It is important to have a retirement plan, even if you are a long way away from retiring from work. About one out of every three 65-year-olds today will live until at least age 90. You can enjoy a more financially secure retirement by taking a few steps to manage your spending, reduce your debt, and make sure you have a way to get income as you get older.
Making a Plan
The first step is to set some goals for your later years. Think about:
- Do you want to work as you get older, even part time?
- How long do you want to work?
- Where do you want to live when you retire?
- What kinds of things do you want to do as you get older?
This chart shows some of the steps included with planning for retirement:
Usually, people have several financial goals and retirement is only one of those goals. Financial goals may include paying down debt too. What do you want to do in the next year that might involve savings or borrowing, like buying a house, going to school, or other life events? How about in 10 years? 20 years? Write down your goals and your timeline someplace you can remember and look at them every few months.
For retirement and other goals, start planning how much you can find in your budget each month. Look into what retirement plan savings you can get at your work. You might want to open up your own private retirement savings account. Advisors and planners can help but can be expensive. Before investing your money, ask a lot of questions and never take a step you do not fully understand.
Let’s learn more…
Retirement Planning Basics Quiz – Take this 10 question tutorial/quiz to learn the basics and test your knowledge. You can take this quiz as many times as you want. To learn more about this topic (before or after you take the quiz), scroll down to the list of learning resources below.
Find out more about how people pay for retirement…
You can claim Social Security as early as age 62, but every month you wait will increase the amount you can get, up until age 70. You have to start getting your benefits at age 70. At age 62, you will receive only 75 cents of every dollar you could get at your “full retirement age” (currently age 66 for people born 1943 to 1954 and 67 for those born afterward). For people with health problems who cannot work, claiming Social Security at age 62 may be the only option. Still, delaying even a few months results in larger monthly payments for the rest of your life.
The average monthly payment is about $1,500 per month, but can vary a lot based on if you are married or not, the age that you start to get your monthly benefits, and how much money you make over your life.
- You have to work at least 40 quarters – that’s equal to 10 years — to be able to get Social Security.
- If you have not worked at least 10 years and you are married, you could get Social Security based on your spouse’s record.
- Divorced spouses and widowers/widows can claim on a former spouse’s record if the marriage lasted at least 10 years.
- You can also get a larger payment if you have a child at home.
Delaying retirement is one way to improve financial security later in life. You can also collect Social Security benefits while you are still working and getting a paycheck, although your benefits may be reduced if you earn a lot. This may feel like a ‘tax,’ but these earnings will result in larger benefits later. Social Security will adjust your future monthly benefit amounts and you will get more money in the long run.
It is often helpful to talk to a Social Security counselor about these issues. Excellent resources are available online (see below), at your local Social Security Administration office, or by calling Social Security at 1-800-772-1213.
- Workplace retirement savings
- Individual retirement savings
- Workplace pensions
Most individual retirement funds are invested in mutual funds since these have lower fees that go to the company that’s managing your money. Before investing your money, ask what the fee is and try to find one with a fee of 1% or less. A special kind of fund, called an indexed fund, tends to have the lowest fees.
Be sure to understand any retirement investments you make, and be careful of the advice of friends, family, and even advisors or brokers. Their advice may not be right for you. If you want to get paid advice, look for fee-only planners, who don’t make money on what they sell to you (look for a Certified Financial Planner or CFP: https://www.cfp.net/).
People can start taking money out of their retirement savings when they reach 59 and ½ years old without paying any penalties for taking the money out early. Most retirement savings plans also allow savers to borrow from the account for special reasons—like paying for a college education or buying a house. There are some “hardship withdrawals” where you can cash out the account and not pay taxes or penalties, but this is rare. With some types of retirement savings, like a Roth IRA, you can take out the money you put into the account at any time without a penalty. (Note: there’s no penalty for taking out the money you put into a Roth IRA account, but there are limits on when you can withdraw the interest your money earned.)
As an added incentive to save for retirement, low to moderate income earners could get a tax credit of up to $2000 when they put money into an IRA or an employer-sponsored retirement plan. You can find out more about the Retirement Savings Contributions Credit (also called the Saver’s Credit) on the IRS website.
