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A 12-Step Plan for a Secure Retirement

A 12-Step Plan for a Secure Retirement

It's never too early to start planning for your retirement. Whether you are just beginning the planning process or already have the retirement pieces in motion, it's essential to know the steps to take to ensure your money is working for you and will continue to do so throughout retirement. With a comprehensive plan in place, you can rest assured that you'll be able to make the most of your savings now and into the future.

Below are the necessary steps that you should take to help you feel confident in a secure retirement. 

Step 1: Ask yourself the following key questions.

Having an accurate picture in mind of what you want your retirement to look like will make it easier for you to plan for your golden years. Consider the following questions:
  • When do you want to retire?
    • In 1 year? 3-5 years? 10 years?
  • Where do you want to be?
    • Do you plan on staying in your home or moving?
    • Will you have a second home or plan to relocate a few months during the year?
  • Who will you be with?
    • Potential for kids or other loved ones to live with you?
  • What will you be doing?
    • How do you plan on spending your days once you are no longer employed?
  • What will you be funding?
    • Will you be taking care of or financially supporting a family member?

Step 2: Maximize contributions to workplace retirement plans.

If possible, maximize contributions to workplace retirement plans, such as 401(k)s, as early as possible to get the most out of any employer matches offered by the company. Here are some ways to optimize your employer's retirement plan:

  • Contribute as early as you can - Time is your biggest ally when it comes to investing. 
  • At minimum, always contribute enough for the match - Employer contributions to your employer-sponsored retirement plan is free money! If you aren’t taking advantage of your employer’s 401(k) match, take action now.
  • Consider using a Roth option in your 401(k) - Roth contributions are made with after-tax dollars, will grow tax-free for life, and allow you to make tax-free withdrawals when you pull the money out in your retirement years.
  • Save as much as you can - In 2024, if you are under age 50, you can put up to $23,000 into your 401(k) plan, plus an additional $7,500 in catch-up contributions for a total of $30,500, if you are 50 or older.
  • Stay on top of your investment risk - Review your risk profile annually to ensure your asset allocation aligns with your risk profile. Target-date funds (TDFs) are great investment vehicles for your workplace retirement account. 

Step 3: Estimate retirement expenses.

Before retiring, it is essential to take into account all of your expected expenses during your retirement years. 

  • Make a list of the following retirement expenses:
    • Housing costs (mortgage, utilities)
    • Food costs
    • Healthcare costs
    • Insurance premiums
    • Taxes
    • Car & travel expenses
    • Subscriptions
    • Dining & entertainment

  • Also consider these additional expenses:
    • Long-term care 
    • Supporting a parent or a family member
    • Second home or relocating for a few months during the year
    • Uncovered healthcare
    • Losing a spouse’s income (Social Security and pension)

Step 4: Understand Social Security eligibility & calculate benefits.

It is important to know how much income you can expect from Social Security so that you can plan for any additional sources of income that may be needed in retirement. 

  • Take into account the following Social Security benefits:
    • Your own social security benefit, and
    • Your spouses, divorced spouse, or widow benefits (if applicable).
  • Determine when you will elect to start taking Social Security benefits.
    • Benefits are based on your full retirement age (FRA), which is dependent on your year of birth.
      • Currently, for most people, the FRA is age 67.
    • You can elect to start benefits at age 62 before you reach your FRA; however, taking benefits early will lower your benefit amount, while delaying benefits results in a much higher benefit amount.
    • If your FRA is 66 and you elect to start benefits at 62, your benefit will be permanently reduced by 25%, and the permanent reduction is 30% for those with an FRA of 67.
    • Alternatively, if you delay benefits to as late as age 70, you will receive a delayed retirement credit (DRC) of 8% per year.
    • There is a lot more to Social Security than simply deciding when to trigger your benefit, especially if you are married or have previously been married.
  • When you are ready, file for your Social Security benefits.
  • File for your spouse, divorced spouse, or widow benefits (if applicable)
    • To qualify, you will need to meet the following criteria:
      • Your marriage lasted at least 10 years
      • You have not remarried
      • You are at least 62 years old
      • Your ex-spouse is able to collect Social Security retirement or disability benefits
      • You must have been unmarried for at least two consecutive years before collecting Social Security spousal benefits from a former spouse
    • In order to be eligible, you may need to provide the following documents:
      • Proof of U.S. citizenship or legal immigration status
      • A marriage certificate
      • A divorce decree

Step 5: Determine retirement income.

