll need to make some choices about your lifestyle now and the future. As you make more money, it’s natural to want a nicer home or car, or other things to reward yourself for working hard and doing well.
Many retirees – and probably your financial advisor – will tell you to skip this year’s new car and put that money in your retirement fund. The thousands you spend on the car will be lost to depreciation, while the thousands invested for your retirement have a good chance of growing.
‘Live within your means’ is another common piece of advice. Building up credit card debt is the fastest way to lose money in the long run. You should shoot for entering retirement debt-free for your best chance to live comfortably.
Another piece of advice from seniors: get healthy now and maintain your health into your future. If you do, your health care costs will go down and your future quality of life will be better. You’ll actually be physically able to do all those things you’re saving for.
Financial fitness trainer
Once you’ve done the initial work of acknowledging that your retirement fitness is up to you, and you have a general goal outlined with estimated expenses, you’re ready to hire a professional to sort out the best way to get you to your goals.
Your personal financial advisor will help you select the best options for your situation. For example, where is the best place to commit a monthly savings deposit: company-matched 401(k)s, Individual Savings Accounts, Healthcare Savings Accounts, stock options, balanced investment portfolios, annuities, among the options.
They will work to create a plan for you to not only save money, but invest money to allow you to earn a monthly income in retirement to add to your government benefits.
They will take taxes into account. Some money is saved before paying taxes and you’ll pay the taxes when you retrieve them. In other cases, you’ll pay the taxes and get the earnings tax-free later. They’ll take into account your income taxes, property taxes, capital gains taxes, and other tax responsibilities.
Together, you’ll look at all the variables that can affect your choices. Will you need life insurance to cover your survivors? Will you have an inheritance? Will you be living abroad? What is the tax, healthcare, and social benefit implications of the new country?
What is your estimated Social Security income? Do you have a pension coming? Will you have dependents to support?
Once you have established your New Year’s Resolution , it’s a good idea to review your retirement plan with your advisor at least once a year.
Choose your personal financial advisor wisely because they will have enormous influence on how your retirement plans work out. Make sure they are licensed, have a good track history, are favorable recognized in the financial industry, and have a transparent fee structure.
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