Workplace Retirement Savings
Many employers offer some types of retirement savings plans, such as a 401(k), 403(b), 457 or other types of plan. These types of plans are also called “defined contribution plans” because the employee is expected to contribute part of their paycheck to the savings account. Some employers will match what you save too. For example, if an employee saves 3% of their income in a 401(k) plan, the employer will also contribute the same dollar amount. A matching retirement account is like getting a bonus!
It is up to you to manage a retirement savings plan by opening an account with your employer and telling the employer how much of your paycheck you’d like to put into it. Some people may have retirement plans from past employers. Often it makes more sense to “rollover” or consolidate these accounts into one account. You own 100% of the money you invest into your retirement plan, but you may not be able to keep your employer’s contribution if you leave unless you work at the company for a certain number of years.
Individual Retirement Savings
Other savings plans are not employer-sponsored, but rather individuals set them up, called Individual Retirement Accounts (IRAs).
- The Traditional IRA gets you a tax deduction this year, but then you pay taxes on your contributions and any interest earned when you use the money in retirement.
- A Roth IRA is different since you pay taxes on the money you invest right away, but then you do not pay taxes on the money you take out when you retire.
- Generally, if you have a lower income—especially if you are young and have a long time to save—a Roth IRA is better.
About 1 in 5 workers have a retirement pension today. These types of plans are provided by employers — usually larger private companies and public employers — who pay a monthly benefit when you retire. These pension plans are also called “defined benefit plans” because your employer defines how your retirement benefits will be figured out ahead of time. The employer determines what the retiree’s monthly benefit will be. Some plans also require individuals to contribute a certain amount to their own pension plan.
- Saving vs Paying off Credit Cards – Paying off high cost credit card loans may your first priority. If a credit card charges 20% annual interest, for example, it’s a good idea to tackle paying off that debt. Paying off a loan frees up money for savings. Some people may be able to pay off debt at the same time as starting to save.
- Emergency Savings – Putting aside funds in an emergency fund can cushion tough times. When unexpected expenses arise, an emergency fund can help you avoid using a high-cost loan or credit card. Set a goal to save a certain amount for an emergency, like the price of a car repair or one month’s rent payment. When you reach that goal, then consider adding a small amount into your retirement savings while you continue to build up for more emergencies. Some retirement accounts, like a Roth IRA, let you withdraw your contributions anytime so could be used in an emergency if really needed. A few other retirement plans may also allow ‘hardship’ withdrawals in an extreme emergency, but you’ll want to understand if there are any taxes, penalties, or if the money is a loan that needs to be paid back to the account.
- Consider the “one-third” approach to savings – Put one-third of your savings towards paying off debt, one-third to building an emergency fund, and one-third to saving for retirement. When all debt is paid off and you have an emergency fund, then put all your effort into retirement savings. You can use the one-third approach to decide how to save income tax refunds, too.
Your retirement savings is at risk every time you change jobs, get married, divorced, have children, move, or other life events. Be thoughtful about your financial routine and make sure you keep saving as much or more than before. Life events may also be opportunities. Getting married can add income from a working spouse. A new job might offer better benefits. When you have a life event, know that this will affect your financial goals and savings.
Retiring from work means that you have to save some of your money while you’re working so that you have some of your paycheck to tap into when you’re not working. Of course, that means living on less while you’re still working.
Tracking your spending for a few weeks can help you to identify expenses that you could cut back on to save more for retirement. Start by tracking expenses for a few days, then for a week or more. Keep it simple, with just a general note of how much was spent. This can help you find “spending leaks” (ways that money leaks out little by little but add up over time). You can also add up categories such as food, housing, utilities, transportation, health, communications, and recreation. Once you figure out a system to track your money, you often feel more financially able to make decisions around spending and saving.
How much to save completely depends on your financial situation. There are some general rules that financial experts share:
- Try for 10% of Your Income – Saving 10% of your income from age 25 to 65 would create a nest egg which could last another 20 years when combined with Social Security. The later you start, the more you need to save. Someone in their 40s or 50s would need to bump their savings up to 20% of their income.
