The financial side of retirement can be intimidating for many people, but it doesn’t have to be. If your family knows what to expect in various situations, they can help you distribute your income and plan finances accordingly for many years to come.
There are multitudes of different financial situations you can find yourself in when it comes time to retire, from all ends of the spectrum. To assess your individual retirement income needs, you’ll need to address these three money matters:
1: Plan Retirement Fund Goals
Most financial advisors will use your current income to give you a golden percentage of what you can comfortably spend per year while in retirement. This percentage will take into account all of your income opportunities, looking at your pension(s), 401(k), investments, stocks, bonds, and income from current part-time jobs if applicable.
The advisor will then calculate what amount of this money you can spend per year to make your money last. You can judge how much money you should have in a retirement savings account before retirement by looking at your current income. Most people’s goal amount for their retirement fund equals between 60% and 90% of their total current income.
That means if you currently live off of $75,000 per year, you can assume you’ll need about $45,000 per year during retirement (on a 60% model) to retain your current standard of living. If you plan on doing a lot of traveling, however, boost your percentage to 90% or even 100% of current income to afford your retired life.
2: Project Your Expenses
How much money you need during retirement directly depends on your retirement plan. Are you going to stay at your job part-time or are you going to retire fully and travel the world? Do you want to buy things like an RV or a boat, or keep your same habits? You need to plan as far into the future as you can, taking into account any expenses that differ from your current habits.
Your family should be involved in this decision, especially if you have a spouse. Ample communication will help this process run as smoothly as possible, without undermining your family’s wishes or sacrificing your own. You need to decide what you want your retired life to look like and adjust your retirement fund accordingly.
If you want to travel, you’ll need to account for the funds to do so. If you’d rather stay and volunteer locally, you won’t need as much in savings. Other factors to address are if you have to provide for your children, siblings, or other dependents during retirement, or if you plan on working part-time.
3: Provide for Your Family
We all want assurance that our loved ones will be well taken care of after we die, and the way to guarantee this is to safeguard your spouse and children from financial pitfalls in the event of something happening to you. The phrase “parenthood doesn’t retire” is true for a lot of people planning for their futures, but there are measures you can take to ensure your family’s future security.
Due to today’s increase in blended families, interfamily dependence, and low savings, current retirees are facing difficult decisions when it comes to family and retirement. Most people feel financially responsible for their children and stepchildren, and provide for their financial needs well into retirement. If this is the situation you find yourself in, you can create different trusts to fit your needs.
There are also potential Social Security retirement benefits for your family if you qualify, which can help cover future expenses if you’re having trouble filling the gap.
Pro Tip: Avoid These Money Mistakes
Too many people fail to prepare for their retirement adequately, and end up harshly disillusioned when they realize their standard of living will have to drop considerably, based on their retirement plan (or lack thereof). There are a few common mistakes during retirement that you should be wary of making – withdrawing money too early, too late, and making too much money.
Early retirement is a welcome perk that most people jump on if the opportunity presents itself, but many are finding that early retirement makes for a more difficult future. Most pension formulas penalize people for retiring early and place a higher weight on the income earned in the last few years before hitting retirement age. That means if you opt to retire at 55 instead of 65, you could be losing more money than you think.
If early retirement does appeal to you, it’s often wise to choose to semi-retire instead of fully retire. Keeping part-time hours at your current job or working part-time at a new job is a great way to maintain a steady income and still have plenty of time to enjoy retirement. Some employees choose to work seasonally, taking six months out of the year to travel or focus on hobbies, and working the other six months.
It’s also possible to withdraw your money too late, if you’re a retiree with a pretax retirement account that incurs tax penalties if withdrawn too late. Taxes can reach up to 50% if a person turns 70½ before withdrawing retirement funds. If you don’t need funds before this age, you’ll do well to reallocate or reinvest them to avoid the hefty tax penalty.
Many people don’t realize that it’s possible to be making too much money during retirement. It doesn’t seem fair that there’s a cap on how much money you can make, but that’s exactly what the U.S. government has imposed on today’s retirees. If you’ve reached full retirement age and still work part-time, the government can take as much as half of what you earn if you exceed the maximum earning amount for the year.