As the baby boomer generation turns 65 at the rate of about 10,000 each day, issues surrounding retirement are on the minds of many. Whether your retirement is quickly approaching or still decades away, there are many things to consider as you prepare to leave the workforce. With some careful planning, you can retire when you want to, and enjoy a retirement on your own terms.
Your ‘nest egg’ should include savings from many sources, but be sure to consider all your assets as you plan. Your grandmother’s Tiffany diamond ring isn’t helping your retirement fund while it sits in a safe-deposit box. Selling your portable luxury assets and converting the cash into an asset that will pay dividends can help jump start your retirement savings, and building that savings is the key to a comfortable retirement. Diamond Estate is one popular jewelry buyer that helps people turn their old jewelry or vintage watches into cash for many purposes, including retirement funding.
Of course, there are many financial options to consider when planning for retirement, and the implications of each should be weighed carefully. In the following article, we’ll catalogue some of the many ways you can begin to prepare for your retirement.
Preparing for Retirement with a 401(k)
Regardless of when you plan to retire, you should start saving now. And if you are already saving, great! But save more, and keep it up. By far, the most important place to save is in your employer sponsored retirement plan, the most common of which is the 401(k). Though these savings plans can vary greatly, they offer you a way to invest your money, and often your employer will match your contribution up to a certain amount. Employer matching is the equivalent of free money, so you should do everything in your power to take advantage of it.
Let’s say you contribute 3 percent of your $100,000 a year income to your 401(k) —$3,000. In many plans, your employer would match that amount 100 percent, adding another $3,000 to your account. The math is simple. Learn about your company’s 401(k) and contribute at least the maximum your employer will match if possible. As your fund grows by earning interest, that interest in turn earns interest, and this “magic of compounding” can make your small investment become large, if given enough time.
There are a few things to be things to be aware of with regards to 401(k)s. First, some companies that match contributions may require you to stay employed with them for a certain amount of time before you gain full rights over the matched funds. If you change jobs before the set time, you may incur a penalty of up to 50 percent of the matched funds. Any money you contributed to the fund is yours from day one.
If you leave your job after the initial time commitment, you’ll need to decide what to do with your 401(k). One option is to cash out, but you’ll incur a tax liability and a 10 percent penalty for taking the money out early. Other options include leaving the money where it is (if your employer allows), or you could roll it over into your new company’s 401(k) program.
Preparing for Retirement with IRAs
If your employer doesn’t offer a 401(k) program, you should consider a traditional Individual Retirement Account (IRA) or a Roth IRA. Both these savings programs allow individuals to contribute to their retirement fund, with the main difference being the tax implications. In a traditional IRA, your contributions are 100 percent tax deductible, but you will have to pay taxes when you withdraw funds later. Roth IRA contributions are NOT tax deductible, but what you earn as the account grows is tax-free.
Preparing for Retirement with Home Equity
The equity you have in your home, (the difference between what you owe and what your home is worth), can be a substantial part of your retirement funding. If you choose to downsize and redirect some of the equity, you should plan to do so before you retire. Regardless of how much equity you have or how small your new mortgage might be, lenders are hesitant to underwrite loans if you don’t have an income.
If you are taking money out of your home, you will need to put that cash into something that will earn money for you. Some people may start a business, while others might invest in something that will pay dividends. Another possibility is buying rental property with your home equity. Your new mortgage will be a fixed cost, but the rents you collect will likely increase each year. Although you can use money from your IRA to buy investment property, the rules are complicated. Since there are potential tax implications and penalties, it’s a good idea to talk to your accountant about the implications of buying rental property.
Estimate Your Position to Prepare for Retirement
Having a good idea of where you stand financially is the only way to know how to best prepare for retirement. This entails not just figuring out how much you have saved for retirement, but what your expenses are likely to be.
On the income side, you should learn what your Social Security benefit is expected to be at the age you plan to retire. You should carefully consider when to start collecting. If you were born between 1943 and 1954, you are eligible to begin collecting at age 62, but your monthly benefits will be only 75 percent of what you would collect if you waited until full retirement age of 66. And Social Security offers an increase of 8 percent for every year you delay collecting up until age 70 — a substantial increase in your monthly check.
To finish calculating your other retirement income, include any pension or defined benefit plan you and your spouse are entitled to, rental income, and finally add in 4 percent of your total financial savings — IRAs, 401(k)s, and bank, brokerage, and fund accounts. Is this total enough?
Many planners use “replacement rates” as a guide for retirement. Basically, the replacement rate is the percentage pre-retirement income that your will realize in retirement. A rule of thumb is that a 75 percent replacement rate should be enough to retire on: if you make $100,000 per year, $75,000 per year should be enough to retire on.
But the equation isn’t really so simple. What do you want to do in your retirement? Do you want to travel? Buy a sailboat? Expensive hobbies can take a large bite out of your nest egg. Will you work part time in your retirement?
What you want your retirement to look like will greatly influence the amount of money you’ll need to have. Careful planning and being diligent about savings are the keys, and though the earlier in your career you plan for retirement the better, it is never too late to start saving.