It's never too early to start preparing for an exciting yet relaxing future. Here are five things to consider as you begin planning ahead.
1. What does retirement mean to me? Retirement is a time in life that many look forward to because you get to spend your days:
- Relaxing with family and friends!
- Enjoying personal hobbies and traveling!
- Participating in community activities!
- Dedicating time to mentoring or helping others!
But remember that retirement also comes along with a few important financial responsibilities, such as:
- Establishing a retirement-spending plan
- Paying for health-care costs and planning for potential long-term care needs
- Prudently managing your investments
- Managing retirement account distributions and taxes
- Ensuring your income lasts through your lifetime (and your spouse's or partner's, if applicable)
2. How much will I spend in retirement? Start with a rule of thumb - you'll spend about 80% of your final year's salary each year during retirement. You might spend more or less depending on your circumstances.
Next, build a customized spending plan based on your actual expenses. Consider using the
Cash Flow Statement to help you create that plan.
A potentially significant expense in retirement is taxes, including pension income, Social Security benefits, withdrawals, investments in taxable accounts, as well as state income, property, and sales taxes.
Finally, consider inflation. For example, even at an inflation rate of 3%, prices in general will double in about 24 years.
3. What do I need to know about Social Security? Benefits costs matter because of the potential to limit or increase your lifetime income. Although you're eligible to receive reduced benefits at age 62, it might be better for you to delay your benefits until your full retirement age (age 66 or 67 based on your year of birth) or until you reach age 70 to receive higher amounts.
4. Will my savings be enough? Once you've calculated your pension and/or Social Security benefits, compare them to your expected or actual spending in retirement. Use the worksheet at
www.icmarc.org/incomegap to determine if there could be a gap between this income and your estimated expenses. Filling the gap is where your 457(b) Deferred Compensation Plan and other savings come in.
In evaluating the gap, consider:
- How long you might live. Half of individuals will live longer than their life expectancy.
- Inflation will increase your living expenses over time.
- Rates of return on your investments will vary year to year and could be subpar for a sustained period of time.
If your retirement savings are unlikely to be enough, consider: delaying retirement, part-time employment, or reducing your planned spending in retirement.
5. How should I manage my withdrawals and taxes? A smart withdrawal strategy takes into account how different retirement accounts (if you have more than one) will be taxed:
- Withdrawals from tax-deferred 457(b) plans are generally taxed as ordinary income.
- Withdrawals from taxable, non-retirement accounts might be taxed at lower capital-gains rates.
Also consider tax rules that might apply, depending on your age and circumstances:
