11 Essential Steps to Retirement Planning
Life Insurance
It used to be that Americans retired at 65 with a gold watch and a nice, fat pension. But times have changed, and now we're finding we have to take a more active role in preparing for retirement.
This new world of 401(k) plans and Roth IRAs leave many people confused and uncertain. A 2009 Employee Benefit Research Institute survey, for instance, found that only 44 percent of Americans have ever tried to calculate how much they need for retirement.
"Planning for retirement can be a daunting task, especially given the recent economic climate," said Insured Retirement Institute (IRI) President and CEO Cathy Weatherford. "And while by most accounts the financial forecast appears to be improving, millions of Americans have yet to begin preparing for their retirement."
According to the IRI and the U.S. Department of Labor, there are 11 steps you can take to ensure that you do not outlive your savings.
1. Select a target retirement date
This important step determines how much money you need. If you want to retire early--say at the age of 55--you need to have a good post-retirement income and a lot of savings because your retirement could last 30-40 years. You should also buy health insurance until Medicare kicks in at age 65.
The Department of Labor says most people retire at the age of 65-66, although many are continuing to work later in life. Key benchmarks that may influence your decision on when you ultimately retire:
* Age 59 ½: You can withdraw from retirement accounts without paying a tax penalty
* Age 62: The minimum age to receive Social Security benefits
* Age 66: Eligible for Social Security benefits if born between 1943-1954
* Age 70 ½: Face tax penalties if you don't start taking minimum withdrawals from retirement accounts
2. Calculate the amount of money you should accumulate by your target retirement date
This is largely determined by what your lifestyle, living and medical expenses will be during retirement. You should also take into consideration the cost of inflation. The Labor Department recommends you plan for a 30-year retirement, regardless of what age you retire.
Key questions to ask yourself:
* Will I still have a mortgage payment or will my home be paid for?
* How much will I want to travel?
* How much of my current monthly expenses continue after I retire?
* How much should I keep in investments? (financial experts recommend that you continue making investments that earn enough to cover the cost of inflation)
* Will I want additional health insurance to pay for services not covered by Medicare?
3. Figure out how to maximize your Social Security benefits
More than half of retirees start collecting benefits at age 62, but advisors note that your monthly payments may be a third higher if you wait until age 66 to start collecting. Those who wait until age 70 receive 75 percent more.
"Millions of Americans may not be aware of the financial advantages most people gain by waiting even a few years to begin receiving their benefits," Weatherford said.
4. Take advantage of tax-advantaged plans, such as employer-sponsored retirement plans, individual retirement accounts and annuities
According to Kiplinger magazine, many retirees who either lost money or lost faith in the stock market are purchasing insurance annuities to provide guaranteed income during retirement. With an annuity you pay an insurance company a large sum of money in return for a monthly check for a certain time period or for the rest of your life. For instance, a 65-year-old man could make $725 a month by purchasing a $100,000 annuity.
The Labor Department notes that some annuities make adjustments for inflation. It recommends you carefully review the terms of the investment and answer the following questions:
* Does the amount paid vary based on investment returns or is it fixed?
* What will you pay in related fees?
* How are the payouts taxed?
5. As that your employer start a pension or retirement plan if one doesn't already exist
Starting a retirement savings plan is easier than many small business owners might think. Retirement plans help to attract and keep good employees, and the employer's contributions are tax deductible.
6. Only use your savings for retirement
Many experts agree on this step. The Labor Department notes that if you dip into your retirement savings, you lose principle and interest, and you may lose tax benefits. Roll your 401(k) into an IRA if you change jobs.
7. Diversify your assets and be sure to include guaranteed income for life
Experts recommend you keep money in a safe, interest-bearing account, as well as some money-earning stocks. This spreads the risk. The Labor Department recommends the following distribution:
* Some money in savings or checking accounts with no risk
* Some in bonds, with a little more risk
* Some in stocks with a higher risk, but a higher return
Another way to diversify is by investing in index mutual funds.
8. Ask questions and get help by seeking the advice of a professional financial advisor
An expert can help you sort through all the investment opportunities and help you decide what's right for you. But avoid strangers on the phone or the Internet--retirees are frequent targets for scammers.
9. Start now and set goals
The IRS recommends you set up a "painless" payroll deduction, regardless of your age or how long you have until retirement. Other strategies:
* Maximize your pre-tax deductions at work
* Make catch-up contributions after the age of 50
* Work a few years longer than you might otherwise have
* Don't take on large debt during your pre-retirement years
* Hold off withdrawing Social Security benefits
10. Start a retirement plan and monitor your progress
A retirement plan can help set out your goals for saving and your strategies for reducing debts. Write down those goals and strategies. According to the Labor Department, people frequently alter future spending patterns if they record their expenses and have a plan for reducing them.
11. Use whole life insurance to protect your family's finances
Purchasing a whole life insurance policy, which pays beneficiaries when the insured individual dies, is a way to ensure your family is financially protected should the breadwinner pass away and is no longer bringing home a paycheck. A whole life insurance policy can provide the funds necessary, so that your spouse doesn't have to go back to work during retirement, or that your children don't have to tap into their own savings to pay for a funeral. A properly sized policy can make sure your spouse has enough money to pay the outstanding principle on your home, finish paying for a child's college or cover other large expenses.
