This marks the concluding article in our series focused on saving strategies across different stages of life. We’ve previously discussed saving tactics during your 30s, 40s, and 50s. Now, as you transition from a full-time career into your golden retirement years, it’s crucial to understand how to get the best out of your finances.
Our objective is to assist those planning to retire earlier than their Social Security eligibility age, as well as those who are finalizing their retirement plans. We aim to prepare you for a well-structured, financially sound retirement. Factors such as annuities, pensions, and strategies for living on a fixed income will be crucial components in achieving your retirement goals. Let’s delve deeper.
WHAT ARE ANNUITIES?
Annuities are insurance products that can provide a steady income during retirement and enhance your retirement savings. Payments can be made monthly, quarterly, annually, or as a lump sum. With annuities, you contribute a certain amount to the account and reap the benefits of accumulated interest over a fixed period.
Annuities can be an attractive option, as they offer an opportunity to diversify funds and bring stability to your financial portfolio. Including annuities as part of your comprehensive retirement plan may be a savvy move depending on your personal circumstances.
Two primary types of annuities are:
Deferred Annuities – If you have maxed out your IRA or 401(k) plans, a deferred annuity could be a good way to save for retirement. These annuities foster growth of your funds through compounded interest and offer tax deferral benefits. However, be warned that early withdrawals may incur penalties.
Income Annuities – Income annuities can offer a lifelong income or an income for a pre-specified period. The payouts could be variable or fixed, adjusting with inflation. This type of annuity provides some stability in volatile market conditions.
While annuities can seem appealing, it’s important to remember they also entail disadvantages. They may be more expensive than some investors might afford, and financial planners or insurance salespersons may recommend them more for the high commissions they earn than for the investor’s best interest. Do your research, ask questions, and ensure you understand the reasons behind their recommendations. Only you, your partner, and your retirement planner can truly decide if annuities are the right fit for your situation.
WHAT ARE PENSIONS?
If you are fortunate enough to be entitled to a pension from your employer, you might have a steady income stream to count on. Pensions usually offer different options for payments.
Lump Sum Pension Payment – If your financial situation is robust and you have the option of a lump sum payment, it might be a good strategy. Your purchasing power now could outweigh your purchasing power in 10 or 20 years. Additionally, lump sum pension payments could be rolled over into other retirement accounts like an IRA, reducing your taxable income.
Monthly Pension Payment – A monthly pension payout might be the right choice if your savings are not as secure as you’d like. Regular payments can provide a sense of safety as you explore other ways to maximize your retirement savings.
SOCIAL SECURITY
Understanding Social Security and when to start reaping its benefits is crucial as retirement approaches. While you might be inclined to withdraw as early as age 62, it’s worth considering holding off until after 65.
Drawing from Social Security early might seem tempting, but it leads to reduced monthly payments. For instance, if you withdraw at age 62, you’ll receive 25% less than you would at age 66. Delaying even longer increases the payments significantly.
Balancing your Social Security strategy involves multiple considerations such as current savings and health. Everyone’s needs are unique, so carefully consider your options as you decide on your retirement lifestyle.
If you’re married and your spouse is also approaching retirement, bear in mind that taking Social Security early could impact them as well. Early withdrawal can decrease the benefits available to your spouse. Make sure to discuss retirement decisions together as they will impact both of your futures.
LIVING ON A FIXED INCOME
Post-retirement, living on a fixed income may become a new reality. This can be an easier transition for those accustomed to a salary, but for those used to hourly wages and overtime, it can be challenging. Here are some tips to adapt:
Downsize to a Rental – If you don’t own a home outright, it might be practical to downsize to a rental property. This lessens the burden of home maintenance costs.
Consider Car Alternatives – Similar to home ownership, a car’s upkeep and related costs can take a toll on a fixed budget. Opting for public transportation or residing in a walkable community can save costs.
Revise Your Eating Habits – Homecooked meals are not just healthier but also more economical. Cutting down on alcohol and tobacco can also provide significant savings.
Prioritize Your Health – Engaging in healthy, low-cost or free activities not only helps keeps medical bills at bay but also enriches quality of life.
Adjusting to new financial habits in your 60s can be challenging, but it’s definitely possible to make changes that will create meaningful savings.
