A Complete Retirement Guide

January 2024: A Complete Retirement Guide

If you’re about to stop working, here’s a look at some need-to-know finance topics

Retirement is something that many of us look forward to for decades! Even though employment may be enjoyable, it’s thrilling to consider when we might leave the workforce and start our golden years. If we’ve made wise financial decisions and reached our retirement objectives, we could even be able to retire early.

If your retirement is here or around the corner, you need to read up on a bunch of retirement-related topics, so that you can make smart moves that keep costs down and let your nest egg last as long as possible.

Healthcare costs: Know how much to expect and how to save for it


Understand how much to budget for and how much to expect.
First, let’s talk about healthcare bills. These are easy to forget about, and not budgeting for them might spell retirement catastrophe. Moreover, they are frequently steep. According to one estimate from Fidelity, a 65-year-old couple planning to retire this year should budget, on average, $315,000 for out-of-pocket healthcare throughout retirement—and that amount doesn’t even account for Medicare or long-term care expenses. (A 35-year-old couple may save that much by depositing around $3,100 yearly for 30 years at a 7% average annual return in a Health Savings Account (HSA).)

Fortunately, there are strategies to attempt to reduce your healthcare expenditures, such as being as active and healthy as possible and visiting your doctor for preventative tests and care.

Additionally, you can utilize Flexible Spending Accounts (FSAs), which allow you to set aside up to $3,050 in 2023 ($2,850 in 2022) pre-tax for qualified medical costs, including prescription drugs, eyeglasses, dental work, and doctor visits. The majority of that money is in the account on a use-it-or-lose-it basis, which is the sole drawback.

Because unused contributions to the previously stated Health Savings Accounts are not lost, they are much better. As an alternative, they can be invested or left in the HSA account, where they can be withdrawn penalty-free and utilized for any purpose in retirement (albeit the amount will be subject to taxable income). For 2023, the maximum HSA contribution for individuals is $3,850 ($3,650 in 2022) and for families, it is $7,750 ($7,300 in 2022). Contributions beyond the age of 55 are eligible for an extra $1,000. You must have a qualified high-deductible health insurance plan in order to take part in an HSA.

It’s also smart to read up on Medicare, as it offers a lot of great coverage beginning at age 65. Don’t be late to sign up, though, or you may be charged extra for it for the rest of your life.


Inflation: Learn how to control the amount of money you have over time

It is critical to include inflation in your retirement planning. For example, if you want to retire in 20 years and save $1 million for it, that $1 million will not have the same purchasing power as it has today.

Inflation has historically averaged around 3% per year, while it can be substantially higher or lower in some years. Over a 25-year period, that type of rate can cut your dollar’s purchasing value in half.

Here’s how you could factor inflation into your plans: Let’s imagine you’re still 20 years away from retirement and believe you’ll be able to survive on the equivalent of a current $50,000 salary in retirement. You might take the number 1.03 and increase it to the 20th degree by pressing buttons on your calculator like 1.03 20 to reach 1.81. Then divide $50,000 by 1.81 to obtain $90,306. That is the real income in 2043, which has the same buying power as $50,000 in 2023.

Holding a large number of dividend-paying stocks may help you resist the impacts of inflation since dividends are often increased year after year, allowing you to stay up with inflation – and the stock price of the stocks itself is likely to climb over time as well.

If you have $100,000 invested in dividend payers with a 3% average yield, you will get $3,000 in dividend income this year. If those rewards rise at a 5% yearly rate, they will be worth about $4,900 in ten years. Investing in Treasury Inflation-Protected Securities (TIPS) bonds, which alter their interest rates to account for inflation, and purchasing annuities with inflation-adjustment features are two further strategies to combat inflation.


Social Security: Know how much to expect

It’s critical to understand how much income you may anticipate from Social Security since, for most individuals, it will make up a significant portion of your retirement income. For comparison, the average monthly Social Security retirement benefit check will be $1,827 in January 2023, or just less than $22,000 per year. Obviously, it will not be enough for most individuals, which is why you should begin planning, saving, and investing as soon as possible. That is only an average; if you earned more than the average over your working life, you will receive more.

