One sad fact that all people nearing or already in retirement have to deal with today is that income during retirement is lower than it’s ever been in the last 60 years. What does this mean for people who are nearing retirement? It means that saving as much as possible (in all areas of their financial picture) is vital as well as having a plan to achieve realistic rates of return on all of their investments once they retire.
A reasonable rate of return is between 3 and 6% and, depending on whether you’d like to use everything that you have during retirement or pass some of that money on to your heirs, the steps below will help you to plan accordingly. Enjoy.
- Focus on eliminating debt before you retire. In many cases this means living below your means, paying down credit cards and other floating-rate debt and paying off your mortgage. Frankly, if you can give up a little in the last few years before you retire, you’ll be able to afford a lot more during retirement.
- On debt that you can’t pay off, fix the rate. Mortgage rates for example, while they have risen a little bit lately, are still very low. In many cases it makes sense to actually raise your monthly payment if that’s what it takes to secure a fixed rate.
- Use Life Insurance to insure your earnings. This is especially vital if you already know that you’re going to need more money in order to be able to sustain the lifestyle that you want during retirement. Using life insurance to ensure those earnings during the last few years that you work is a great idea.
- Assess your Insurance Coverage. What you want to do here is to make sure that you’re not over insured with your life insurance and under insured on long-term healthcare. Also look into “co-insurance”, an insurance policy that, for example, will pay 30% to 70% of future costs rather than 100% but will more than likely be a lot less expensive. This is a good option if you have enough savings to cover some healthcare costs should you need them.
- Fully analyze all of your income streams. Social Security, your pension, your income from any real estate as well as from investments, interest and savings plans should all be analyzed so that you know exactly what you have and can better plan for what you will need.
- Don’t forget to consider your taxes. Social Security and real estate have a number of tax ramifications but tapping principle from a tax account that has no realized capital will cost you nothing. IRAs and other types of retirement distribution are generally taxed as ordinary income. Knowing how and when all of these different income streams are taxed is vital.
- Convert your assets to liquid assets. Even if you have a substantial net worth you may have income trouble if you don’t have enough liquidity, especially if interest rates begin to rise.
- Don’t be too keen on chasing yield. Hi grade municipal bonds, AAA rated corporate bonds and other government-backed bonds in the bond market can be susceptible to major corrections. “Chasing their yields” can be a bad idea since they’re sensitive to interest rates and, as rates rise, their value will go down.
- Don’t be afraid to spend your savings. If you’ve accumulated enough savings and you have other income streams that will continue to bring in money during retirement, spending that saved money moderately is not a bad idea.
Hopefully these tips have been valuable and you’ll be able to use some of them to keep more of your hard-earned money where it belongs, in your bank account. If you have questions about retirement, individual retirement accounts or financial questions in general, please let us know and will answer your questions, give you the advice you need and bring you solutions that can help.