Money Management

The future is a murky place. No crystal ball has yet been invented that will tell you exactly what financial realities you will face in retirement. Today’s Millennials, GenX-ers and Baby Boomers are all approaching the zero hour with lots of questions. So many variables! Marriage, babies, divorce, bills, bonuses, job changes and the country’s shifting economy all play into the equation.

Without offering a rigid, one-size-fits-all solution, here are some ideas that you might consider as you contemplate the end of your working years:

Those in their 20s and 30s are at the entry end of careers, often straddled with student debt, credit card debt and high living expenses. Nevertheless, now is the time to start thinking about retirement savings. It comes faster than you’d suppose.

Consider saving 15 percent of your pre-tax income. Sounds like a lot. But that is the figure experts in the field say is necessary to have a health retirement.
Take advantage of ”free money” such as employer-sponsored 401k programs, which often offer a matching contribution to expand the benefit. If that seems too high a goal now, put whatever you can into a work-sponsored savings option or into personal savings. Look into profit sharing options if your employer takes this approach to helping employees to a healthy retirement. If you have to start small, plan to add a percentage to your savings each year until you reach the 15 percent goal.

Plan and budget conscientiously, not haphazardly. Keep your must-have expenses at a level not more than 50 percent of your take-home pay. Some items, such as housing, food, health care, transportation, child care and debt, can’t be avoided, but they may be flexible. Study your own circumstances and determine if there are places to cut, even if it means a little temporary sacrifice to make it work. Turn down the thermostat in winter, up in the summer, to save on heating and cooling. Buy groceries and clothing when they are on sale and brown -bag it to work. Minimize eating out.

Try to have three to six months of essential expenses in a savings account in case of an extended emergency. Think of a contribution to this fund as a monthly expense, not separate from other “musts.” After you have this three-to-six-month cushion, save for short-term expenses that pop up unexpectedly. Consider having these savings taken from your paycheck and deposited in separate accounts automatically.

Especially if retirement is some decades in the future, it gives you time to ride out the inevitable rises and falls in the stock market. Stocks have traditionally produced higher long-term returns than bonds and cash, despite the volatility.

Keeping a balance between accounts where retirement withdrawals are taxable and those where withdrawals in retirement are taxable and those where withdrawals are tax free can help manages taxes when you are living on that retirement income.

An annuity is one way to create a simple and dependable income stream that is guaranteed for as long as you or your spouse lives.

Since Social Security may be a significant factor in your retirement, make the most of the government’s program. The longer you wait to take out Social Security, the higher your monthly benefit will be. For instance, in a very simple example, a person retiring at 62 may receive $1,200 per month, while one who waits until age 66 to retire will receive $1,600. If you wait until age 70 in this scenario, the monthly benefit will be $2,112 per month. The average life expectancy for a woman now is 89 years.

Married couples should look at a number of options that would maximize their retirement income through Social Security. Divorced persons also may be able to claim a former partner’s benefit, if it is larger than their own.

Although there are many variables in trying to determine how much you need to have to live on after retirement, there is a general sense that between 55 percent and 80 percent of the amount that you earned is necessary. While some expenses you have routinely paid while working, such as savings, taxes and insurance, you may find that out-balanced by new expenses such as health care, travel and new insurances.

If you are coming close to retirement, make a detailed budget to see how your money will need to be re-directed. Check your expected expenses against all potential sources of income. Personal finance experts advise that you plan to withdraw not more than 4 percent to 5 percent of your retirement assets per year, adjusted for inflation.

It is essential to have an estate plan with clear directions about who is to inherit your estate when you die. Planning goes beyond a will. You may need expert advice to help you plan distribution in a way that will help your heirs to pay less in taxes, fees and potential legal expenses.

When retirement is a considerable way down the road, it is easy to minimize the importance of budgeting and saving and chafing to have to part with money you could spend making life better in the here and now. But thousands of elderly Americans who are now scratching their way through retirement will tell you that it is worth it.