Recently, the maximum compensation for persons retiring at full retirement age was $3,627, or roughly $43,524 per year. (It should be noted that Social Security payouts are subject to monthly inflation adjustments.)

If you are unhappy with the projected benefits you are receiving, you should be aware that there are several ways to boost your Social Security payments. For example, the benefit formula is based on your earnings in the 35 years in which you earned the most. So, if you only worked for 31 years, it will have four zeros, lowering your benefits. If you can work for a few more years, your pay will be higher. Even if you’ve previously worked 35 years, if you’re making considerably more today than you ever did, working an extra year or two will allow you to replace a few years’ worth of low income with greater income.

If you’re married, a little planning with your spouse might help you get the most out of the program.


The best-case scenario: You have enough saved to retire

Now consider three situations: the best-, middle-, and worst-case scenarios if you aim to retire soon. In the best-case scenario, you’ll have saved enough money to retire comfortably, a figure that will provide you with enough income for the rest of your life. What is the limit? Well, how much money you need to retire with varies depending on your health, predicted longevity, lifestyle, location, and other factors.

If you’re attempting to figure out how much money you’ll need for retirement, consider it in terms of yearly income rather than a lump sum. One rule of thumb is that we should try to survive on 80% of our pre-retirement income in retirement. That’s only a preliminary estimate.

You may require more if you anticipate to be considerably more active post-retirement than you were before, such as through extensive overseas travel. Similarly, if you feel you are in bad health and will require extensive medical treatment, you may require more. You may get away with less if you anticipate to spend most of your time gardening, walking, and reading.

Consider all of your revenue streams, and keep in mind that you may be able to add more, such as some passive income. Social Security, pension income, dividend income, interest income, annuity income, and rental property revenue are common sources of income for many people.

If you estimate that you’ll require $60,000 per year in retirement and expect $25,000 from Social Security and $15,000 from annuities, you’ll need $20,000 more. By multiplying it by 25, you may invert it and utilize the 4% rule to transform it into a required nest egg. (This is because dividing 1 by 04, or 100 by 4, yields 25.) This earns you $500,000.


The medium-case scenario: You have nearly enough saved to retire

For many people, approaching retirement with almost enough money is a more plausible situation. What can you do if it describes you? You do, however, have some alternatives. An excellent one is to simply postpone retirement and continue working at your existing position. This has various advantages:

  • You can save and invest more money.
  • You’ll be delaying taking anything out of your nest egg to live on.
  • Your nest egg will have a little longer to grow, untapped.
  • You’ll end up having to support yourself in retirement for fewer years.
  • You may be able to enjoy your employer-sponsored health insurance a little longer, saving some money.

You might also consider semi-retiring for a few years. See if you can reduce the number of hours you work at your current employment to half-time. Or you might retire from that job and supplement your income with a side work or two. You may try driving for a ride-sharing firm, selling handicrafts online, tutoring kids, pet-sitting, or freelance work as a side career.


The worst-case scenario: You don’t have enough saved to retire

In the worst-case situation, you will simply not have enough money saved to retire comfortably. If it helps, you are not alone: According to the 2022 Retirement Confidence Survey, 34% of workers have saved less than $25,000 for retirement. Yikes.

So, what are your options? If you can avoid it, don’t retire now or soon. Try to work for a few more years than you planned, and if possible, work until you’re 70. Because it is the age at which your Social Security payments will cease to rise, you should begin receiving them at that time. If you wait until age 70 to begin collecting Social Security and your full retirement age is 67, your benefit checks should be around 24% larger. This may transform a $2,000 payment into a $2,480 payout, increasing your yearly benefits from $24,000 to nearly $30,000. Starting to take Social Security benefits at age 70 will also take some financial pressure off you at that point, perhaps permitting you to work less.

Think outside the box a bit, too. You might rent out some space in your home on a long-term basis. If a boarder pays you, say, $600 per month, that’s $7,200 in annual income. You might also relocate — to a smaller, less costly home or to a less costly part of the country. 


Annuities


When it comes to annuities, they’re definitely worth thinking about for your retirement. The negative is that the money you spend on them is usually gone and will not be available to leave to heirs, but in exchange, you may set yourself up to earn monthly income for the rest of your life.

