Retirement Advice I Would Give the Twenty Year Old Me

If I only knew then what I know now. Way back when I was 20 thoughts of retirement never crossed my mind. There were plenty other distractions. I could not even imagine being retirement age. But funny thing – here I am.

I have learned a thing or two over the years whether through my personal experience or those of friends and family. If I could share with the 20-year-old-Dave any words of wisdom to prepare for the road ahead, it would go something like this:

Prepare for the non-financial side of retirement

Everyone knows it is critical to save enough to subsidize the retirement lifestyle you hope to live. But too few consider the importance of preparing beyond finances. What will you do to find meaning in your day? Who will you become once you are no longer defined by the person you were on the job? How does your spouse envision retirement? It is too easy to waltz into retirement without preparing for the coming 10 or 20 or more years ahead. Without genuine preparation you risk boredom and dissatisfaction during a time of life that should be anything but.

Hands off retirement savings accounts

Over my 30 year career I moved from job to job quite a bit. One consequence was repeatedly facing the option to cash out 401k accounts. In most cases the temptation proved too great. Too often I withdrew the funds, paid the 10% additional tax fine and had money to do as I wanted. The only good thing is I did not use the money to splurge but rather to pay off bills that had accumulated. Still I sacrificed potential growth over multiple years that could have added to my ultimate retirement nest egg. “Leave it alone and let I grow” would be my suggestion to the younger me.

Don’t count on staying at the same company

In my career as a sales manager focused on start-up companies there was not much latitude when it came to hitting target goals. If quota was not achieved, no matter how unreasonable or inflated the number, your job was on the line. I had a pretty good batting average over all but there were times when missing a quarterly target cost my job.

Message to younger self: be prepared to work at many different companies over your working years. The days of spending an entire career at one place are gone.

Understand the financial realities of retirement

Retirement will not be cheap. According to Fidelity healthcare costs for the average couple retiring in 2016 will ring in at $260,000. Healthcare insurance rates are sky rocketing with double digit yearly increases becoming the accepted norm. Everything is getting more expensive while your income remains fixed.

No one knows what unplanned health event their future may hold. My parents experienced this recently when my dad had a stroke. Initial hospital charges were huge and the bills keep coming. Thankfully they have a Medigap plan which helps pay healthcare costs not covered by Medicare including co-payments and deductibles.

In retirement you want to do those things you have dreamed of. Realizing those dreams will generally not be cheap either. When budgeting don’t forget to account for those things you have been waiting all your life to do.

Note to 20-year-self: put those dollars aside now so you can do all you dream of when you finally have the time to do it.

Getting retirement right takes practice

Since this will be our first time at it, none of us has any real experience being retired. It is possible you may not get everything exactly right from the get go. Be prepared to be dynamic, to go with the flow. Make changes where necessary, try new things, and don’t be too hard on yourself. There is no deadline to get everything right. So long as you continue to learn as you go you are making progress.

Keep exercising

When I was around twenty I began a life-long commitment to good health setting aside time for regular exercise and attempting to eat a decent diet. I would remind the younger me that good habits now will continue to be good habits later in life. Exercise is an important part of any happy retirement. Keep weight training for muscle and bone strength. Continue yoga and stretching for balance and flexibility. Get some cardio to keep the heart healthy. And don’t neglect exercise for your brain one very important “muscle” to keep in shape. The retirement journey will be that much more enjoyable when you are healthy in mind and body.

It might have been helpful to hear these words of wisdom when I was younger. But I cannot complain. I am retired with my wonderful wife in a beautiful part of the world. We are healthy and happy. And I just started a part time job pouring wine at a wonderful little winery walking distance from where we live. All in all, retirement has turned out a-okay for us.

LoveBeingRetired.com

Tax Tips in Retirement

Written by Sally Perkins

Many retirees may assume that they don’t have to pay as much income taxes since they don’t work. Though a single or married retiree may be in a lower tax bracket, certain retirement vehicles are still taxable. In fact, you may have to pay taxes on social security if you are in higher tax bracket. But if you plan ahead and learn the tricks of how to manage your taxes, you can be prepared for that dream trip to Europe or the extra indulgence you’ve been hoping for. So when tax planning year to year, consider the following:

Manage Your Expenses

It has been said before, but managing your expenses is a key element to a successful financial retirement. If you can keep your adjusted gross income below $37,500 in 2017 your tax burden will only be 15%. So try your best to avoid a higher tax bracket when you are withdrawing from any of your savings accounts, IRAs, 401(k)s, etc. Follow a budget, a retirement income strategy, and how you are going to pay for potential healthcare costs.

If you are considering retiring, try to have your house paid off as you can then avoid using retirement money for this expense.

Life Insurance Legacy

If you want to leave a legacy or if your dependents may have debts to pay on your estate, consider a life insurance policy. The death benefits and payout are not taxable. However, if you borrow against the policy you may be subject to taxes.

Withdrawal Strategy

Some retirement income is taxable. As mentioned earlier, social security is taxable if you are in a higher tax bracket. But, for example, if you are withdrawing money from a Roth IRA it isn’t taxable if you contributed the money over 5 years ago. The general advice given by many financial planners is to withdraw money from your retirement income in the following steps:

  • Taxable accounts, like investments
  • Tax deferred accounts, traditional 401 (k)
  • Tax exempt accounts, Roth IRA

The idea behind this tiered strategy is 401(k)s and Roth IRAs can continue to grow without any tax penalties. In your investment accounts there is no tax shelter, so you might as well use investment money first. Then, if you are going to have a year where your expenses are going to increase, use the tax exempt money so you won’t have to pay income tax on the withdrawal.