  • Determine sources of retirement income, which may include the following:
    • Employer-Sponsored Retirement Plans
      •  401(k)s, 403(b)s, most 457 plans, and the federal government’s Thrift Savings Plan (TSP):
        • $23,000 contribution limit in 2024 with a $7,500 catch-up for employees age 50 and over for a total annual limit of $30,500
    • Additional Savings / Investments
      • Individual Retirement Account (IRA) and Roth IRA:
        • $7,000 annual contribution limit for 2024 with a $1,000 catch-up for individuals age 50 and older for a total annual limit of $8,000
    • Pension Plans
      • Employees do not have control over investment decisions with a pension plan, as contributions are made primarily by the employer.
      • With a pension plan, you have the guarantee of a given amount of monthly income in retirement.
    • Social Security
      • See Step 4 above.
  • Calculate your retirement income.
    • Social Security + 4% retirement savings + Other = pre-income tax total income
    • Up to 85% of Social Security benefits may be taxable for Federal Income Taxes.

Step 6: Evaluate budget.

Once you have an understanding of your expected costs, you should create a budget plan to ensure that your retirement savings are sufficient to cover these expenses.

  • Evaluate your current budget.
    • The 50-20-30 Rule is a budget guideline that functions to help you work towards your financial goals via an easy-to-follow, intuitive way to allocate your spending:
      • 50% should be put towards your needs,
      • 20% should go towards your savings goals
      • 30% should be used for your wants
    • These percentages apply to your after-tax income. This rule functions as a template to help individuals manage their money and take charge of their finances and financial life, especially when it comes to saving for retirement and maintaining an emergency fund.

Step 7: Trim back on unnecessary expenses and consider downsizing.

It is essential to trim back on unnecessary expenses and consider downsizing. This process is not just about cutting back, but also about prioritizing and optimizing your finances for your future.

  • Evaluate your current situation and spending habits.
    • Keep track of your expenses for a few months.  This will give you a clear picture of where your money is going and highlight areas where there is potential for savings.
  • Act like a business and cut any unnecessary expenses.
  • Explore ways to reduce costs (consider cheaper healthcare options, like generic medications, etc.)
  • Reduce debt/downsize home - If you're living in a large house that's costly to maintain, moving to a smaller home or apartment can drastically cut your costs. If you have a spare room, consider renting it out for additional income.
  • Do no harm – no loans from retirement plans! 

Step 8: Review existing investments and adjust asset allocation accordingly.

An effective investment strategy carefully allocates across asset classes with the goal of maximizing return for a given level of risk.

  • Align your retirement funds.
    • Aligning retirement funds based on how those assets will be used during retirement helps to ensure a higher degree of confidence throughout your retirement years.
    • Put simply, you want to aim to shift your portfolio to become more income-oriented near and during retirement, especially in terms of the portion of your portfolio that will fund your monthly income needs.
    • To learn more about structuring a portfolio in retirement using the Bucket Strategy, read here.
  • Prior to retiring, it is important to review any existing investments and make sure they are still aligned with your long-term goals and objectives.
    • This is also an opportunity to review the asset allocation across all of your accounts and make any necessary adjustments to poise your investments for your retirement years. 
    • Rebalancing your investment portfolio involves realigning or reallocating the assets within an investment portfolio to ensure the desired allocation is maintained amid market movements.
    • This process helps ensure your portfolio accurately reflects your risk profile and your desired asset allocation by buying and selling assets to safeguard your portfolio from being exposed to undesirable risk.
    • The goal is to make sure the risk exposure in your portfolio remains at your desired level to meet the intentions and goals for your account(s).
    • For example, if your account is primarily intended for retirement savings and you know you will not be tapping into those funds until years down the road, you will most likely want to maintain a higher level of riskier investments in your portfolio to increase the potential for a higher return over the long term.
    • If market behavior throws your allocation off and you are left with less risk than you are aiming for, you may miss out on potential returns unless you rebalance to bring your risk exposure back up to your target level.  

