Tag Archives: Retirement

Non-Financial Aspects of Retirement

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Most Baby Boomers need to prepare for the profound personal and life changes retirement involves.

Retirement has changed dramatically since your parents’ generation. Being ready to retire means much more than financial matters. It also means being mentally, emotionally and socially prepared for your later years of life.

People are living far longer and in far better mental and physical health. Instead of slowing down, they leave their jobs feeling ready to take on the world. They’re financially independent, active, and capable, write authors Ted Kaufman and Bruce Hiland in their book “Retiring?: Your Next Chapter Is about Much More Than Money.”

Yet, people are less prepared for the rigors of living during retirement. Although financial planning and knowing your “magical number” remain essential prerequisites for retirement, a successful retirement requires equal, if not more, attention to non-financial issues.

Addressing non-financial issues seemed to be the key to a satisfying retirement, but only financial matters seemed to get the necessary attention.

Most individuals approaching retirement have practically no real-world experience with what people actually do after they retire, not to mention how their lives change, so they ignore planning for retirement.

Those approaching retirement need to learn more about how retirees live day-to-day or what issues they face other than aging. They do not have much to go on.

Paying attention to fears, feelings, and relationships regarding retirement can be uncomfortable, and planning the next chapter of your life without a roadmap can seem daunting.

According to an experienced psychotherapist, denial is the likely explanation for people’s failure to plan for the non-financial aspects of retirement. Denial is people’s unconscious psychological defense mechanism to avoid a problem or issue.

However, successfully retired people describe retirement as a “new chapter” or “journey.” They see their retired life as a “new adventure.”

The fundamental questions to ask yourself include, “When should I retire?” “What will I do?” and “Where will I/we live?”

Also, you should think about how you will care for your body, your brain, your heart, and your soul, or, said differently, your physical, intellectual, emotional, and spiritual well-being, wrote Ted Kaufman, a former United States Senator from Delaware and Bruce Hiland, formerly McKinsey & Co. and was Chief Administrative Officer at Time Inc.

Source:

  1. https://www.nextavenue.org/retirement-is-about-much-more-than-money/
  2. https://bookshop.org/p/books/retiring-your-next-chapter-is-about-much-more-than-money-ted-kaufman/16291203

We need to start counting our blessings, be grateful, rejoice over the most minor matters, and enjoy the simplicity of life!

Also, it’s important to value human connection, the opportunity to add value, and the ability to help others realize their potential through small but thoughtful and intentional gestures.

Qualifying Longevity Annuity Contract (QLAC)

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A qualifying longevity annuity contract (QLAC) is technically a deferred income annuity purchased by a tax-free transfer of a portion of your tax-qualified accounts, generally made after age 55. That transfer, in addition to adding a QLAC to your plan, reduces your account to determine taxable required minimum distributions (RMDs).

So, if you used 25% of a $400,000 qualified account, your $100,000 purchase of a QLAC would reduce your RMDs by 25%. And the income from a QLAC could be deferred until as late as age 85.

Retirement Isn’t An Age

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Retirement isn’t an age. It’s a point at which your finances are where you can permanently leave the workforce. ~ USAToday

Retirement refers to the time when someone permanently leaves the workforce, usually in their later years.

Retirement is often synonymous with the idea of financial independence, which is when your savings and investments are sufficient to cover your living expenses and support you for the rest of your life.

Many Americans think of retirement as a certain age. And certain retirement benefits are indeed associated with a specific age. For example, the minimum age to start collecting Social Security benefits is 62, but you’ll have to be 66 or 67 to collect your full benefits.

However, retirement isn’t an age. It’s a point at which your finances (the magic number) are where you can more than cover your monthly living expenses and permanently leave the workforce.

The “magic number” rule of thumb for retirement is to have 25 times your annual expenses or to spend only 4% of your portfolio per year during retirement.

Source:  https://www.usatoday.com/money/blueprint/retirement/what-is-retirement/

The Magic Number Rises

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More Americans say they don’t feel financially secure…rising inflation and incomes that aren’t keeping pace get most of the blame. ~ Northwestern Mutual

The “magic number” for retirement has surged in recent years thanks to high inflation. According to Northwestern Mutual’s 2024 Planning & Progress Study, Americans now believe they need $1.46 million in savings and investments to retire comfortably.

Yet, this number reveals more about Americans’ anxiety than precise planning. We often overestimate our financial needs

This ‘magic number’ figure has leaped 15% in a year and an astonishing 53% since 2020. Meanwhile, retirement savings have dwindled to a mere $88,000.

