Being stuck at home for months and months, thanks to COVID-19, has many people rethinking what their dream retirement looks like. Others, who are out of work or underpaid/underemployed, are concerned about falling behind when it comes to saving for retirement. Whatever your situation, it is never too late to improve your financial security in retirement. That being said, the earlier you get started, the greater your odds of having a happy, healthy, and wealthy retirement.
Over the past 18 years as a Los Angeles-based financial advisor, I have noticed people tend to get serious about planning for retirement around the age of 50. By this time there is a desire to retire, and leaving the workforce doesn’t seem like some faraway goal. At this point, you should take stock of where you stand as far as retirement savings, home equity, pensions, and estimated Social Security benefits. It will also help to have a rough idea of how much money you will need to live comfortably and at what age you hope to retire. From there, you will be able to determine how much work is still needed to fund a secure retirement.
If you are not already working with a fabulous fiduciary financial planner, now is the time to get the benefit of expert financial guidance. A financial advisor can help with some of the emotions and stress of planning for retirement. Not to mention, he or she can help you establish a plan to get you to where you want to be in your dream and secure retirement.
How to Stay on Track for A Secure Retirement
Excluding the more than 210,000 Americans who have died from the Coronavirus (as of writing this article), today’s retirees are living longer and healthier in retirement, on average. The older members of Generation X and younger Baby-Boomers are less likely to have a pension when compared to their parents, and many can expect to spend more years in retirement. Many are carrying student loan debt from their children; some probably are still paying off their own student loans. Others have seen their retirement plan thrown off course by an illness or divorce. Some may be straining under the added expense of boomerang children who are living at home into their thirties or forties.
Keep reading as we share Four Ways to Stay on Track for a Secure Retirement.
Save More Money, Tax Efficiently
In 2020, you can contribute $19,500 on a pretax basis to a 401(k), plus another $6,500 if you’re 50 or older. As long as you turn 50 anytime this year, you can start making those catch-up contributions now. You will not owe income taxes on the money you contribute to a 401(k) this year.
You will not owe taxes on your 401(k) until you make withdrawals. Make sure you account for the cost of taxation when you retire. If you are withdrawing $10,000, per month, from your 401(k) in retirement, you will not be netting that amount. Ideally, with smart tax planning, you will still be able to stay in a lower tax bracket in retirement than when you were working.
It is also recommended to put some money in a Roth IRA, if you are eligible. This money will grow tax-free and come out tax-free in retirement. But, you will not get a tax deduction when making contributions. Higher earners will also likely need to save into a post-tax investment account, beyond their 401(k) and Roth IRA.
Keep Lifestyle Inflation at Bay
As we age, it seems to be easier to spend more and more money. This is often called lifestyle inflation. You buy nicer bottles of wine, stay at nice hotels, drive nicer cars, and spend more money on clothes. I could go on all day. Keeping lifestyle inflation from creeping in helps in two ways. First, it frees up more money to save for a secure retirement. Second, it means you will need less money in retirement to live comfortably.
A few areas where people focus on reducing their expenses include restaurants, cable/satellite service, and driving cars a little longer. For those who are further behind in their retirement savings, more drastic steps may be needed. That may include downsizing your home or picking up a side hustle or second job.
Working Longer Can Increase Retirement Security
Working just a little longer can significantly increase your financial security in retirement. First, it will give you more time to save for that dream retirement. Second, working longer allows your retirement account to grow, thanks to compound interest. Third, each year you delay claiming Social Security, your benefits increase. Lastly, this also means that you will need less of your life savings because you will have fewer years of retirement to fund.
Don’t Ignore the Cost of Medical Care in Retirement
People seem to think that medical care will be free in retirement, thanks in part to Medicare. This could not be further from the truth. You will likely still have premiums for Medigap or Medicare Advantage Plans, as well as co-pays for office visits. The cost can be even higher if you go to a doctor who doesn’t accept Medicare.
You will also need to account for long-term care expenses in retirement. According to Genworth’s Cost of Care Survey, on average, in the United States, a private room in a nursing home costs $8,365, per month, or $275 a day. Depending on where you live, this number could be higher or lower, but regardless, it will be a shockingly large number. This is per person; the cost of care could double if a couple needed care at the same time.
Fidelity estimates that the average couple, retiring at age 65 in 2020, will spend a whopping $295,000 on health care costs. This estimate includes Medicare premiums and out-of-pocket expenses, and coverage to fill the gaps, over 21 years or so. To help pay for medical bills later, consider setting up a tax-friendly health savings account now, such as a Health Savings Account (HSA).
There is a triple tax break when properly using a Health Savings Account. First, contributions are tax-deductible (or pretax if made through your employer). Second, your investments within the account will grow tax-deferred. Third, you can use the funds, tax-free, to pay for eligible medical expenses in any year.
Planning for what could be a 30-year-plus retirement may seem daunting, but please don’t procrastinate. The earlier you start saving for retirement, the more options you will have down the road, and the easier it will be to accumulate a large enough net worth to fund the secure retirement you desire.