Here’s your 10 minute Guide to a Worry-Free Retirement

retirement readiness

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Would you believe that 85 percent of American pre-retirees dread retirement? That’s according to a poll done by Greenwald & Associates for the National Institute on Retirement Security (NIRS).

The report paints a grim picture of the financial state of senior citizens in America. It states that nearly 25 percent of the eighteen million workers aged between 55 and 64 will be poor by the time they hit 65!

That explains why so many Americans are anxious about their retirement readiness.

However, this doesn’t have to be your story. Sharon and Michael Marchisello’s have a different story. Sharon, 64, worked in a middle-income career, starting at $ 9 per hour. By the time she retired, her salary was about $ 55,000. Michael, on the other hand, was earning about $ 60,000 by the time he was retiring. Today, Sharon and Michael have a net worth value of over $ 3 million.

How did they do it? They were diligent about planning for their retirement. They saved as much as they could, and made the most of the available plans.

Just like Sharon and Michael, you too can plan your way out of the financial jitters of retirement. Start by assessing how ready you are and estimating your financial needs. Here’s how you can do that.

Assessing Your Financial Readiness

Some psychologists hold the opinion that retirement readiness is more about psychological preparedness than it is about financial readiness. However, we believe that the latter significantly influences the former.

When people are getting ready to retire the most common question they ask is how much would be enough? Many want to hear of a magic figure. However, since each person has diverse goals, preferences, and faces unique financial circumstances, the best you can do is assess your financial readiness. These exercises will help you in assessing your readiness.

Do a Financial Inventory

Preparing a financial inventory is essential because it helps you put your financial status into perspective. Putting it all together can seem like a daunting task. Nevertheless, a financial inventory is critical when you’re getting ready to retire.

To come up with a comprehensive inventory, first, review and list all your assets, including sources of retirement income. That includes all checking accounts, bank savings and deposit accounts, CD’s, Brokerage accounts, 401 (K), IRA, Roth IRA, annuities and others such as residences you own.

You can use this opportunity to assess the investment performance and re-balance your portfolio.

After writing down the assets, list all the expenses and liabilities, including mortgage, utilities, auto and home maintenance, entertainment, insurance, and other debts (excluding mortgage). You’ll have a fair picture of what you owe and what will carry on into your retirement.

Once you’ve completed your financial inventory, you’ll have a thorough understanding of how your assets, investments and insurance policies can work together during your retirement.

Identify Your Income Sources in Retirement

After writing your financial inventory, identify your income sources in retirement. Any money that you receive from pensions, social security, part-time work, or a business can significantly reduce the need to dip into your savings.

But what sources of income can you count on?

According to a recent Gallup poll, Social Security, and pensions were rated as the most popular and reliable sources of retirement income. Other sources of income include home equity (such as a reverse mortgage facility), individual stocks or mutual fund investments and a significant chunk of pre-retirees hoped to get part-time jobs during their retirement. However few pre-retirees were counting on income from rental property and royalties.

Develop a Retirement Income Distribution Plan

Knowing whether you have a big enough pool to retire is only one battle of retirement readiness. Making a plan of how to sustain that pool for as long as you need it is yet another battle. An income distribution design is a plan of how your assets will be paid out to you during your retirement.

There are a various retirement income distribution strategies that can help you to stretch your money for a long retirement. But you have to be flexible and keep an open mind. Instead of picking a single strategy to use throughout your retirement, you can consult with a financial planner and see how you can brew a cocktail and make it for you.

Some strategies involve accumulating as much guaranteed income as you’ll need to cover your basic needs. It’s a good strategy, especially for the risk-averse. Other strategies involve bucketing. That is, protecting a portion of your money for a short-term, while the rest is allowed to grow for long-term use. A typical bucket strategy uses three buckets.

In all strategies, retirees are advised to make systemic withdrawals and sequence their accounts. That is, making withdrawals of the same amount every month or quarter or every year and choosing which accounts to begin with in order to minimize their tax liability.

Speaking of making withdrawals, a popular method, the 4 percent rule, which was first proposed by veteran financial planner William Bengen more than thirty years ago has taken root amongst several pre-retirees. However, not all that glitters is gold and over-relying on this rule could be disastrous. You can read more about the 4 percent rule and the dangers of over-reliance on it in this article. Also, this article will help you learn more about different retirement withdrawal strategies and which strategy will work best for you.

