Decisions You Must Make Before Retiring

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Sooner or later, you will want to retire. When you do, you will want to ensure that you are both comfortable and healthy during that time so you can enjoy it. The Department of Labor (DOL) says the average length of retirement for Americans is 20 years. This much time requires that you do some retirement planning to ensure you have enough money saved to enjoy it.

Carefully Calculate Your Retirement Needs

As you get closer to retirement, you need to sit down and calculate how much money you need to retire comfortably. Since you will likely not be earning a lot of income during that time, you want to ensure that you will have enough—and more—letting you do some things you have always wanted to do. The DOL suggests that you will likely need between 70–90 percent of what you are making now.

Accurate calculations mean looking at all your expenses now to see where your money is going. Then, look it over carefully and decide which costs you can do without—enabling you to put even more away for retirement.

Know how much money you can count on as income during retirement. Many people are surprised at how low their required minimum distributions (RMDs) will be over a 20- or 30-year period because they never considered finding out. Contact your plan administrator for details to ensure no surprises after you retire.

Save for Retirement

The best way to start being prepared to retire is to set aside some money each month into one or more retirement accounts. Probably the best one is one your employer offers—if they also offer matching funds. If you can, contribute at least an amount equal to what your employer is willing to match. It is free money for you that builds interest and helps your retirement account grow faster.

Depending on which plan your employer offers, you may want to consider one that deposits after-tax money. This kind of account lets you withdraw money after you retire without any taxes—enabling your retirement dollars to go further. If you max out your allowable contributions, remember that you can open other accounts and contribute to them.

Consider Paying Off Your Biggest Bills First

Ideally, you should not retire before your biggest bills—such as your mortgage—are paid off. Once eliminated, it enables you to keep as much money for a long retirement as possible. It will also help you have less stress during your retirement and more money to do some fun things, such as travel.

Pay off your credit card debt with the highest interest rates first. MerrillEdge mentions that if your credit card charges 17 percent interest, paying it off will give you that much more each month.

Save for Your Retirement

As soon as you can, start saving money in one or more qualified retirement plans. Some plans allow you to put in money pretax, giving you a tax deduction. Other ones are aftertax, i.e., without a deduction.

When you turn 72, you will need to take the RMDs and cannot contribute any more money. As an alternative, you can roll your money into a Roth IRA, which does not require RMDs, and you can continue to make contributions.

Downsize Your Home

Selling your present home may also enable you to save more money. Personal finance expert Suze Orman suggests downsizing several years before retiring to help you save more money. The interest you could gain in those few years could make such a decision well worthwhile.

Downsizing could also enable you to move to an area with a lower cost of living and fewer taxes. You may also want to move closer to your children or grandchildren—but that may lead to being more conservative in your spending if it is in a big city.

Build Your Emergency Fund

It is also a good idea to increase the size of your emergency fund before you retire. Suze Orman makes this recommendation because if inflation continues to increase, it could become necessary to start taking money from your retirement savings to make ends meet. You can keep your retirement fund intact if you have more money saved—two or three years’ worth—in your emergency fund.

Wait Until Reaching Full Retirement Age Before Taking Social Security

You can start getting Social Security benefits when you turn 62. Even though it may help you retire early, you could be selling yourself short by a lot of money if you do. A chart on the Social Security Administration’s (SSA) webpage reveals that you will lose 25 percent of your benefits by retiring early at 62. If your spouse also retires at 62, another 25 percent will be lost—which amounts to hundreds of dollars’ difference—possibly more than $1,000 per month.

On the other hand, waiting until you turn 70 will give you the maximum Social Security benefits possible. If you still decide to retire early, you could hold off taking Social Security if you can live on other retirement savings until you reach full retirement age.

The Recommended 4 Percent Withdrawal per Year May Be Too Much

In the past, it was often recommended withdrawing 4 percent of your retirement funds per year. This figure fell out of favor a few years ago, but may be making a comeback. LiveMint suggests this still could be a good idea.

LiveMint suggests taking a lower amount—such as 3.3 percent in your first year—because of lower returns on investments in today’s market. If inflation decreases the following year, you can adjust your withdrawals to a higher percentage—possibly 3.8 percent or 4 percent. The biggest risk during retirement is having more than 60 percent in stock. A bear market could wipe out some of your future investment money.

The longer you wait to enter retirement, the bigger percentage of your savings you could take each year. As you grow older and your health and strength start diminishing, you will be less likely to want to travel and do other costly things. It means you will likely not need as much money per year in your later seventies and eighties.

After you retire, you still need to keep an eye on your retirement funds. The economy is constantly changing, and it will affect your various retirement accounts. Social Security accounts for inflation each year by adding a cost-of-living adjustment (COLA), but other retirement accounts do not. By ensuring you have enough money before retiring, you will be able to have less stress and enjoy your retirement more.

The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.