- Aim for 12 Times Your Current Annual Income by the Time You Retire – With this rule, you can spend about 5% of your retirement savings each year. You will have around 80% of your current income in retirement when combined with your Social Security benefits. Of course, some retirees find their expenses do not go down as much as they expected in retirement. Given rising medical and other costs, some people may need to save more. (See the section on health care below)
If you own your home, you can also sell or borrow against your home as you age. Some people decide the expenses of owning a home as they get older are not worth it, so they move in with family or look at other options. Do not make the mistake of counting on a large and unexpected inheritance to shore up your retirement savings, but do be sure to use any inheritance to add to your savings.
Medicare is a federal government health insurance program that covers everyone who paid into Social Security during their working years. You have to sign up before turning 65 or could pay a penalty. Medicare does not cover all medical costs, so you also need to have supplemental health insurance, as well as pay for co-pays and other costs.
Except in a few special cases, you cannot get Medicare before age 65. People may end up working until age 65 in order to be eligible for Medicare. If you are approaching retirement and need to get health care coverage before you can claim Medicaid at age 65, you may need to buy expensive non-employer coverage.
The largest uncovered health related-costs are due to needing long-term care. This includes in-home care, as well as nursing home care or long-term hospitalization. A nursing home can cost $100,000 or more a year, for example. Medicare covers only short stays in a nursing care. Some people purchase long-term care insurance, but it is expensive.
Wills and Estate Plans
Estate plans cover a range of activities, from simply organizing documents to figuring out who will inherit money to legal actions like wills. It also covers health care and end-of-life decisions.
A will is a legal document. Not everyone needs a will. With a will, when you pass away a probate judge will supervise how your estate is divided up to creditors and loved ones. They will name an executor, who can be a person or an organization, who will take care of your property when you die, and pay off any expenses and debts. Attorneys will write your will for a fee, or you can write a simple will using forms available online.
Every financial account (such as a bank account or life insurance policy) has an option of naming a beneficiary in the case you die using a simple form. Without a will or the actions of a judge, the named beneficiary will inherit the account. For people with only a few accounts and no other assets, much of estate planning can be done simply by naming beneficiaries on all of your accounts. The beneficiary can be anyone, such as a spouse, child, sibling, grandchildren, a friend, a church, or even a charity.
An Advanced Directive for Health Decisions, also known as a Healthcare Directive tells doctors and family about what medical treatment you want if you are so sick you cannot make decisions anymore. A Durable Power of Attorney for Healthcare, also known as a Healthcare Proxy, appoints a person to make health care decisions for you. Both forms are simple and easy to fill out and make it easier to manage your estate if you cannot.
|Form:||What it is used for:|
|Beneficiary Designations||Tells your bank, investment and retirement accounts who gets the account or money when you die. Ask your bank or insurance company for their approved form.|
|Health Care Proxy||Also called a “Power of Attorney for Healthcare” form. Notarized signatures are not required, but you do need 2 witnesses when signing this form. Find a free form for Wisconsin residents at: https://www.dhs.wisconsin.gov/forms/advdirectives/f00085.pdf|
|Wills||Legal document with designated executor and information on how to distribute assets. Notarized signatures are required.|
- Ballpark Retirement Estimator – Online or paper worksheet that can be used to estimate how much you might want to save for retirement: http://articles.extension.org/pages/12960/ballpark-etimate
- Deciding the right time to claim Social Security, National Public Radio broadcast (5.21 minutes): http://www.npr.org/2013/04/02/175937361/deciding-the-right-time-to-claim-social-security
- Social Security Basic Facts: http://www.ssa.gov/news/press/basicfact.html
- Internal Revenue Service (IRS) information on the Saver’s Credit for retirement contributions: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-savers-credit
- Boston College Social Security Administration claiming guide: http://crr.bc.edu/special-projects/books/the-social-security-claiming-guide
- Consumer Financial Protection Bureau (CFPB) Educational Materials: https://www.consumerfinance.gov/consumer-tools/retirement/before-you-claim/