Most of us work hard most of our lives in hope that when the magical moment, aka retirement, comes, we’ll have no responsibilities, debt-free, all children are on their own, mortgage all paid for, life insurance and estate planning all set. The only thing missing is destination and itinerary.
We all spend a lot of time dreaming about retirement, when all we do is sit at beaches all over the world chilling with a glass of wine in our hands.
My retirement dream is to play tennis, play golf, hang out with friends for lunch and dinner, travel around the world (for free), continue to help families with their financial needs and building wealth (because that’s something I enjoy doing).
Ok…hold on a second. Where’s all the money coming from?
That’s right, we all love to dream big, then reality sets in. How do we fund our retirement?
Well, my full-time job does have retirement plan for employees. Remember, it’s not your employer’s duty to make sure you have enough to retire.
You need to start planning…
Income may not be as important as what your expenses will be in retirement when determining the size of your retirement nest egg.
Most retirees can live on far less than they make once they have independent children and a paid-off home.
Unfortunately, your level of financial independence also determines your ability to maintain independence in other areas of your life, such as maintaining dignity during any long-term or chronic illness.
That’s right, we keep thinking about all to fun things to do about in retirement, we forgot we’re also older and eventually may need long term care.
How much do I need to retire comfortably without compromising my current lifestyle?
Some financial advisors would suggest a specific dollar amounts, but that’s arbitrary. And percentages of income do not matter much at all either since many people's incomes fluctuate dramatically over time.
The only thing that really matters is your expected expenses in retirement. I would suggest aiming for enough savings to cover 25 years of expenses in retirement. That's a reasonable assumption for people nearing retirement age now. An average man who is 65 is expected to live until 84, according to the Social Security Administration. And an average 65-year-old woman is expected to live to 87.
1. Have personal and financial goals for your retirement
There’s nothing more important than knowing where you’re going. Knowing what you want to do during your retirement will help you determine how much money you’ll need, and how long you’ll need.
If you plan to move to live in Philippines for the rest of your life during retirement, your retirement income need would be a lot lower than if you stay in Honolulu, Hawaii.
If you plan to stay in Honolulu, Hawaii and travel the world, you will probably need a fortune to completely retire.
2. Project your retirement expenses
Now that you’ve some ideas and goals of what you want to do during retirement, you can start with figuring out how much money you’ll need in expenses.
Your annual income during retirement should be enough (or more than enough) to meet your retirement expenses. That's why estimating those expenses is a big piece of the retirement planning puzzle.
To help you get started, here are some common retirement expenses:
• Housing: Rent or mortgage payments, property taxes, homeowners insurance, property upkeep and repairs
• Utilities: Gas, electric, water, telephone, cable TV
• Transportation: Car payments, auto insurance, gas, maintenance and repairs, public transportation
• Food and clothing
• Insurance: Medical, dental, life, disability, long-term care
• Health-care costs not covered by insurance: Deductibles, co-payments, prescription drugs
• Taxes: Federal and state income tax, capital gains tax
• Debts: Personal loans, business loans, credit card payments
• Education: Children's or grandchildren's college expenses
• Gifts: Charitable and personal
• Savings and investments: Contributions to IRAs, annuities, and other investment accounts
• Recreation: Travel, dining out, hobbies, leisure activities
• Care for yourself, your parents, or others: Costs for a nursing home, home health aide, or other type of assisted living
• Miscellaneous: Personal grooming, pets, club memberships
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Don't forget that the cost of living will go up over time. The average rate of inflation over the past 20 years has been approximately 3 percent per year. And your retirement expenses may change from year to year.
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To protect against these variables, build a comfortable cushion into your estimates (it's always best to be conservative).
3. Decide when you'll retire
The earlier you retire the more years of retirement you have to fund. And the longer you live, the more years of retirement you have to fund too.
To determine your total retirement needs, you have to determine how long you'll be retired.
The length of your retirement will depend partly on when you plan to retire. This important decision typically revolves around your personal goals and financial situation. For example, you may see yourself retiring at 50 to get the most out of your retirement.
4. Identify your sources of retirement income
Now that you know how long you and your spouse want to continue working, then determine who you will be responsible for in retirement, all your sources of income (including Social Security).
Once you have an idea of your retirement income needs, your next step is to assess how prepared you are to meet those needs. In other words, what sources of retirement income will be available to you?
Retirees today face two main challenges: not saving enough for retirement and fear of outliving their retirement savings.
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Protecting your assets
Additional sources of retirement income may include a 401(k) or employer-sponsored retirement plan, IRAs, annuities, and permanent life insurance. The amount of income you receive from those sources will depend on the amount you invest, the rate of investment return, and tax treatment. If you plan to work during retirement, your job earnings will be another source of income.
The older we get, the more likely it becomes that we will need healthcare. For retirees, the concern is whether they will be able to pay for good quality healthcare when they need it. After working for a lifetime, retirees want to know that their golden years will be just that - golden, and spending some of those years in a sub-par nursing home is sure to make the experience much more difficult to enjoy.
5. Invest in long term care insurance
Medical expenses and private nursing home care can quickly wipe out a lifetime of savings. A retiree's ability to pay for the cost of in-home healthcare, adult day-care and nursing home expenses may determine the quality (or lack thereof) of healthcare the retiree can receive.
Retirees should look into purchasing a long term care insurance. LTC insurance not only cover expenses during long-term illnesses, it also protects you from having to spend down all your assets to qualify for Medicaid.
Some long term care insurance allow you to choose where to receive the care - a nursing home, an adult day-care center or at home.
6. Sign up for Medicare
Eligible retires should sign up for Medicare, which can be used to cover most medical expenses. Medicare provides two types of insurance - hospital insurance for in-patient care and certain follow-up care, and medical insurance coverage for physician services that are not covered under the hospital insurance.
The hospital insurance portion of Medicare is available at no additional cost, as it is paid for as part of an individual's Social Security taxes during employment. The medical portion of the insurance is available at a premium and is optional.
Medicare can cover medical expenses that you would have to pay with your own savings.
7. Leave on a good note
Have all your funeral and final expenses taken care off by a final expense insurance. The Everest final expense insurance provides planning tools and a 24/7 concierge service that takes care of everything for your family in the time of stress.
So instead of spending time looking for funeral homes and purchasing plans, your family can focus on what’s more important - the ones left behind.
Now you should have most of your financial needs taken care of for retirement. With good planning, your income sources will be more than enough to fund even a lengthy retirement, including any unexpected expenses.
What if it looks like you'll come up short? Don't worry.
You can always work part-time or start a new business to supplement your retirement income. Many retirees choose to continue working part-time during their “semi-retirement” years doing things they love. Some retirees do so for personal-fulfillment reasons, others may do it for the extra income it provides.
Starting a small business is a great way to supplement retirement income because you’ll also receive tax benefits that are reserved for business owners, further helping you to save on retirement expenses.
Whatever the reason you have, it’s great to know that you’re working because you CHOOSE to, and not because you HAVE to.