Retirement planning doesn’t happen on its own

Retirement these days is vastly different than when your parents retired. You can’t just work your career and rely on a built-in security blanket of a pension. Retirement planning doesn’t happen on its own; you need to start planning as soon as possible. Even if you are retired now, you still need to get a sense of what your retirement will cost down the road.

 

Estimate future expenses

The first step of retirement planning is estimating what your future expenses and needs will be. Although there are many unknown factors with retirement, there are approaches you can take to build in some margin. When estimating your future retirement expenses, factor in potential situation changes and house updates such as roof repairs and potential health care increases. With the constant changes in the United States healthcare system, it is challenging to predict your healthcare costs over a lifetime. To accommodate these changes, experts suggest that you factor in at least a 25% increase in healthcare costs than you are paying now. It is also essential to factor in inflation. When dealing with longevity calculations, inflation is a critical element. The average inflation rate over the last 20 years was 3.22%. At that rate, prices could potentially double in the next 20 years.

Based on your estimate, you can get a rough idea if you have enough to retire without running out of money. It’s impossible to determine how long you are going to live. Still, the government created an actuarial life table that provides an estimate of how long you’ll be alive paying taxes and collecting Social Security. This approach will also help you determine when you can retire.

 

Retirement income

If you are lucky enough to have a pension, then your retirement plan is probably in great shape, however very few employers offer pensions, so don’t feel left out if you don’t have one. Most baby boomers will rely on Social Security to fund at least a portion of their retirement funding. The amount you receive each month from Social Security depends on your age when you start receiving payments. You can begin receiving payments at age 62, but the monthly payments increase by 8% for each you delay claiming benefits up to age 67 (considered the full retirement age). The take-away point here is that if you can afford to wait, you should delay payments.

 

Investments

Many baby boomers have investments to draw from in retirement such as stocks, bonds, and 401(k) accounts. It’s important to remember that market volatility can significantly increase the risk of running out of money in retirement if the market is down for any period of time at the beginning of your retirement. Using home equity during times of economic downturn can help mitigate these sequence of return risks in retirement.

 

Income gap management

Once you calculated your estimated living expenses and compared those against your anticipated retirement income, you will have a good idea if you have a healthy retirement plan or not. If you have a gap between your retirement income and your expected retirement expenses, you have a few options; lower expenses or delay retirement to earn more money.

Consider downsizing your living situation to a smaller house or even renting. The equity that is tied up in your home can translate into significant income. If you downsize to a smaller house, the excess revenue from moving to a smaller house can have a significant impact on your retirement plan.

 

Make your retirement plan work

When it comes to retirement, it is impossible to predict all of your future expenses, but with some careful planning, you can set yourself up with the best chance possible. Start making moves today and take action to create a successful retirement plan.

This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.