It’s never too soon to start planning for retirement
When people are considering whether they can afford to retire, the first area of concern is developing an income plan. Nothing else matters if you cannot pay your bills.
Surprisingly, many people are not sure how much they need each month. If you are not sure, carry a journal and keep track of your purchases for a period of time. Don’t forget things that you pay a couple of times a year, such as property tax and insurance premiums.
You have to consider when you will need to make capital purchases. This could be a new roof, a furnace, car or another major expenditure. While these purchases do not occur regularly, they can cause havoc to your budget.
The first income goal is to cover all the basic necessities. Hopefully, you have additional funds to cover your retirement bucket list. Most people create dreams over their working life for when they have more time during retirement.
One way to make retirement less stressful is reduce your debts while you are still working. Eliminating your mortgage will free up more cash flow for fun things. Everyone should strive to pay off credit cards every month. They often have interest rates of 16 percent or more. You cannot safely earn this amount on your investments.
Social Security is a very important part of senior’s retirement income. It is not unusual for a middle-class senior couple to receive $1 million in lifetime SS benefits. This is why Social Security planning is so important.
SS is one of the few retirement assets that have a cost-of-living adjustment. This helps you maintain your purchasing power. Decisions you make in your early 60s can affect your income for decades to come.
The major reason people cannot retire in their early 60s is the cost of health care. If you do not get help from your work, each couple may well have to pay $600 a month each. Because of this, some seniors try to limit their income to qualify for a health-care subsidy. No one knows how long these subsidies will continue.
Once you reach 65, you can go on Medicare. This will cost most seniors between $135.50 and $300.00 per month. Medicare does not provide coverage for long-term care.
Taxes are another area that can consume a lot of your retirement assets. Every time you spend some of your qualified funds, you pay ordinary income tax. Even if you do not need the money, you must take out and pay taxes on required minimum distributions when you reach age 70½. The percentage you must take out increases each year as you get older.
Sometimes, people ask how soon they should start thinking about retirement. The truth is, it is never too soon. The earlier you start saving, the more it will compound.
Having the right asset allocation means your savings are distributed among qualified, non-qualified and Roth savings. This gives you more versatility about how to utilize your assets.
Eliminating debt will make the whole process easier. If you plan correctly, you can achieve your dream.
Gary Boatman is a Monessen-based certified financial planner. He is author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”
To submit columns on financial planning or investing, email Rick Shrum at rshrum@observer-reporter.com.