Double Check Your Retirement plan

The last part of assessing your financial readiness is double checking your retirement plan.

Is it comprehensively done? Splitting the hairs of a retirement plan may be a little overwhelming especially if financial planning is not your strength. However, you can get professional help from certified financial planners specialized in retirement from firms such as Blooom. They’ll help you create a personalized plan and offer unbiased expert advice.

But you know what they say about the best plans. In these days of economic uncertainty, you’ll need a backup plan. Here’s what your plan could entail.

A fall back means of earning

It’ll help to reduce reliance on the 401(k) or IRA. You could turn one of your hobbies into a business or consult in your specialty on a part-time basis. A neat way of making some side cash is participating in polls for a pay. Several pollsters including SSI (Opinion Outpost), Paid For Research, E-poll surveys and My Survey US are more than happy to pay for your opinion.

It really doesn’t matter how you make the extra bucks as long as you don’t have to keep dipping into your savings.

Rethinking your budget

You may have put up an appreciable egg nest, however, some costs may demand more than what you had anticipated. In that case, your backup may entail cutting back on the extravagance, relocating to a less expensive part of the country or significantly downsizing. Making advance plans of what you can cut down on is critical if it comes to that.

Broadening your horizons

Perhaps you pictured retirement as you’ll spend more time playing golf, or gardening. However, after a few years of doing that, you could find yourself looking for more. Don’t be afraid to broaden your horizons. If it’s something you’ve really fancied but don’t have the skills, I’m sure you can get the right training through online course providers such as Udemy at a fraction of the cost.

Don’t forget to set up an Emergency Kitty

When you’re thinking of your retirement readiness, your kitty should be able to survive shocks. Like Mike Tyson said, everyone has a plan, until you get punched in the face.

Can your retirement plan survive a punch in the face?

You could be thinking that you’ve figured it all out. But something unexpected can happen that would skyrocket your expenses. Don’t be shy or too confident to ask, “What can go wrong?”

Some of the things that could go wrong include an early death, accidents, sudden illness, natural disasters or claims from potential creditors. Plan for an emergency kitty; you’ll never know when it can come handy.

These steps will help you reflect on your financial readiness. But, getting ready to retire is more than just stashing some cash and managing risks. It’s about sustaining your lifestyle, thus you need to project the cost of your needs. Here’s how you can predict your financial needs.

Estimating Your Financial Needs

A significant chunk of Americans workers getting ready for retirement have concerns about meeting health bills and other recurring bills. However, the extent to which your bills will bother you during your new chapter of life depends on your view of retirement.

You can approach retirement pretty much like you would a vacation. First, you must decide on the destination.  Then spell out what you’ll be doing during this new exciting phase of your life.

Be as extravagant as your mind would allow as you list your goals.  Then categorize these goals into needs, wants, and wishes. Needs are the things you cannot do without and wants and wishes are those you can do without. If your wishes and wants excite you, you’re on the right track!

Lastly, take the list of needs, wants and wishes and quantify them into costs. Here’s how you can estimate your needs and their costs.

Use your Current Expenditure to Predict Retirement Expenses

An excellent way to estimate your financial needs is to use your current monthly net-pay as a starting point. Then use the following questions to guide you in predicting your needs:

  • What is your monthly net pay? (What’s the pay after tax, retirement plan, and insurance deductions?)
  • What expenses are coming out of your paycheck now, but you’ll have to pay out of your pocket once retired? They can include payments such as health insurance etc.
  • What additional expenses will you include in your budget after retiring? This could be things like extra cash for health care.
  • Are you expecting major home repairs or automobile purchases in the foreseeable future?
  • Are there some expenses that you’ll cut down on? For example, your commute to work, or your dry cleaning bill?
  • How much are you currently saving for retirement? If you are currently having trouble saving for retirement or you are always having a monthly balance on your credit cards, you’ll need to make major adjustments before the big day.

Make sure you capture all the major items. Many retirees underestimate their financial needs. They end up overspending and depleting their savings much earlier than anticipated. Here are some of the major expenses you mustn’t miss.