The “Silver Tsunami” of retirement approaches, with millions of Baby Boomers riding the waves into retirement.

Track and prioritize your spending is vitally critical. This involves prioritizing the spending that’s most important to you and letting things that are less important fall off. You’re saying no to some things so that you can say yes to others. You might even want to employ loud budgeting.

Loud budgeting gives you permission to say no to social engagements by saying you don’t have the money for it. To put loud budgeting to work, you commit yourself and share that you’re doing it. Loud budgeting lets you spend money on true priorities while skipping things that won’t really provide or align with your values and priorities.

Loud budgeting can be a simple way to push back when you’ve spent too much. But it works best when it starts with a solid budget and a financial plan that helps you balance future goals with what you need for today. The idea isn’t to say no to everything, but loud budgeting should help you say no when needed.

Ultimately, your financial goal is to have more income coming in each month than expenses going out.

But make sure that you’re thoughtful about your spending so that you feel good about what you’re getting when those dollars leave.

Source:

  1.  https://news.northwesternmutual.com/planning-and-progress-study-2024
  2. https://www.northwesternmutual.com/life-and-money/what-is-loud-budgeting/

Changing Retirement

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“The traditional idea of retirement, where Americans stop working altogether, is more the exception than the rule these days. The majority of Americans continue to work in some capacity, whether or not they get a paycheck. They’re active, involved, and full of things they want to do for themselves and for others.” ~ Carrie Schwab-Pomerantz, SVP, Charles Schwab & Co., Inc.

Retirement Planning

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Planning for retirement is a way to help you maintain the same quality of life in the future.

You should start retirement planning as early as financially and emotionally possible, like in your early twenties or thirties. The earlier you start, the more time your money has to grow.

That said, it’s never too late to start retirement planning, so don’t feel like you’ve missed the proverbial boat if you haven’t started.

Keep in mind, every dollar you can save now will be much appreciated later. Strategically investing could mean you won’t be playing catch-up for long.

Additionally, retirement planning isn’t merely about counting the days until you hang up your work boots and calculating your magical financial number.

It’s about ensuring that your golden years exudes comfort, financial security, personal relationships, meaning and purpose. Here are five financial steps to guide you as you prepare for career and life transition:

  1. Know When to Start: Determine when you want to retire. Will it be an early retirement at 62 or a grand finale at full Social Security benefits age (around 67)? Remember, the earlier you claim Social Security, the less you will receive monthly, but delaying it can enhance your benefits.
  2. Calculate Your Magic Number: Calculate how much wealth or nest egg you need to sustain your desired lifestyle. Consider living expenses, healthcare costs, and the joys you wish to indulge in during retirement.
  3. Prioritize your financial goals: Pay off debts, build your savings, downside if necessary, and calculate your monthly expenses.
  4. Choose Your Accounts: Explore retirement accounts. Will it be a 401(k), an IRA, or both? Each has tax advantages, contribution limits, and investment options. Mix and match wisely.
  5. Invest Wisely: Your investments must propel you toward your financial destination. In your youth, invest aggressively. As you approach the retirement, dial back to a more conservative mix.

Whether you’re a few decades or a few years away from retirement, having a plan can help you feel confident that you’ll be prepared when the time finally arrives.

Source: https://www.nerdwallet.com/article/investing/retirement-planning-an-introduction

Financial Advisers Reported That 40% of Their Clients Were Forced to Retire

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People are retiring today, but they’re not slowing down — it’s the new retirement.

A survey by financial services firm Edward Jones found that 40% of financial advisors said their clients retired not at a time of their choosing, but when life circumstances “forced” them to do so.

Almost all financial advisors surveyed (97%) agree that retirement involves more surprises and challenges than their clients expected while an equal number (98%) agree that preparation, flexibility and willingness to adapt are key to success in retirement.

The majority of financial advisors recommend that retirees obtain supplemental health insurance (52%), secure long-term care insurance (48%) and adopt a more frugal lifestyle (48%) for financial stability.

References:

  1. https://www.prnewswire.com/news-releases/financial-advisors-report-40-of-their-clients-were-forced-to-retire-edward-jones-survey-finds-301877073.html

 

Social Security Benefits for Children

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In October of 2022, more than 3.8 million children received Social Security benefits because one or both of their parents are disabled, retired, or deceased. These benefit payments to children total more than $2.6 billion every month.

Sadly, many children don’t get the benefits for which they are eligible, writes Devin Carroll.  Most people don’t know about the qualifications and rules for this special benefit, so they don’t know to apply for the children in their lives.

Who Is Eligible for Social Security Benefits for Children?