Step 9: Create an estate plan.

Creating an estate plan can be a complex process, but it is essential for ensuring that your assets are distributed according to your wishes after death while avoiding costly probate court proceedings. Here are the steps you should take to create an effective estate plan:
  • Make a list of all of your assets and liabilities. It is important to include any debts or liabilities to get a complete picture of your financial situation. This includes the following: 
    • bank accounts
    • property
    • stocks, bonds
    • life insurance policies
    • retirement plans
    • any other investments 
  • Choose an executor: An executor will be responsible for carrying out the instructions in your will and handling any other related tasks after you pass away.
    • It is important to choose someone who is competent and trustworthy.
    • You can also appoint alternate executors in case the primary executor cannot fulfill their duties for any reason.
  • Decide how you would like your assets distributed: You should document who you would like to receive each asset upon death.
    • This includes family members or other beneficiaries who will benefit from the distribution of these assets.
    • Be sure to include specific instructions on how these assets should be distributed, such as what percentage should go to each beneficiary or if they should receive any specific item(s).
  • Prepare any necessary legal documents: Depending on the complexity of your estate plan, this may involve creating a living trust or using other legal documents such as wills or powers of attorney agreements that outline how certain decisions should be made upon disability or incapacity due to serious illness or injury.
  • Communicate with those named in your estate plan: It is important that everyone named in your estate plan (including family members, legal representatives, and trustees) understands their responsibilities after death for the distribution process to run smoothly without delay or dispute.
  • Make sure someone knows where all relevant documents are stored: Regularly review the details with them, so there are no surprises down the line when it comes time for the distribution of assets.

Step 10: Research healthcare options, including Medicare.

Learn which healthcare options are available to you during retirement, so that you can choose the best one based on cost, coverage, care, and other factors that matter most to you and your family’s needs.

Step 11: Plan for long-term care. 

An often overlooked, but critical part of retirement planning, is long-term care insurance. This type of coverage helps to bear the costs of care facilities or at-home assistance, which can be exorbitantly high, and are typically not covered by traditional health insurance or Medicare.

  • To obtain long-term care insurance, start by assessing your individual needs and financial situation. Considering the factors listed below will help you estimate the age at which you might need this coverage and the duration of coverage required.
    • Your current age
    • Health status
    • Family medical history
  • Research various insurance providers and understand the offerings. Each company will have different policies, coverage options and premium rates. Look into the policy's benefits, any exclusions, limitations, and the maximum amount that the policy will pay for your daily or monthly care.
  • Before finalizing, make sure to compare quotes from multiple providers. You can either do this by contacting the companies directly or by using online comparison tools. Always check the financial stability of the company, as you want to ensure it will be able to meet its financial commitments when needed.
  • Engage with a dedicated insurance agent or a financial advisor. Such an individual can provide valuable insights and guidance in understanding the nuances of each policy, help you navigate the process, and ensure the plan aligns with your overall retirement strategy.
  • Remember, long-term care insurance is an investment in your future well-being. Proper diligence and planning now will secure your comfort and peace of mind during your retirement years.

Step 12: Stay healthy and active.

Investing in your health is an important part of retirement planning. Taking the time to properly care for your physical and mental wellbeing now can significantly improve your quality of life during the retirement years.

  • Exercise regularly, establish healthy eating habits, and find healthy ways to manage stress.
    • Exercise helps to keep our bodies strong and agile, while a balanced diet supports our immune system and decreases the risk of chronic disease.
    • Stress management is also essential, as it can help us to stay focused and productive in the present while preparing for a secure future.
  • Establish healthy habits now, which can help reduce potential medical bills in retirement.
    • While traditional health insurance and Medicare may cover some costs, these do not always provide coverage for advanced treatments or long-term care.
    • It is important to factor these costs into retirement planning, and investing in preventive care now can reduce the need for more costly treatments later.

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