At Idaho Medical Association Financial Services, we know retirement is full of unknowns; you cannot predict how long you will live, how markets will oscillate, or what the rate of inflation will look like in future years. Variable factors like these create confusion as to how retirement should be planned and prepared for.
The good news, however, is that there are some things you can count on. For example, you have control over how long you decide to work, when you start saving, and what investments you make. As you focus on maximizing the factors you can control, you can ensure that you do not outlive your money during retirement. What’s more, you can provide yourself with a retirement that is comfortable and financially secure.
As you prepare for retirement, implement these four tips to make sure that you do not outlive your money.
1. Have a Plan
A recent study showed that Americans’ most widespread financial regret was not saving for retirement early enough. In fact, over half of Americans have under $5,000 saved for retirement, and a large portion of those have saved absolutely nothing. Without a plan in place, the financial needs and wants of everyday life can cause retirement savings to be pushed to the back burner.
Thus, the most crucial step in ensuring that you do not outlive your money is to create a plan. A financial advisor will play a critical role in identifying your goals, discussing your resources, and creating a retirement plan catered to your individual needs and circumstances. As you partner with a financial expert, you will experience confidence in knowing that your retirement funds will be sufficient for any financial needs your retirement years will bring.
2. Expect a Long Life
Although there is no way to know your exact longevity, we do know that life expectancy is on the rise. In fact, life expectancy is up almost ten years from where it was 50 years ago. For this reason, plan to live well into your 80s or even 90s, depending on your family and personal health history. When factoring how much you will need to have saved, always plan for longer than you think.
Understand that you are planning to leave money behind; sufficiently planning for retirement means that you will not be spending your last penny on the day you die. Instead, plan to leave assets behind for family or charities (This also means that a proper retirement plan includes a proper estate plan). Don’t be caught unprepared by your long life; plan for it.
3. Maximize Your Social Security Benefits
The Social Security benefit formula is based on years worked, amount paid in, and your retirement age. Although you can begin collecting Social Security at age 62, collecting early may cost you up to 30% of your potential benefits. You must wait to claim your benefits until your full retirement age (somewhere between 65 and 67, depending on your year of birth) to ensure that you receive 100% of your retirement benefits. After that, your benefits increase 8% each year until age 70. If you live beyond your early eighties, you will receive the most benefit by waiting to claim your benefits until then. For couples, the second spouse to die will receive the larger of the two benefits, so as long as one spouse lives past their early eighties, the higher-earning spouse should take benefits at 70 to maximize their lifetime benefit.
However, the right choice may vary by circumstance. If your life expectancy is shorter, you may want to consider taking your benefit earlier to maximize your benefit. Some couples may choose to take a smaller lifetime benefit in exchange for increased cash flow while they are younger and more physically able to adventure. Regardless of your circumstances, a competent financial adviser should be quickly able to inform you of your optimal choices with your Social Security benefit.
4. Invest in the Right Places
Beyond having adequate emergency cash reserves (4-6 months of core expenses), the optimal order of savings can vary somewhat by circumstance. The very first action to take, if applicable, is to contribute enough to your employer-sponsored retirement plan (401(k), 403(b), etc.) to qualify for the full employer match. A company match is essentially free money. For those eligible, the next priority should likely be to max out their Health Savings Account. HSAs are a powerful tool because contributions enter pre-tax, grow tax-deferred, and are spent tax-free. It’s the most tax efficient vehicle available to most people.
The most common place to save for retirement is through a tax-advantaged vehicle like an IRA or a 401(k). By deferring taxation until withdrawal, these accounts allow you to postpone taxes from your high-income earning years to your retirement years when most individuals pay taxes at a lower rate. Also, because taxes on the gains of your investments are also deferred, it will grow faster than a normal investment account. If your tax rate is higher now than it will be in retirement, this is a step for you.
However, there are additional places to allocate your funds when planning for retirement. If your tax rate is lower or equal to what it will be in retirement, consider contributing to a Roth IRA or making Roth contributions to your 401(k). Your contribution will not be tax deductible, but it will never be taxed again in your lifetime. Ask your financial adviser if you are eligible for a profit sharing plan or cash balance plan. They won’t apply to many, but, for those eligible, they represent powerful ways to save large sums for retirement in a tax-advantaged fashion.
Regardless of the tax vehicle your money is in, make sure that your investments are low-cost and highly diversified. Consider consulting with a fee-only financial adviser to create a portfolio best designed to meet your financial goals.
Beginning with these four steps, take control of your financial situation today to ensure your money lives as long as you do. Here’s an infographic we came up with for easy reference:
Whatever your stage in life, implementing these four steps and meeting with an advisor at Idaho Medical Association Financial Services to help you manage your financial plan can ensure that your money lasts even longer than your retirement does. Curious about how we can help? Call us today at 208-504-1736.