If you're approaching retirement or already living in it, you're probably focusing more than ever on regular health checkups to stay in good shape and live comfortably. But it's essential that anyone in this age group doesn't let their financial health fall by the wayside either. As you near retirement age, it's a good idea to take a step back and reassess your financial priorities to make this stage of life as easy as possible. And no matter where you're at in life, it's important to know what can be done now to ensure a healthy financial future.
Know how much to save
There is no fixed dollar amount that dictates how much we should all have saved up for retirement. Everyone's goals for when to leave work and what to focus on afterward are vastly different, making no two retirement plans alike. Instead, it's better to estimate future spending based on the income you've become accustomed to while working. This is something that is best done prior to entering retirement, but will work for just about anyone.
- First, estimate future spending by using recent budgets, monthly expense reports or any way you usually track your finances. Take a look at each of these costs and make a rough calculation of whether they will increase, decrease or stay similar in retirement.
- Use these estimates to understand the income you'll need to provide for them. Income in retirement is usually less than in working years, but some expenses may also be reduced. Financial planners commonly advise retirees to plan for replacing 80 percent of their pre-retirement income. Again, this is not a hard-and-fast rule, but can be helpful for planning purposes.
- Consider using an online tool like a retirement calculator to add up assets, investments and expenses. This will give most people a good general idea of what saving and spending will look like in retirement.
Understand Social Security
Many retirees look forward to utilizing the Social Security benefits that they've been contributing to for most of their working life. But Social Security is far from a windfall, and is not designed to replace other forms of savings. As of 2016, the average monthly benefit for retirees eligible to receive Social Security was $1,341. This is certainly enough to be useful, but far from a suitable primary income for most people. Be sure to factor these savings into your general plan for retirement. Some other basics to know:
- Social Security benefits can begin as early as 62 or as late as age 70. Delaying benefits will increase the total amount received, but retirees are required to begin receiving benefit distributions after age 70 regardless.
- Retirement benefits can be transferred to a surviving spouse in the event of the other spouse's death, as long as everything checks out.
- Social Security contributions are deducted from wages, bonuses and vacation pay, up to a fixed amount per year, but do not apply to earnings from investments or other retirement plans.
Check in on investments
Whether you are already well into retirement or still many years removed, it's good to check in on any investments to ensure you're getting the most from them. Many workers contribute savings to a 401(k) or IRA account tied to a selection of mutual funds. These funds may be limited to what your plan provides, but should still allow room for a little retooling.
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- Generally, it's advisable to invest most retirement savings in the stock market at a young age, and gradually transition to bond funds as retirement approaches. But that doesn't mean older workers need to completely avoid stocks. Managed retirement portfolios usually include around 30 percent stocks as late as the age of 70.
- Understand your tax obligations related to your retirement funds, including how much you should expect to owe. If you've been contributing to a Roth IRA or 401(k), you have already been paying taxes on contributions and should not owe anything once you begin taking distributions. Traditional IRA or 401(k) plans will incur taxes upon withdrawal.
- If you would like more investment choices in a 401(k) plan, consider a rollover into an IRA.