It goes without saying that envisioning an ideal retirement is still a big part of the American dream. When you define what an “ideal retirement” is, many people would say that it involves good health and the companionship of a spouse or loved one; the elimination of financial debt obligations like a mortgage, car payments or college tuition; And most importantly: the peace of mind in knowing that you have effectively planned not to run out of money in retirement.
With those ideas in mind, CNN/Money and the Motley Fool recently compiled a list of the 5 financial steps you should take before you retire.
1. Make a Social Security plan
It’s important to know how much you’re going to get each month from Social Security, and with a “My Social Security” account or a paper copy of your statement, you can get a great estimate of that number. Your specific benefit will be based on your (or your spouse’s) earnings history and the age at which you start collecting. Key things to consider when it comes to Social Security are that you can start collecting at any age between 62 and 70, and the longer you wait in that window, the higher your monthly benefit will be. In addition, know that you’ll likely face a penalty if you’re still working and start collecting benefits before your full retirement age.
2. Get on top of the coming changes to your health insurance
If you’re 65 or older, you’ll likely qualify for Medicare. If you’re retiring under age 65, your employer may offer you a chance to stay on its plan as a retiree in good standing. If it doesn’t, you might still be able to stay on the company plan for 18 months through COBRA benefits. Beyond those options, you qualify for guaranteed-issue health insurance through the Obamacare program, and may receive a subsidy for it, depending on your income level.
3. Adjust your budget to fit your new circumstances
While your healthcare costs are likely to rise in retirement, many of your other expenses will fall, notably those associated with working. In addition, if your kids are grown and independent, and your mortgage is paid off, your regular outlays will be significantly lower than they once were. Particularly since your income will likely drop in retirement too, and a portion of your cash will come from spending down your assets, it’s incredibly important to keep your spending rate sustainable.
4. Put together a savings structure for your near-term needs
While stocks are a great way to build wealth, once you start relying on your portfolio to cover your costs of living, the volatility of stocks makes them unreliable as a source of spending money. Indeed, money you need to spend within the next five or so years does not belong in stocks, though even as a retiree, you’ll likely have longer-term financial goals where stocks can still play a role. Make sure you have plenty of cash to meet your current needs over the next few months to a year.
5. Think about the legacy you want to leave behind
If you’re following the 4% rule of retirement withdrawals, chances are good (though there are no guarantees) that you’ll leave some assets behind once your retirement draws to a close. These can be used to help your children, their children and/or charitable endeavors of your choice. If you plan well, you may even be able to make choices that mean you’ll be around to see them benefit from your generosity. Consider things like lifetime gifts to your children. You and your spouse can each give up to $14,000 to each of your children and their spouses each year with no gift tax consequences. That allows for a maximum transfer of $56,000 from one married couple to another, each year. Additionally, there are no limits on money you send to eligible education institutions for tuition or health care providers for qualified medical care for others. If you exceed the annual limits, you can take a credit against your lifetime exemption ($5.49 million for singles, $10.98 million for married couples) and still not pay a gift tax. If you choose to support a charity, a charitable remainder trust is a tool that can help you get funds to it while you’re still alive. With that setup, you will still receive an income stream from that donated money to help cover your costs. In many respects, it’s a win-win: You get to see the benefits of your goodwill, but you still get the income from your assets. And of course, you can always leave a portion of your estate to a charity of your choice in your will.
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