There is an old joke in my office that goes like this: Everybody can retire in 15 years starting with nothing. I can prove it. Most people overspend until their birthday has a 5 in front of it. Then they panic. OMG! I have only 15 years until retirement! And then they get serious and get it done.
Of course it isn’t that simple. Many people do save early. Yet all too many suffer a diminished retirement due to financial habits in the years leading to retirement. A heavy debt load can move the starting block to negative territory, making the drive for retirement all the more challenging.
No matter your age or financial condition, you can always improve your situation. We will focus on tools for those 50 and older in this post, but make no mistake, each tool listed here has potential for people of all ages.
Using the story above, people who get serious about retirement can reach that goal by age 35 and even younger. The FIRE (financial independence, retire early) community is a prime example of people moving the urgency of retirement from age 50 to an earlier age. Which leads us to a simple concept: Decide when you want to retire by picking the year you will get serious about planning for retirement. Start at 25, retire by 40; start at 40, retire by 55; start at 50, retire by 65; never start, never retire.
The closer you are to retirement the more important it is to make financial decisions that will keep you on course. A major financial setback in the final run to retirement can be devastating. Today we will deal with those risks and work to mitigate them.
1.) You Need a Budget
When I was a wee tyke I was already budgeting. It was a simple ledger listing income and expenditures. If I wanted a new Wrist Rocket slingshot I needed to save for the purchase. (This is a true story.) That required a plan.
A budget is not about deprivation! A budget is about knowing where you are financially and managing income and spending.
A simple spreadsheet can do the trick. This is something I have used since I was in middle school. Back then I used paper and pencil. Later I graduated to Excel and similar spreadsheet software. It doesn’t have to be fancy; it just has to work! If you want bells and whistles you can try You Need a Budget. Fancy or something simple, all works as long as you start and remain consistent.
Budgeting is more than limiting expenses in each category. A budget shows you where you are spending and this allows you to eliminate waste without any sacrifice. Sometimes you will notice an expense that is out of line and it will become a conscious choice to reduce spending in that area.
The point is budgeting gives you control of your finances. You can’t manage what you don’t understand. As much as you think you know where your money is going, there is no way to really know and manage money properly unless you can see it. That is what a budget does. It works for anyone at any age, but is vital if you are reaching the end of your working years. This frees up money so you can pay-yourself-first.
2.) Eliminate Debt
It is hard to enjoy retirement when you are managing debt payments. A mortgage would be bad enough, but credit cards, auto loans and student loans are things you want wiped off the slate before you enter retirement.
Remember: Paying off debt is a form of investing. It is a backward way of thinking about allocation of excess funds. Investing is straightforward. Yet, paying off debt also has a return. High interest debt is a cancer to a budget. Paying off the debt reduces the interest expense. That lowers expenses and makes budgeting a world better.
Getting into debt is easy; getting out can be a serious challenge for many. There is help. If you have reached the crisis level consider contacting the National Foundation for Credit Counseling.
Most people can reduce and eliminate their debt by tracking their income and spending on a spreadsheet. Budgeting is the place to start so you can visualize your finances. This should reveal the low hanging fruit. Modest tweaks to your finances can yield a significant boost to your free cash flow.
Dave Ramsey has made a career out of helping people get out of debt. His baby steps and debt snowball programs have helps thousands of people get out of debt and stay debt-free. I have witnessed many clients over the years benefit from Dave’s system. If you have debt you might want to consider looking into Dave’s programs. You can check out his books from the library if you don’t want to spend a penny. Financial Peace University is a good program. Or you can own his book The Total Money Makeover for under $12 at the time of this writing from Amazon. (Note: Many years back I was a Dave Ramsey Endorsed Local Provider in the tax field. Dave Ramsey is not an affiliate, but the Amazon link is.)
3.) Take the IRS Up on Catch-up Contributions
Once you reach age 50 the IRS allows you to supercharge your retirement savings. Congress made these rules because they stood behind me when I was working and quickly realized I was not joking when I say people get serious about retirement when the calendar stamps 50 candles on their birthday cake.