 Housing

Housing remains the most significant expense in a retiree’s budget. Retirees, just like pre-retirees, spend an average of 40 to 45 percent of their income on housing and housing-related items. However, this is one expense that you can control.

Think about it. You can be creative about a house redecoration and spend less. Also, you can downsize to a smaller home in a less expensive neighborhood and opt for a reverse mortgage. That’s an excellent way to turn an expense into an income.

Healthcare

Healthcare expenses tend to swell as you age. Even if you have an excellent health insurance package, it’s likely that your out-of-pocket medical expenses will increase. Dental expenses also tend to increase as we grow older.

You may consider long-term care insurance. There are excellent healthcare service providers such as Caringforaparent, Health plans of America and Medicare providers who would be glad to chat about a suitable and affordable plan. It may seem like a pricey move at first. But it may save you from blowing all your assets if you need extensive nursing.

Taxes

In life, you can only be certain of two things, death and taxes. You may be no longer subject to payroll taxes, but, even in retirement, you’ll still have to pay income tax. The taxman will still slash off a fraction of your Social Security, and income from other investments.

In addition, some states recover taxes from pension income. Thus you need to pay closer attention to what benefits a state accords to retirees.

Travel, Transportation and Shopping

Travel often tops the wish list for many retirees. But it’s a discretionary expense which you can control or cut out. That is, if it’s too stretching.

On the other hand, you’ll be saving on commuting costs after retirement, but you’ll still need to get around. When you factor automobile costs such as insurance, maintenance, and repairs you may consider downsizing on the number of cars you own.

Shopping is yet another expense retiring folks can’t avoid incurring. But, you can make the most out of coupons and get excellent deals on Coupons.com. Also, don’t forget to keep track of all your expenses using apps like the Trim Financial Manager. It’ll help you to reduce your monthly expenses.

Caring for kids

If you thought that retirement means that you are through with taking care of the kids, think twice. You may want to put up a down payment for their first home, chip in some cash for some of their wedding bills, or even start contributing to a college fund for your grandkids.

If you’d like to do that, just remember that it’s a discretionary expense. The health bill and tax bill, on the other hand, are not. So, settle the must-pay-bills before you indulge in the kids’ expenses.

Factoring Inflation to Your Needs

Several pre-retirees come up with meticulous plans covering a variety of risks. However, there are some who leave out the “inflation creep.” It’s a common oversight, and many people leave it out when planning their retirement.

Some folk factor zero inflation when calculating their retirement investments and savings. Others consider a nominal figure of 3 percent, then figure-out that their income will meet their growing expenditure. However, both approaches are flawed.

Although Social Security checks are adjusted each year based on the general rise in the cost of living – retirement planning should not focus on replacing your income. You should focus on sustaining your living standards. You need to meet both essential and non-essential expenses.

Essential expenses such as phone, insurance, and housing will rise with inflation, therefore, it is critical to factor inflation when planning for them. Non-essential expenses or the “fun” stuff may inflate but they are purely discretionary. Therefore you can flatten them out and adjust your expenditure.

Estimating Your Life Expectancy

Lastly, when estimating your financial needs in retirement, you must estimate how long you’ll be around. You need to have a good estimate of how long you expect to be around so that you may adjust your nest egg to survive that long.

When it comes to couples, the situation tends to get a bit awkward since it calls for planning for an earlier demise of the husband. In the US, the average life expectancy in the US is 79 years for men and 81 for women. However, according to the SSA, a man hitting age 65 can expect to reach 84 and a woman can expect to reach 86.

All these statistics are crucial in planning your nest egg. However, instead of planning using generalized statistics why don’t you calculate your own life expectancy information such as your medical history, lifestyle, and genetics? You’ll come up with a more precise plan.

Remember, as you age, certain costs swell – such as healthcare. Others, like travel and transportation, reduce.

To conclude, Kenny Dychwald, Tamara Erickson and Bob Morison wrote an article for the Harvard Business Review which vouched for the “abolition of retirement.” Their article raised quite a number of recommendations company heads could consider. However, their recommendations are yet to be embraced and retirement is a reality each person should prepare to face (whether you are in business or employed).

Use these steps to assess your financial readiness and project your needs and you’ll be in a better position to face retirement.

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