Retirement Planning in 2020: A Helpful Guide

While most Americans look forward to retirement, they also approach these years with caution.

Yes, retirement years can certainly be the best of your life; however, they also pose new potential challenges.

Fortunately,  there are steps you can take to prepare, both financially and otherwise, for a successful and fulfilling retirement.

Financial Considerations

Expenses

During their work years, people tend to spend more time thinking about how to save for retirement than they do thinking about how they’ll spend their money once they do retire.

The two questions, however, are linked.

To the best of your ability, you should plan how you’ll spend and then spend according to your plan.

In calculating your potential expenses during retirement, be sure to include line items from the following categories.

  • House and household expenses. Where you will live, how much it will cost to live there, and how you will maintain your day-to-day lifestyle should be some of the first questions settled. In this phase of planning, carefully consider your food budget, accounting for potential fluctuations in cost as time passes.
  • Healthcare. While it’s certainly your hope to maintain a fit and healthy lifestyle in your retirement years, anything could happen. Be sure to calculate how much you may spend on regular premiums, supplemental insurance, and so forth. Also, remember to set some money aside for unforeseen circumstances.
  • Travel and recreation.  Depending on your tastes and interests, you may find this a large or a small line item in your retirement budget. Whether you plan to travel to see the grandkids, take a yearly cruise, or simply stick close to home and enjoy local hiking trails, you’ll want to have a plan in place to keep those options financially feasible.

While calculating your potential expenses, remember to consider fixed and flexible expenses separately.

To determine your percentage of fixed versus flexible expenses:

  • First, total the fixed expenses
  • Second, total all other, non-fixed expenses separately
  • Third, divide fixed expenses into total expenses

Doing this will offer perspective on how your retirement spending could be affected by fluctuations over time.

PRO TIP: If this portion of retirement planning feels overwhelming, consider consulting with a financial planning professional. You can also access simple online tools, such as this retirement budget worksheet from TIAA.

Savings

It’s important that you have a plan in place to transition living off your employment income to living off your savings.

In the past, the most basic rule of living off retirement savings was to live by The 4% Rule. The 4% Rule, established in 1994 by William P. Bengen, states that a retiree can withdraw approximately 4% of his retirement portfolio, adjust it annually for inflation, and still be reasonably sure to outlive his money.

As with any rule, however, there are exceptions; and financial planners now advise that rather than sticking blindly to The 4% Rule, retirees take a more nuanced approach, one that factors in how fluctuations could affect spending.

Determining a safe retirement income based on your portfolio value is just not as simple as one withdrawal rate. But the close monitoring of your portfolio and spending, possibly with a competent financial adviser at your side, can give you the confidence to spend comfortably on the items you truly desire with the timing that makes sense given your overall goals for retirement. Perhaps the most important retirement income planning strategy to take is to create a plan before you start tapping into your retirement investments.

Taxes

Your tax responsibilities during retirement are affected by a number of factors.

Here are just a few.

  • Which state you live in.
  • Whether you receive a pension.
  • How many properties you own.
  • What type of retirement accounts you maintain for your savings (more on this in the Retirement Accounts section below).

While all these factors play a part, the key consideration is to make sure not all your retirement income is taxable. Unless you’re already highly skilled in this area, it would be wise to consult an expert to ensure you’re on the right track.

Social Security

Social Security is not a one-stop, one-size-fits all experience. How much you’ve earned and the age at which you sign up both make a big difference in how much you receive.

Though the official retirement year is age 66 or 67 depending on your birth year, you can enroll as early as age 62; however, if you claim payouts early, the amount of each payment will be reduced. If you wait until the age 70 to claim, you will receive even larger payments.

There are lots of reasons to claim early or to wait. Every person should carefully weigh the options and decide what works best.  If you’re weighing your options, consulting the Social Security Administration’s Frequently Asked Questions page is a good place to start.

Retirement Accounts

Depending on the type of Retirement Accounts you favor, you’re going to take different approaches.

  • 401k – If you maintain a 401k, you probably already know that this plan allows for early withdrawals. One way to prepare for an optimal retirement is to avoid early withdrawals completely if you can; if you can’t, be sure to make them as minimal as possible. Once you do make it to retirement, you may want to consider rolling your 401k over into an IRA.
  • Roth IRA or Traditional IRA – When it comes to IRAs, choosing between a Roth IRA and a Traditional IRA isn’t as simple as it may sound. Though there are some basic similarities, such as minimum investments and contribution limits, there are lots of seemingly small differences that could have a big effect on your investments over time. For example, Roth and Traditional IRA’s are not taxed in the same way, and there’s a big difference between tax-free and tax-deferred. When comparing the two, take your time, consider the differences, and consult a professional if necessary.

Non-Financial Considerations

While much of the discussion on this topic revolves around being financially prepared (perhaps rightly so), there are other areas in which you should also do some pre-retirement preparation.

Location

It’s been said that the three most important factors in real estate are location, location, location. Something similar can be said about planning for retirement.

Though it may sound desirable to live in a cabin in the woods or a beachside cottage, as you think about where you would like to retire, don’t forget to factor in the following elements:

  • Proximity to friends, family, and loved ones
  • Accessibility to essential services
  • General cost of living
  • Climate
  • Taxes

In order for this phase of planning to prove effective, these separate factors must be considered in relation to one other. For example, a low cost of living could very well be mitigated by high travel expenses if you decide to live far from loved ones, and vice versa.

Be sure to look at the big picture.

Lifestyle

How you choose to spend your retirement years is, in effect, how you choose to spend the final phase of your life.

With that in mind, you may choose to spend this phase:

  • Reinventing yourself
  • Investing in volunteering
  • Deepening important relationships
  • Sharing wisdom with the next generation
  • Joining community partnerships
  • Relaxing and enjoying life

This is entirely your decision, of course, but one that should be made with care: by taking time to think through this question now, you’ll avoid the pitfall of simply falling into a certain lifestyle by habit rather than by choice.

Fitness

According to the CDC, fitness plays a vital role in this phase of life.

Fortunately, a little fitness goes a long way.

Older adults can obtain significant health benefits with a moderate amount of physical activity, preferably daily. A moderate amount of activity can be obtained in longer sessions of moderately intense activities (such as walking) or in shorter sessions of more vigorous activities (such as fast walking or stairwalking).

Consider your interests and capabilities, and make a fitness plan to match. Whether it’s something simple and social, like taking a daily walk with a friend, or something more skill-based and competitive, like playing regular rounds of golf, be sure to make daily fitness a part of your retirement routine.

Hobbies

In addition to bringing joy and vitality to daily life, hobbies can have some quantifiable health habits, including stress relief and improved memory functions.

As you approach retirement, make a running list of the hobbies you’d like to pursue. Be sure to factor in things like the skills needed and the potential costs involved.

By the time you retire, you’ll have a full list of well-considered options to choose from.

Well-Being

Finally, before retiring, consider what factors are necessary for you to maintain a proper state of well-being.

Such factors might include some of the following:

  • Regular social engagements
  • Spiritual nourishment
  • Mental stimulation
  • Purposeful activity
  • Restful sleep

By prioritizing your well-being, you’re providing the building blocks you need to pursue a successful and fulfilling retirement.

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