Of course, you can start before age 50, too. You can stash away serious money with a 401(k) or other retirement program. Once you are 50 and older you can top off your annual retirement contributions with an additional $6,500 in a 401(k), 403(b), 457 or SARSEP; $3,000 for SIMPLE plans; $1,000 for traditional and Roth IRAs (these are all 2021 numbers).
4.) Start a Health Savings Account (HSA) if Allowed
The HSA is one of the best financial tools in the tax code. If your health insurance is HSA qualified, be sure to contribute to an HSA savings account. Contributions are deductible. Withdrawals are tax-free if used for qualified medical expenses. You can’t use HSA funds to pay for health insurance premiums, but you can use them to pay Medicare Premiums. That means if your medical expenses are low your HSA becomes a wonderful tax-free tool as you prepare for retirement.
For 2021, you get a $1,000 contribution limit increase if you are 55 or older.
Consider Fidelity or other low-cost investment house for managing your HSA funds.
5.) Consult a Tax Professional
Most people reading this are not concerned about starting their financial plan; they already started and want to manage their finances to maximize benefits while reducing taxes.
Even in retirement taxes are still a major expense. Consulting with a tax professional is a high-value investment.
In my office I make it clear to clients I am not interested in saving them money for one tax year only. My goal is to get the lowest tax possible for all years involved combined!
Retirement is different than your working years. The rules change and the tax code is different once you push into the traditional retirement years. You spent your entire life looking at income and the slice you will dedicate towards retirement investments.
Now you need to balance Social Security income, retirement income, tax brackets, tax credits and more. Social Security benefits can be tax-free, but it is getting harder to accomplish that. This is where a good tax pro comes in. Required Minimum Distributions play a role. Pension income and capital gains, too. Tax professionals who can navigate the moving parts are worth their weight in gold.
Steps you take today will affect your taxes in future years. I consult with many clients approaching retirement and in retirement each year. It is always a profitable consulting session for the client. The moving parts are numerous. A seasoned tax pro can help you navigate the options. Your facts and circumstances determine your optimal path. One size does not fit all.
Insurance is a strange animal. Each person’s situation is unique. Your health will determine the health insurance policy best for you. Some people might need life insurance, many will not. What about long-term care?
Insurance has a built in profit for the insurance company. Insurance should not be considered a good financial investment. Instead, it is a tool to help manage and protect your wealth.
As your financial resources increase you might wish to increase the deductible on your policies. Depending on the value of your vehicle, you may wish to forgo collision completely.
Insurance gets expensive as you get older, especially health insurance. It might be a wise choice to have disability insurance or long-term care coverage. Your personal situation will determine the proper course.
Discuss the issues with your insurance agent and then have a disinterested third-party (someone not getting paid a commission for the sale of the insurance policies) to review the choices provided. A financially knowledgeable family member or trusted friend might be a good choice. Or, you can discuss the options provided by the insurance agent with a tax professional or attorney that is versed in these matters.
7.) Legal Matters
All the bad party jokes have attorneys as the butt of the joke. While attorneys get a bad rap, they are the most powerful tool out there in protecting your wealth as your nest egg grows.
Estate planning requires a legal professional. Do you need a trust? Will? Durable Power of Attorney?
Attorneys are also trained in asset protection. When you have only a small net worth there is less to worry about. Once you build serious retirement assets you need to take steps protecting those assets.
Finding a qualified attorney is the challenge. I use Legal Shield (not an affiliate) in my office. They can answer simple legal questions and refer you to an attorney specializing in the area of practice you need.
The biggest risk is not starting or starting too late. The second biggest risk is a financial disaster as your approach your retirement date.
You do not want a financial surprise after 50. There just isn’t enough time to recover as you get older. And who want to work forever anyway? (You might enjoy working, but you don’t want to be required to work over poor financial planning.)
Tax planning and legal help are vital. The key is to review each facet of your life annually once you reach 50: investments, health, tax, legal, et cetera. Several tools have been provided above. I encourage you to use them.
Retirement isn’t out of reach. You can do this. If you are looking forward to an early retirement you can use most of the tools in this post; if you are over 50 you can lock and load on powerful programs that supercharge your net worth.
It all boils down to a plan. With a proper plan retirement will be the blessing you dreamed it would be.
It is never too late to start.
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