So, what are you waiting for? Ask away!
©Rawpixel.com/Shutterstock.comHow much money do I need?
The big question on every pre-retiree’s mind is "How much money do I need?" Frustratingly, no one right answer exists.Retirement plans are as unique as people’s personalities and constantly evolving. Your retirement plan is a reflection, at the time, of your hopes and dreams for the future. Your retirement plan also reflects your personality. Are you a worrier? You’ll probably want a bigger nest egg before you’re comfortable enough to retire. Are you a planner? You’ll probably start saving early.
A good rule of thumb if you retire at 65 is to have saved at least 25 times what you spend annually. If you spend $50,000 a year, try to have $1.25 million saved. That way, you should be able to take out 4 percent the first year, adjusted annually, for 30 years without running out. If you want to retire younger, shoot for at least 30 times what you spend annually. That’s $1.5 million in this example.
In addition, online calculators do a good job estimating with more precision how much you’ll need.
Is Medicare enough?
Healthcare costs are a giant wild card faced for anyone thinking about retirement. Given the magnitude of potential costs, you don’t have a retirement plan until you have a healthcare plan.For most people, Medicare is not enough. With Medicare Part A, you get hospital coverage. Part B, which costs most people $135.50 a month, covers doctor visits and lab tests. You can also pay to get drug coverage with Part D.
Many people find that they need more coverage and buy a Medigap policy. Others purchase a Medicare Advantage plan, offered by private insurers, which combines Parts A, B, and C.
Medicare provides information to help you sort out all these plans.
What will I do with my free time?
More pre-retirees should ask themselves how they will fill their free time. Although you might be able to afford retirement financially, are you ready to step away from your work life emotionally? Many people tie their identities to and structure their days and social circles around office life. If you love what you do and are good at it, retirement might not be the goal you think it is.A good friend of mine who considered taking an early retirement package figured that he needed at least three new activities or goals to fill up his time if he was no longer working. Unable to come up with them, he passed on the buyout and stayed at work.
What three activities or goals do you have?
Will I run out of money?
After you retire, you might wonder how long your money will last. You can measure the likelihood of your money going the distance, given a number of reasonable assumptions.Vanguard’s Nest Egg Calculator provides a quick and easy estimate of how long you might expect your money to last. It also shows you how to make adjustments, if needed.
For instance, suppose you are still working and have saved $1 million, spend $45,000 a year, and plan to need the money for 30 years after you retire. If you invest 60 percent of the $1 million in stocks and 40 percent in bonds, Vanguard estimates that you have an 85 percent chance of having enough. If you cut spending to $40,000 a year, the probability of having enough jumps to 91 percent. Or if you hold spending at $45,000 annually but work longer and save another $300,000, the odds of success jumps to 96 percent.
Should I have a Roth or traditional IRA?
You’ll read lots of opinions regarding whether a Roth IRA is better than a traditional IRA. For me, it boils down to whether you think your tax rate will be higher or lower in the future.If you think your tax rate will be higher, the Roth IRA is for you. If you’re in a low tax bracket now, why not pay your taxes now? If you think your tax rate will be lower in the future, skip the Roth and go with the traditional IRA. Perhaps right out of college you got a high-paying job that you plan to do for only a few years before joining the Peace Corps. You might as well pay taxes when they’re likely lower in the future.
If you think your tax rate will be the same, the Roth and traditional IRA plans are the same, taxwise. The Roth does have the advantage of not requiring you to take distributions when you turn 70-1/2.
How good is my 401(k)?
If your 401(k) offers a match of any kind, it’s good. You should contribute at least enough to get the maximum match. Beyond that, deciding whether the 401(k) is the best place to put your retirement money gets trickier.To find out, look at the funds in the plan. If you can choose low-cost funds and a sampling of low-cost index funds, the plan is likely good. If you’re not sure whether the plan is suitable, head over to BrightScope and enter the plan’s name. The site will analyze your 401(k) and help you decide if you could do better setting up your own IRA.