A child who is your biological child, adopted child, or dependent stepchild  is eligible for children’s benefits if:

  • you become disabled
  • you retire
  • you die
  • and, the child is:
    • unmarried, and
    • under age 18, or
    • 18 or 19 if a full-time student in secondary school through grade 12 (see note below), or
    • 18 or older and disabled with a disability that started before age 22.
      Note: A 2022 report by the Office of the Inspector General found that the Social Security Administration erroneously terminated the benefits of students who turned 18. 

How Much Is The Benefit?

If you become disabled or retire, your qualified child is eligible for up to 50% of your full retirement age benefit.

If you have kids at home, and are thinking about filing for Social Security, filing early before full retirement age (RFA) could make more sense because your children cannot collect a Social Security benefit until you file.

Consider the difference in lifetime benefit amounts for a couple with the following circumstances.

Roger is 62 and his wife is 46. They have two kids at home, ages 8 & 10.  Roger is financially well off enough to stop working and can be flexible on what age he begins to collect Social Security.

If Roger waits until his full retirement age, he’ll get $2,000 per month. If he files now, he’ll only get $1,500 per month.   He ran the numbers and figured out that if he lived to 90, he’d receive an additional $70,000 in benefits for delaying filing until 66 instead of filing at 62.

For most people, this math shows that it makes sense to delay receiving benefits. However, this does not account for the benefits paid to the children. While the children are eligible for benefits based upon Roger’s retirement, the kids cannot get benefits until he files.   Roger’s family would be able to collect thousands of dollars more in lifetime benefits if Roger files early and turns on the benefits for his children.

Here’s how…

If you run Roger’s full retirement age benefit through the family benefit calculator, you’ll arrive at a maximum benefit of approximately $3,500 . If Roger files at 62 he’ll receive $1,500 and each of his children would be eligible for $1,000 in children’s benefits. That additional $2,000 per month ($1,000 for each of the children) is only available if Roger files for Social Security.

Whenever a minor child receives a Social Security benefit, the Social Security Administration pays the benefit to a representative payee or  a parent (or legal guardian) who is responsible for managing the benefits on behalf of the child.

Before a recent law change, all representative payees were required to file an annual report. However, due to a recent change in the law, the SSA no longer requires most parents or guardians to complete an annual Representative Payee Report.

Even though the SSA doesn’t require an annual reporting, they do have the following cautioning language. “All payees are responsible for keeping records of how the payments are spent or saved, and making all records available for review if requested by SSA.”

If you haven’t spent all the money, the SSA will require you to send it back to them when your child turns 18. This is because your child is considered an adult in their eyes and they will begin to deal directly with them.

References:

  1. https://www.socialsecurityintelligence.com/social-security-benefits-for-children/#more-2900

The Best Filing Age for Social Security Benefits

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Filing for Social Security benefits at age 62 can offer a greater financial benefit in tax savings and capital accumulation than filing at 70 in the right circumstances, states Devin Carroll, author of “Social Security Basics: 9 Essentials That Everyone Should Know”l

There are several factors or variables you should consider:

  1. You want to make sure your money is going to last throughout your 30 years or more of retirement
  2. You want to make sure your Social Security filing decision is coordinated with your other financial assets and income
  3. You want to know if a Roth conversion would work for you (and how much to convert)
  4. You need a better estimate of a year-by-year retirement income plan
  5. You want to make sure that your retirement income strategy won’t cost you unnecessary local, state and federal income taxes
  6. You want to make sure you understand the right sequence to access your taxable, deferred and Roth retirement accounts

 

50/15/5 Budget for Saving and Spending

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Key takeaways

  • Consider allocating no more than 50% of take-home pay to essential expenses.
  • Try to save 15% of pretax income (including any employer contributions) for retirement.
  • Save for the unexpected by keeping 5% of take-home pay in short-term savings for unplanned expenses.
  • Budget. The 50/15/5 rule is Fidelity’s simple guideline for saving and spending: Aim to allocate no more than 50% of take-home pay to essential expenses, save 15% of pretax income for retirement savings, and keep 5% of take-home pay for short-term savings.

50/15/5 Budget is an easy plan for managing your saving and spending

50/15/5 Rule Budget are simple guidelines for saving and spending and managing your money. Track your money using 3 categories:

  • Allocate no more than 50% of take-home pay to essential expenses,
  • Save 15% of pretax income for retirement savings, and
  • Keep 5% of take-home pay for short-term savings.

Fidelity Investment’s research found that by sticking to these guideline, there is a good chance of maintaining financial stability now and keeping your current lifestyle in retirement.