It’s normally advisable to focus on fixed annuities, which may begin paying you immediately or at a future time you select, rather than variable and indexed annuities, which have more limited conditions and may not be as good a deal.

Learn more about annuities before purchasing one, but the examples below will give you a sense of the type of income fixed instant annuities provide.

PERSON/PEOPLECOSTMONTHLY INCOMEANNUAL INCOME EQUIVALENT
65-year-old man$100,000$570$6,840
65-year-old woman$100,000$544$6,528
70-year-old man$100,000$651$7,812
70-year-old woman$100,000$616$7,392
65-year-old couple$200,000$960$11,520
70-year-old couple$200,000$1,062$12,744
75-year-old couple$200,000$1,225$14,700

To get a sense of what a delayed annuity may give, consider that a 65-year-old man might recently spend $100,000 on an annuity that would begin paying him in 10 years and would pay him $1,138 every month for the rest of his life. Deferred annuities are excellent instruments for avoiding financial insecurity later in life.

In times of higher interest rates, annuity contracts will offer bigger payouts, and we’re currently in a low-interest rate environment. So consider a “laddering” strategy, where you spend just a portion of the amount you want to spend on annuities first, and then spend another portion in a year or two, when you hope interest rates will be higher, and so on.


Early retirement

While the majority of individuals have not saved enough for retirement, and many enter retirement with insufficient funds, there is another group of people who have saved and invested actively and have a significant nest egg. Those individuals may be able to retire early.

If you’re among those who haven’t considered retiring early, think about it. After all, we only have one life, and you don’t know how long it will last. You may be able to begin receiving Social Security at the age of 62 and retire at that age (or before) with enough income to live on, including adequate contingency savings for healthcare and other unforeseen requirements. Early retirees have greater health than later retirees, which allows them to be more active and enjoy hobbies such as travel, gardening, golf, tennis, and so on.

An early retirement may be especially possible for you if you’re still quite young. By ramping up your savings and investing, you may reach your retirement goals sooner. The table below shows what might be accomplished:

GROWING AT 8% FOR$10,000 INVESTED ANNUALLY$15,000 INVESTED ANNUALLY$20,000 INVESTED ANNUALLY
3 years$35,061$52,592$70,122
5 years$63,359$95,039$126,719
10 years$156,455$234,682$312,910
15 years$293,243$439,864$586,486
20 years$494,229$741,344$988,458

Taxes in retirement: What you need to plan for and how to minimize taxes

Another key concern in retirement is taxes. Here’s what you need to know:

  • Social Security: If your income exceeds a specified threshold, your Social Security benefits may be taxed.
  • Traditional Individual Retirement Accounts (IRAs) and 401(k) Plans: Traditional types of retirement savings accounts allow you to contribute money before taxes, reducing your taxable income in the year of contribution. In exchange for the tax cut up front, your retirement withdrawals will be classified as taxable income. (Keep in mind that your tax bracket in retirement may be lower than it was when you were working.)
  • Roth Individual Retirement Accounts (IRAs) and Roth 401(k) Plans: These accounts do not provide an immediate tax advantage, but if you follow the regulations, you may withdraw money from them tax-free in retirement. This is due to the fact that you were previously taxed on the amount you gave.
  • Investment income: Your other investments are subject to taxation as well. Short-term capital gains (from assets held for a year or less) are taxed at your regular income tax rate, but long-term capital gains are taxed at 0% or 15%, depending on the circumstances. Dividends on most equities held for more than 60 days are normally taxed at 0% or 15%.
  • Interest income: The majority of interest income is taxed as ordinary income. Treasury bonds and bills are solely subject to federal taxes, whereas corporate bonds are often subject to federal, state, and municipal taxes. Municipal bonds are often tax-free.

The non-financial side of retirement

As you plan for retirement, think about how you will spend your days outside of the financial sphere. Many retirees are astonished to realize that they are restless and maybe sad now that they no longer have the structure of their working days – and have lost the possibility to mingle with others that employment provided.

Aim to keep physically and socially active after you retire, and you may want to start participating in certain activities and clubs even before you retire to help with the adjustment. Staying fit and healthy might also make you happy and lower your healthcare bills. Exercise and volunteering are two things that most people like.

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