In the five years leading up to retirement, a person will make more important decisions about how to maximize their retirement than at any other time. Why? Because these decisions are not easy to change and the impact will affect significant income and expenses for the rest of their lives. Making the right decisions can generate a lot more income over a longer period of time, which is the ultimate goal.
Millions of people have to make these decisions every year. About 2 million baby boomers retire each year since the oldest turned 65 in 2011. To effectively prepare for a retirement without financial worries, here are five important decisions pre-retirees will need to master to prepare for a confident retirement:
Know how much you need to retire
For most retirees, this is the crucial question they must answer. It guides all other decisions, because “your number” depends on your level of spending, the return on your investments, the tax rate and how long you have to live.
To help you determine your number, start by projecting your retirement spending needs. Make a list of all current expenses, as well as anticipated future needs. For example, you can buy a new car every five years or deposit $ 10,000 a year into an education savings account of 529 for your grandchildren.
Next, consider your sources of retirement income. Income from sources such as pensions, part-time work and social security will first be applied to offset your expenses, leaving a remaining part to be covered by your savings and investments.
For example, suppose a couple who retire at age 67 plans to spend $ 100,000 per year in retirement. They will receive a pension of $ 25,000 per year and a combined Social Security income of $ 25,000 per year. To meet the remaining $ 50,000 of retirement needs, our couple would need a portfolio of approximately $ 2 million in assets. A portfolio of this size will cover their current expenses at a conservative 4% withdrawal rate, while the remaining capital continues to grow and can be passed on to their heirs.
Review your asset allocation and costs
To maximize the long-term potential of your portfolio to generate income, it is essential that your investments are not too aggressive or too conservative. As people get older, they tend to put more money in cash and bonds, and less in stocks. This can be a prudent strategy because a person nearing retirement has less time to recover from potential losses.
However, by reducing growth investments like stocks too much, retirees can deprive themselves of the returns on investments necessary to preserve growth and maintain purchasing power. Most retirees plan to live off their investments for 30 years or more, and the amount allocated annually to expenses must be indexed to inflation. I often advise clients to continue to invest 40% to 60% of their investment portfolio in stocks, even after retirement, to overcome the long term brake on inflation.
Plus, excessive fees are a sneaky culprit that erodes big returns. To guard against this risk, analyze all fees paid to your advisors, custodians and mutual fund families. And, while fees are an important consideration, make sure your financial advisor is providing the appropriate value for the services you receive!
Optimizing social elections
More than 64 million Americans now benefit from Social Security. Optimizing these benefits can have a significant impact on your annual retirement income. While most retirees are aware of the reduction in benefits by taking them too early, few understand the cumulative impact of deferring Social Security benefits. For each year that your benefit is deferred beyond your normal retirement age, your benefits will increase by 8% per year.
For example, a person expected to receive $ 25,000 per year in Social Security benefits at the age of 66 of full retirement will receive $ 33,000 per year if they wait until age 70. For a married couple, the benefit is even greater because a surviving spouse is able to also retain the highest social security benefits throughout their life.
There are hundreds of different Social Security filing strategies. Astute financial advisers have the ability to triangulate the optimal strategy. Before the first person turns 62, review your Social Security options with a financial advisor and make a plan to maximize those benefits.
Project retirement outcomes for the rest of your life
Your money should outlast you. Before ending your career, hire a financial advisor to work out a year-by-year cash flow projection (we recommend up to age 95), as well as the order in which each asset should be operated. This exercise will help you understand the impact of your sources of retirement income, how expenses are allocated, and where investment returns contribute to your long-term success.
And here’s another plus: By testing these projections against past results, you’ll see the likelihood of your results. Nothing better than to retire with a high probability of confidence to take the first step!
Explore the final contributions to your pension plan
Whether it’s selling your business or looking to maximize the value of stock options, the potential for facing a big one-time tax bill exists early in retirement.
To protect your hard-earned retirement capital, be sure to fully contribute to the 401 (k) and other qualified (i.e., tax-deferred) pension plans before your retirement date. . By speeding up things like your 401 (k) deferrals, you can “top up” your retirement savings and reduce your income before a taxable event.
For small business owners benefiting from these plans, there is a unique opportunity to use a portion of their business’ cash flow to maximize their profit sharing and defined benefit contributions in the year they sell their business. company.
For example, a dentist who sells his practice mid-year can save a lot of money in taxes. By contributing $ 50,000 to their profit sharing plan, they can save almost $ 20,000 in taxes, assuming a combined federal and state tax rate of 40%.
Whatever your situation, taking the time in the five years leading up to retirement to explore all possible options and make the right financial decisions can generate hundreds of thousands of dollars in additional income during your retirement years. This difference will allow a retiree to enjoy these years without worry while leaving many assets to his heirs.
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