Essential expenses: 50%

Some expenses simply aren’t optional—you need to eat and you need a place to live. Consider allocating no more than 50% of take-home pay to “must-have” expenses, such as:

  • Housing—mortgage, rent, property tax, utilities (electricity, etc.), homeowners/renters insurance, and condo/home association fees
  • Food—groceries only; do not include takeout or restaurant meals, unless you really consider them essential, i.e., you never cook and always eat out
  • Health care—health insurance premiums (unless they are made via payroll deduction) and out-of-pocket expenses (e.g., prescriptions, co-payments)
  • Transportation—car loan/lease, gas, car insurance, parking, tolls, maintenance, and commuter fares
  • Child care—day care, tuition, and fees
  • Debt payments and other obligations—credit card payments, student loan payments, child support, alimony, and life insurance
    • Keep it below 50%: Just because some expenses are essential doesn’t mean they’re not flexible. Small changes can add up, such as turning the heat down a few degrees in the winter (and turning your AC up a few degrees in the summer), buying—and stocking up on—groceries when they are on sale, and bringing lunch to work. Also consider driving a more affordable car, carpooling, or taking public transportation.
    • Consider a high-deductible health plan (HDHP), with a health savings account (HSA) to reduce health care costs and get a tax break. If you need to significantly reduce your living expenses, consider a less expensive home or apartment. There are many other ways you can save. Take a look at which essential expenses are most important, and which ones you may be able to cut back on.

Retirement savings: 15%

It’s important to save for your future—no matter how young or old you are. Why? Pension plans are rare. Social Security probably won’t provide all the money a person needs to live the life they want in retirement. In fact, we estimate that about 45% of retirement income will need to come from savings. That’s why we suggest people consider saving 15% of pretax household income for retirement. That includes their contributions and any matching or profit sharing contributions from an employer. Starting early, saving consistently, and investing wisely is important, as is saving in tax-advantaged retirement savings accounts such as a 401(k)s, 403(b)s, or IRAs.

How to get to 15%: If contributing that amount right now is not possible, check to see if your employer has a program that automatically increases contributions annually until a goal is met. Another strategy is to start by contributing at least enough to meet an employer match, and then if you get a raise or annual bonus, add all or part of these funds to your workplace savings plan or individual retirement account until you have reached the annual contribution limit.

Short-term savings: 5%

Everyone can benefit from having an emergency fund. An emergency, like an illness or job loss, is bad enough, but not being prepared financially can only make things worse. A good practice is to have enough put aside in savings to cover 3 to 6 months of essential expenses. You can start with $1,000 or a month’s worth of expenses, and then gradually build up to 3 to 6 months’ worth. Think of emergency fund contributions as a regular bill every month, until there is enough built up.

While emergency funds are meant for more significant events, like job loss, we also suggest saving a percentage of your pay to cover smaller unplanned expenses. Who hasn’t been invited to a wedding—or several? Cracked the screen on a smartphone? Gotten a flat tire? In addition to those, there are certain categories of expenses which are often overlooked; for example, maintenance and repairs of cars, field trips for kids, copays for doctor’s visits, Christmas gifts, and Halloween costumes, to name a few. Setting aside 5% of monthly take-home pay can help with these “one-off” expenses.

It’s good practice to have some money set aside for random expenses so you won’t be tempted to tap into your emergency fund or pay for one of these things by adding to an existing credit card balance. Over time, these balances can be hard to pay off. However, if you pay the entire credit card balance every month and get points or cash back for purchases, using a credit card for one-off expenses may make sense.

How to get to 5%: Having this money automatically taken out of a paycheck and deposited in a separate account just for short-term savings can help a person reach this goal.

50/15/5 Budgeting guidelines serve as a starting point

Our guidelines are intended to serve as a starting point. It is important to evaluate your situation and adjust these guidelines as necessary. If you’re close to the 50/15/5 target spending and saving amounts, good job. And for those staying within the guidelines, any remaining income is theirs to save or spend as they would like.

Some ideas: First, pay down high-interest debt. For other goals, like paying for a child’s college or wedding, you could use the remaining income to save for them. And finally, for those who want to retire early or haven’t been saving diligently, putting it toward retirement savings may make sense.

The good news is that it isn’t about micromanaging every penny. Analyzing current spending and saving based on our 3 categories can give you control—and confidence. Most everyone’s financial situation will change over time. A new job, marriage, children, and other life events may change cash flow. It’s a good idea to revisit spending and saving regularly, particularly after any major life events.

References:

  1. https://www.fidelity.com/viewpoints/personal-finance/spending-and-saving