Thinking about retirement
Planning ahead is key for Jefferson County residents What you pay into Social Security buys you three things: retirement income, survivor income and disability income. The size of the benefit is determined by your earnings and the number of years you earned. Thinking ahead is the key to planning, and living, a reasonable retirement. The sooner you start this planning, the greater your ability to get where you want to go. Even if you are on the cusp of retirement, or have already passed that threshold, it’s late but not too late to make a difference in the years ahead. Here are key questions you need to answer for retirement planning, according to most financial planners: • What are the true costs of retirement? • How much do you need to set aside to retire comfortably? • How should you invest or manage your resources for the long term? • What role will Social Security play? • What are your goals for retirement? • When do you start? FRUITS OF YOUR LABOR People in their 50s and 60s have been in the workforce for 30-40 years. The average life expectancy is about 84, so retiring at 60 or 65 leaves 20-25 more years to enjoy the fruits of your labors. Retirement is a question of balancing your expenses and your savings, retirement earnings and other income. Expenses can rise after retirement through travel and other deferred wishes; those things cost money. Some expenses go down upon retirement. No more FICA taxes; no more diversions to retirement plans; probably lower tax rates. One rule of thumb: To maintain your preretirement standard of living, you’ll need 70 percent to 80 percent of your preretirement income. The ideal retirement income would be that which equals your gross income today, minus savings and federal income taxes. Inflation plays a role. Running at 2 percent to 3 percent annually, it eats into a fixed nest egg over time. It will make sure that the $50,000 a year you’re living on comfortably today will buy much less in 10 or 20 years. Your investment earnings may or may not keep up with inflation.
help reduce your tax bill, because they don’t count against your taxable income for the year. Most 401(k) plans use medium-performing mutual funds as their investment of choice. You should always look for ways to put your retirement savings in tax-advantaged accounts and plan to keep them there. Remember: Retirement savings are for retirement! Don’t use them for anything else. Tax-advantaged options include an employer plan with a match, a Roth IRA (you don’t pay taxes on the earnings when you begin withdrawals), an employer plan without a match (this gives a tax deduction by contributing pretax money), a traditional IRA and an annuity. Advisers tell you to study annuities closely; they can be expensive and may restrict your investment choices. They may make sense for people who have contributed the maximum to other plans, will keep the annuity for 1520 years, are in a high tax bracket today that will be drop in retirement, and desire a “guaranteed” income for life in retirement.
WHAT GOES WHERE? It was once a rule of thumb that the proper investment mix was to subtract your age from 100, and devote that portion to stocks. A 40-year-old would invest 60 percent in stocks; a 70-year-old would have 30 percent stocks. But people are living longer, and the number INCOME SOURCES moved up to 110, allowing for more If you’re still employed, now is growth potential. But each person the time to study retirement plans must decide for themselves how or tax-deferred income options much of his or her nest egg should from your employer. be subject to the ups and downs of Most companies offer some kind the stock market. Here is a comof plan. mon practice: In a “defined benefit plan” or 1. Money you need next year a “company pension,” employers should be in cash or immediately may offer substantial funding or convertible. share the cost with employees. The 2. Money you need in the next plan tells you how long you have two to five years should be in a to be on the job until the money conservative, fixed-income investis 100 percent yours, called vestment, such as bonds or certificates ing, and what the penalties are if of deposit. They will grow very you withdraw the retirement fund little, but they will be immediately early. available. Contributions to a 401(k) plan 3. Money you don’t need for five
People in their 50s and 60s have been in the workforce for 30-40 years. The average life expectancy is about 84, so retiring at 60 or 65 leaves 20-25 more years to enjoy the fruits of your labors. But expenses must be balanced with your post-retirement income. Courtesy photo
during which you earned. For wage earners, FICA (Federal Insurance Contributions Act) takes a 7.65 percent bite out of every paycheck. Self-employed workers hand over twice that amount. Although they are called contributions, these amounts are really taxes that go to Social Security (6.2 percent) and Medicare (1.45 percent). You can file for benefits on or after age 62, or you can wait until age 70. The longer you wait, the higher the monthly income will be once it starts to flow. The monthly benefit increases by as much as 8 percent each year you wait. If you die or become disabled, Social Security may provide a survivor’s benefit to your spouse or children. Take a look at your annual The Dow Jones Industrial Average over the past 10 years – from 2006 to 2015 Social Security statement. It gives – shows the dip of the “Great Recession” and the rebound since then. Past the level of benefit you can expect, performance is no indication of future performance, but most financial in- and then you’ll also know the gap vestors still say the stock market historically offers the best returns for long- between that and your actual term investors. Chart by Leader Grafix retirement-living needs. That gap represents the additional level of income you’ll need. to 10 years should be more heavily about every 14-24 years. Hence To figure a Social Security beninvested in the stock market. the need for growth. efit, the government looks at your That way you’ll have cash toBonds and cash add stabilentire working life and uses as its day, money needed in a few years ity and ready access to cash. But basis the 35 years of your highest and investments that should beat for long-term growth, stocks still earnings, adjusted for inflation. inflation. make sense for most. If there are a lot of zero-income Plan carefully, because the years in those 35 years (including SOCIAL SECURITY money you are saving for retirethrough early retirement), it will Many people younger than the ment should be safe from immedireduce the benefit. Resuming work age of 50 think Social Security ate needs. fills in those zero-income years won’t be around for them. We’ll Most investment advisers besee, but the dates for changes keep and increases the benefit. lieve the higher average returns Questions? Visit ssa.gov. of stocks make them superior over getting pushed back for the obvious reason that, as the population the long term. The market shifts YOUR NEXT JOB? ages, so does the voter base, and daily, and it cycles up and down. Some people retire and then elected officials are loath to ignore But over the course of a decade start a second career. This may be them. Most agree that Social Seor two, the historical evidence is clear. A broad range of stocks (usu- curity may not pay as much in the because they’re bored. It may be because they realize their retirefuture as it does today. ally lumped together in mutual ment income won’t be enough. It It helps to know how the sysfunds or index funds) outperform may be that they are in pursuit of tem works today. other options. a company-offered health insurWhat you pay into Social SeRetirement investing is a longance plan. curity buys you three things: reterm goal, so you’ll want to shoot Much depends on the age at for the best investment growth you tirement income, survivor income which work is resumed. If you’re and disability income. The size of can get. If inflation is running at younger than 62, a job increases the benefit is determined by your from 3 percent to 5 percent annually, the cost of all we buy doubles earnings and the number of years See PLANNING, Page 4▼
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