Who will you be when you retire? Retirement is about having control of your time. Maybe retirement means earning money doing something you love, at a pace that is comfortable for you. Maybe it is helping a charitable organization or volunteering your time for activities you care about. Spending time with family and friends and sprinkling in some travel appeals to many. Whatever you aspire to be in the next phase of life, a sound financial plan for getting there will help ensure your ability to choose. There are some key pieces of the puzzle that will help ensure retirement success. The earlier you start building a retirement nest egg the easier it will be.
I have identified five primary preparation stages for planning. In the last newsletter we looked at preparing for retirement in the “Busy Stage” of your adult life. In this stage, it is important to decrease debt, take advantage of deferred tax retirement savings plans, review college funding and insurance needs.
This quarter, we are addressing the “Pre-Retirement Stage.”
Pre-Retirement Stage
The “Pre-Retirement Stage” is when we are planning for retirement within the next 5-10 years. There is no set age for each stage of planning. Everyone is different, and each stage will come in its own time.
Debt. Minimizing debt needs to be a top priority. The goal at this stage is to eliminate all debt, including your home mortgage. Without major monthly cash commitments, social security or pension payments can go a long way to support your retirement needs.
- Home Mortgage. With relatively low interest rates, mortgage debt is a solid investment in your future. As retirement approaches, however, this is likely your largest monthly cash commitment. Eliminating this outlay will significantly improve cash flow in retirement.
- Car. By eliminating auto debt, another large monthly cash commitment can be laid to rest.
Saving. Savings is vital in this stage.
- Emergency Fund. At this stage an emergency fund should be a habit. A stable savings account to help weather any storms or take care of unexpected expenses should always be available.
- Tax- Deferred Savings. In addition to maximizing the match at your employer, seek to invest the maximum allowed in your pre-tax retirement accounts such as Roth and non-Roth IRA accounts and employer retirement plans. For traditional 401(k) and 401(a) accounts, the maximum is $18,000 for 2015-2017. If you are over 50 years old, additional funds may be saved in both a 401(k) and IRA accounts. Take advantage of this additional opportunity to save in tax-deferred investments.
- Taxable Investment Accounts. As a diversified investment option to retirement plans, a taxable investment account can offer flexibility, accessibility and opportunity. When planning for income in retirement it is important to remember that any non-Roth deferred tax account distributions will be taxed at the income tax rate. Distributions from taxable accounts are currently subject to lower rate capital gains taxes on any earnings.
Insurance. With a family, insurance is a vital piece of financial security.
- Life Insurance. Supporting a spouse and children in the event of an unexpected tragedy is important. As children grow self-supportive, life insurance may be a lower concern. A low-cost term life policy can often meet the needs of your family. Try to avoid higher cost insurance investment vehicles. Consult with an insurance representative regarding the best options.
- Long-Term Care and Health Insurance. Research insurance options depending on your age.
Estate Planning. Estate planning should be considered prior to the pre-retirement stage. At this stage it is vital. Meeting with an estate planning attorney to make sure your affairs are in order is an important way to take the burden off your loved ones. A good estate plan will take care of financial considerations as well as put health care directives in order.
Schenkelberg Investments is here to help you put the pieces together. Please call or email to discuss options (402)658-2152, jj@schenkelberg.investments.