10 Ways to Prepare for Retirement
Posted on September 22, 2023
Most people look forward to retiring someday. If that’s you, then putting a retirement plan in place now will help ensure your financial freedom. At The Sanibel Captiva Trust Company, we would like to share our team’s cumulative years of knowledge and experience on how best to prepare for retirement – whether now or in the future.
- Saving and Cash Flow
It doesn’t matter how much you make. It matters how much you spend!
Our clients became the successful people they are by understanding their cash flow. That means they know how much money they need each month to pay their necessary bills, as well as how much they can sensibly spend on the extras, like dining out, travel, a country club membership, a boat, etc. And if buying the “extras” means putting it on a credit card that you cannot pay off at the end of each month or within a few months, it may be best to put that purchase off until it makes sense. Carrying credit card balances with high compounding interest rates are difficult to pay off and quickly depletes cash flow. Self-discipline is the key to saving for a comfortable future.
- Know Your Future Financial Needs
Most people believe they will spend less in retirement, so in order to maintain your pre-retirement lifestyle, estimate between 70% to 90% of your pre-retirement annual income. However, those first few years can be exciting and filled with all the fun things you have been wanting to do, and that costs money. That’s okay. You’ve earned it. Just be prepared to spend a bit more during that time frame. Also, while you are still working, create an emergency fund to have now and in retirement. This way, if you have an unexpected expense, it will not keep you from continuing to invest today or negatively affect your income during retirement.
- Eliminate Debt and Simplify
Eliminate as much of your debt as possible as you get closer to retirement so that more of your income can go toward your living expenses and lifestyle. Pay off the car, the house, credit cards and the boat. It may be the right time to sell the family vacation home now that the kids are grown and have children with busy lives of their own. Downsizing from your primary home can reduce expenses tremendously and allow you to invest that extra cash. Finally, decluttering and selling or donating the unnecessary items you’ve accumulated over the years may put a little money in your wallet and bring a fresh start to this new period of your life.
- Basic Investment Principles
Not all investment options are the same, so know how your money is being invested. Decide how aggressive or conservative you want to be with your investments, also called “risk tolerance” and diversify your assets to weather the ups and downs of the market over the long-term. Long-term investing is the key rather than trying to time the market at its highs and lows. The asset allocation or types of investments, such as equities (stocks) vs. fixed income (corporate and government bonds) may shift as you get closer to retirement. Early on you may be more heavily invested in equities for growth opportunities and later, fixed income investments may become more important to mitigate risk to your savings, while generating interest and dividends which provides income in retirement.
- Employer’s Retirement Plan
Find out the specifics about your employer’s retirement plan, such as a 401(k) and invest in it as early as possible. Contribute whatever you can until you reach the maximum amount permitted because these funds come directly out of your paycheck before taxes. That means you are not paying taxes on that income this year. It is tax-deferred until you retire and begin drawing money from your retirement account. The long-standing premise is that the compound interest of this long-term investment will allow your contributions to grow faster the longer your money is in there. Many employers also match up to a certain percentage of your contribution each year as a benefit from the company to enhance your retirement plan. No matter when you start, it’s never too late!
- Employer’s Pension Plan
If you work at a company with a pension plan, you are fortunate, since pension plans are rare today. Be sure to ask about the specific benefits of the plan. What do you have to do to participate? What are your benefits? When are you vested and what does this mean? Employers usually require that you work at the company for a certain number of years to keep your pension plan for your lifetime. How is your plan affected if you leave the company for another job? Is your spouse covered under the plan? How will benefits from previous employment affect this plan? Can you have a pension plan and a retirement plan? YES.
- Invest in an Individual Retirement Account
If you are under the age of 50 you can contribute $6,500 into an Individual Retirement Account (IRA) each year and that amount increases if you are 50 or older. When you are over 50 you will also have the option to make a catch-up contribution of up to $7,500 per year (2023). Just like with your savings, you don’t have to start with $6,500, but start with what you can contribute. When you open your account, you will have the option of a traditional or Roth IRA and the option you choose will determine your withdrawal options at retirement.
- Social Security Benefits
As you develop your plan, don’t forget about your Social Security retirement benefits. For the average person, 40% of their financial needs during retirement come from their Social Security benefits. If you would like a more exact number, the Social Security website has a calculator that can assist you. You qualify for Social Security by accumulating credits when you pay Social Security taxes on your earnings. You can earn up to four credits per year. Workers qualify for Social Security retirement benefits when they reach 40 lifetime credits or 10 years of work. Social Security is then based on your 35 highest earning years. You may be surprised at the level of income this can provide.
- Avoid Borrowing from Retirement Savings
It’s generally not a good idea to borrow from your retirement account. The whole point of putting money into a tax-deferred retirement account is the growth potential on pretax money. If you take it out of your account before retirement, you will lose out on any appreciation that money may accrue. For example, if you borrow from your 401(k), you will need to pay it back with after tax dollars within five years. Failing to do so could cause penalties, and all funds withdrawn will be taxed as ordinary income.*
- All Answers are not Financial
You have a financial goal that you would like to reach before retiring, but there may be other factors that determine when you retire: your health; do you take primary care of a family member; are you emotionally ready…to name a few. Retirement isn’t only about the finances, but if your income is taken care of, that allows you to focus on the things that are most important to you and enjoy the next adventure.
The Trust Company team includes Certified Financial Planner™ professionals and wealth advisors who assist many people through the retirement planning process. As you approach retirement age, it is important to work with your financial planner since they will take your entire financial picture into account, as they help you develop your plan for retirement. Each investment plan is unique and customized to the individual, based upon the needs, goals and financial ability of that individual. The Trust Company can manage your investments and your estate plan tailored to the goals of your individual retirement plan. We invite you to visit with us to see how we may help you achieve your best possible retirement. www.sancaptrustco.com
*Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities product, service or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. First consult with a qualified financial adviser, tax professional or attorney before implementing any strategy or recommendation discussed herein.
LEGAL, INVESTMENT AND TAX NOTICE: This information is not intended to be and should not be treated as legal advice, investment advice or tax advice. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel. Not FDIC Insured | No Guarantee | May Lose Value