This is an important concept and may be worth talking to a financial planner about.

Annuities

Annuities have a tax benefit as well. Annuities are an insurance product where the individual purchases an investment and the price paid is converted into periodic payments to the retiree. There is a lot of flexibility on how often you get paid (monthly, quarterly, annually), when payments start to occur, how long you want the payments for, etc. Setting up a payment plan can take out some of the guess work.

If you have to cash out the annuity because of an emergency, you will have to pay income taxes on all earnings. But if you hold onto the annuity and paid for it with pretax money, then the payments will be taxable. If you use after tax income to buy the annuity, then you will only be taxed on the earnings.

Deductions

Of course all taxpayers want deductions! Individuals over 65 used to be able to itemize for medical expenses that were over 10% of their adjusted gross income, but that changed in 2017 to 7.5%. Keep this in mind when it comes to tax time, but stay organized and track your medical payments as you never know when your medical expenses will be high. Medical expenses include health and long term care premiums, dental care, prescriptions drugs and other health care expenses.

Another deduction that some people miss is dividends from investment income which are taxed lower than regular income, and you can still invest as a retiree. If you still run a business, even part time, your business expenses are deductions. Downsizing houses can be attractive and if you sell your home and you’ve lived in your home at least two of the five years before you sell the property, the equity won’t be taxed.

And if you are considering selling and moving…

Tax Free States

Florida may be infamous for having many retirees, and for good reason, there is no state income tax. There is also no state income tax in Nevada and Texas. The weather is warm in all three! So though there may be an expense to moving, you could recoup that by saving on taxes. If you are considering moving to warmer climates, look into these states and research the cost of living.

Finally, with a little strategic planning, you won’t be giving all your hard earned retirement income to the IRS. Have a budget, try not to have a mortgage, plan how you are going to withdraw income, look at different income vehicles, and consider your tax deductions. It will be worth the time investment to carefully plan your income streams.

Grow Wealthier During Retirement

Written by Jeremy Biberdorf

Most people think of retirement as a time to live as simply as possible with the hope savings accumulated through life won’t run out before the end of your life. While this is the reality that many older adults deal with, it’s not absolutely necessary. In fact, it’s possible to grow wealthier during retirement. It may require some reallocation of assets, but if you’ve prepared for retirement, it may surprise you to know that your wealth can actually grow as you go.

1)    Eliminate Inefficiencies. It’s important not to waste money. Take a careful look at your life and make those difficult changes. If you have poor credit, you’ll pay much more for loans for the rest of your life. Choose OneMain personal loans to see some practical examples. If you are currently renting, consider buying a home. This will build personal equity, another leverage point for future borrowing. Restrict monthly spending as much as possible. If you don’t need it, don’t buy it. And if you feel you must have it do without something else as a tradeoff.

2)    Focus on Enrichment. Retirement is a time to live gently. Fortunately, gentle living is not terribly expensive. Spend time exercising, meditating, reading, taking classes, and hanging out with the people who mean the most to you. Not only will filling your days with healthy activities like these preserve your wealth, it will make you healthier so that you enjoy your retirement more.

3)    Increase Saving. No matter what age you are, you should be saving as much as possible, at least if you hope for a retirement that’s free of financial anxiety. Your savings will be the basis of future security. Even if you are well on your way to a comfortable retirement, saving is an integral skill to keep active. If you are able to work part time, through a job or a profitable hobby, you can continue to add to your savings.

Now we come to the investment portion. Once you’ve controlled spending and increased your savings, you want to allocate your financial resources in a way that will build wealth without requiring too much in the way of active management. Here are some ways to do that.

1)    The 4% Rule of Investment. Let’s say you have $1,000,000 invested in index funds through Vanguard. Investments like these grow, on average, about 8-10% per year. Retirees who withdraw 4% of their investment balance every year ($40,000 in this case) still see their investments gaining value, at a faster rate than money is being withdrawn. This is an incredible way to gradually accumulate greater wealth during retirement, even as you’re living off of the investment balance. The less you take out to live on, the larger balance you have gaining value.

2)    Real Estate and Other Passive Income. Some people build wealth through ownership of property, companies, and more. If you have a property that yields a positive cash flow through renters or other forms of tenant, you can live off of this income or use it to increase your wealth. Once you’ve paid off the property which, by the time you retire, may have already happened, you’ll enjoy that entire monthly rental balance in your pocket less the on-going costs to maintain the property.

3)    Make Sure You Know About All Assets. By the time you retire, you will likely have worked a number of jobs, lived in many houses, and had an incredible variety of experiences. In this time, you may have received inheritances, retirement accounts from work/pensions, property, and other assets. It is important to make sure you know what you own, and to have it allocated in the way that best provides ongoing security. By knowing exactly what you have you can better maximize your returns. Get rid of low performers and build an efficient portfolio of quality investments.

Retirement doesn’t have to be a time spent watching your resources move inexorably to zero. You may be able to create a situation in which you money grows significantly, even when you no longer have direct income from your career. This takes time, hard work, and making the best of your opportunities prior to retirement, but if you are able to hit these targets you’ll have a prosperous retirement with a large estate.