Figuring out how and when you’ll retire from your business can be, well, tricky business. What financial factors do you need to consider? How do you create a retirement plan? What do all the terms mean? Here are six important steps you should take now to plan and account for your future:
1. Figure out when you can retire.
One important factor in figuring out when you can retire is anticipating your retirement income and how much you’re likely to spend each year. Most financial advisors suggest planning to spend 75-85 percent of your current, pre-retirement income, since you will be likely spending less overall after retirement. However, if you are likely to have any higher-than-average expenses, such as college tuition, large healthcare bills, or significant debt, you may need to plan on spending more.
Keep in mind that you will mostly be spending from your savings, although Social Security will provide some additional income.
Once you figure out when you will have enough savings to retire, factoring in how much you should plan on spending each year, you can set a goal age for retirement.
2. Maximize your savings.
After the age of 50, you’ll be eligible to make catch-up contributions to employer-sponsored retirement plans, such as a 401k and 403b, and IRAs, meaning you can contribute a greater percentage of your paycheck to retirement savings than you would have previously.
You’ll want to keep track of all your investments and consider your asset mix as well. You may want to move money into different investments as you near retirement, since plans and life circumstances can change. Also, consider which accounts will be subject to taxes after retirement. If you convert some of your retire savings into a Roth IRA, for instance, it won’t be subject to taxes after retirement.
3. Pay off your debt.
Pay off any debts you’ve accrued now, when you’re still earning income, rather than waiting until after retirement. This may mean working a bit longer than you might expect or like. But it’s preferable to do it before you retire, so you don’t have to worry about factoring in debt to your list of expenses when your earnings are significantly lower. Plus, you’ll be able to spend your savings and Social Security earnings on other expenses.
When mortgage interest rates are low, it may be a better idea to put your potential payments into a retirement savings account and let it grow. If you take money out of your 401k or IRA before you’re 59 1/2, you’ll be subject to penalties and income tax, so try to avoid doing so until after that point. If your rate of return is higher than your mortgage interest rate, you may want to allow the money in your accounts to grow rather than withdrawing funds immediately.
Student debt, whether for yourself or your children, can have a serious impact on your income and savings. As with mortgage, it’s a bad idea to withdraw from your 401k or IRA if you’re under the age of 59 ½.
Many people decide to take out loans to pay off student debt. If you take out loans, make sure you pay them off before retirement. If your current interest rate is higher than your expected return rate for retirement investments, using your income to pay off loans is probably your best bet.
4. Plan for healthcare costs.
Healthcare is an important factor in retirement planning.
At age 65, you’ll be eligible for Medicare. You’ll need to apply three months before your 65th birthday to enroll, but you’ll be automatically enrolled if you’re already collecting Social Security.
Medicare covers basic healthcare, such as hospital stays, doctor visits, and prescriptions, but it doesn’t cover everything. Many people elect to have supplemental insurance to cover the costs of services that are excluded from Medicare coverage. You may also want to consider buying a long-term care plan, since you never know what could happen down the road. If you need serious, long-term care, Medicare probably won’t cover much of it, so buying a plan now could help out your family in the long run.
If you retire before the age of 65, you will need to arrange another means of health insurance. You may be able to arrange a continued coverage through your employer or your spouse's employer, or you can buy it directly from an insurance company.
5. Create an emergency fund.
You can’t plan for everything. That’s why it’s important to have an emergency fund.
Save three to six months-worth of living expenses, or pick a fixed dollar amount to set aside in an emergency fund, preferably in an interest-bearing account. Don’t touch this money unless an emergency arises.
6. Estimate your Social Security.
The amount of Social Security you’ll earn after retirement depends on how much you paid in Social Security taxes for the years you worked and your total number of working years. The longer you wait to take your Social Security, the more money you’ll earn each month past retirement.
Most people are eligible for Social Security payments starting at age 62. However, you’ll be subject to deductions of about six percent per year if you start collecting Social Security before your full retirement age. Full retirement age varies based on when you were born. If you were born between 1943–1954, your FRA is 66. If you were born 1960 or later, your FRA is 67. The age rises two months per year between 1955–1959 (e.g. 1955 is 66 and two months, and 1957 is 66 and six months).
Factor in your longevity risk, marital status, and how long you anticipate living to determine when you should start collecting Social Security. Of course, it can be hard to predict your life expectancy. Keep in mind that you must start collecting Social Security benefits by the age of 70. Ultimately, the longer you wait, the more you’ll end up earning in the long run, assuming you livve long enough to see the benefits. Since someone who starts collecting at age 62 will have smaller monthly payments than someone who waits longer, she will reach a tipping point at some point in her 70s when someone who waited until 70 to collect her benefits will catch up and exceed her net payments.
The United States government provides a Social Security calculator to help you estimate your earnings. Keep in mind that this calculator provides just an estimate, and that your actual rate may vary based on personal factors, such as life expectancy.