What’s an RMD?
Deferred taxes on retirement accounts are good while they last. But eventually, the taxman will want his cut. Enter the required minimum distribution, or RMD. With traditional IRAs and 401(k) plans, when you turn 70-1/2, you must start taking money out of your retirement accounts by April 1 of the following year. Going forward, you must take money out by December 31. And yes, you must pay taxes on the money you’re taking out.The amount you must take out varies based on your age. Vanguard can estimate your RMD.
Failing to take an RMD is a massive fail. If you take out less than your minimum RMD, you owe a 50 percent tax on the shortfall. Yes, 50 percent. That pretty much wipes out any tax benefit of putting money in a tax-deferred account in the first place.
Remember, you don’t have to take a required minimum distribution from a Roth 401(k) or Roth IRA. That’s a big advantage of those types of accounts.Can retirement rules change?
Retirement rules can change. In May 2019, for example, the U.S. House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act is poised to revise many important aspects of retirement planning.At press time, it was unclear which changes to retirement planning the Senate would adopt, but the sweeping nature of the House version showed that lawmakers weren’t afraid to make some major changes. Specifically, the House version went after Stretch IRAs, which are given to non-spousal beneficiaries after you die. The House wants to force the money to be taken out — and taxed — more rapidly.
Other rules open to revision include pushing back the age at which you must take RMDs and allowing annuity products to be offered in retirement plans.
The fact that Congress can change the rules around the tax status of retirement accounts is one reason why some critics are opposed to Roth IRAs and Roth 401(k) plans. Some fear that Congress might try to tax distributions taken from Roth accounts in the future. If so, this would result in double-taxation of the money. This scenario is unlikely, but the possibility argues for tax diversification. Using the tax diversification idea, why choose between a Roth or traditional account? Why not have both? That way, no matter how retirement accounts change in the future, you can maximize your tax benefit (or at least minimize the cost).
What can I do if I’m near retirement age and don’t have a plan?
Are you getting close to retirement age but still don't have a retirement plan? The key thing is to not panic.You need a retirement plan, of course. However, you might first need to adjust your expectations. Rather than targeting retirement at age 65, you’ll want instead to find ways to boost your savings rate and lengthen your time in the workforce.
The key for you is recognizing that your employment income is your top asset and should be protected. Make sure your skills remain relevant in your field. Get disability insurance. You’ll want to maintain your enthusiasm for your work, too, because you’ll likely be working longer than many of your similarly aged friends.
Also do your best to not take Social Security until after your full retirement age. For every year after your full retirement age that you wait to claim Social Security, your benefit goes up by 8 percent, according to Charles Schwab. You’ll rely on Social Security more than others, so you should try to maximize your benefit from it.
Do I need a financial advisor?
You don't need a financial planner. You can do all your retirement planning yourself. The question, though, is will your retirement plan improve if you hire a planner? Consider the following factors:- Do you have time to monitor your portfolio and developments in financial planning? If you’re busy with other obligations, it might be worthwhile to have someone watching over your financial affairs.
- Are you interested in personal finance? If you find personal finance topics interesting, managing your own money might not only save you money on fees but also give you something to do in retirement.
- Do you know a financial planner you’re comfortable with? A skilled advisor who has experience optimizing plans like yours can add value. Do you know a planner like this? Do the fees the planner charges fit into your plan? Have you looked up the planner on BrokerCheck to make sure he or she has the proper licenses and a clean record?
- Is your financial situation complicated? If you’re a multi-millionaire or a divorced business owner with interests in multiple partnerships, the complexity of your situation might warrant getting help. With large estates, one major smart move can save enough money to justify the fees.
- Are you comfortable with technology? If you’re comfortable with apps and online tools, you might want to sign up for a robo-advisor service. This type of service can help you optimize your plan at a reasonable cost. If you’re not comfortable with technology, or just want someone to talk to about your financial goals, it makes more sense to hire a human advisor.