Retirement Planning: A Critical Phase of Life
As individuals approach age 65, they often begin to contemplate the next chapter of their lives, including retirement and the benefits that come with it, such as Social Security and Medicare. However, retirement planning involves more than just considering these benefits; it requires careful thought about taxes, healthcare, and budgeting.
Assessing Your Finances
The first step in retirement planning is to examine your expected savings, income, and planned retirement date. This will help you determine how much money you’ll have and when. Your income, both from your portfolio and benefits, will depend heavily on when you choose to retire. For example, if you retire at 67 and don’t plan to continue contributing to your account, your finances could look like this:
- Age: 67
- IRA: $1.75 million
- Benefits: $4,200/month ($50,400/year)
On the other hand, if you wait until age 70 to retire and claim your Social Security, your benefits could increase significantly.
Creating a Retirement Budget
Once you know how much income you can expect to generate each year, the next step is to create a budget for it. This involves balancing your financial priorities with personal priorities, such as aspirations, goals, and dreams. A commonly applied rule of thumb is to withdraw 4% of your portfolio in your first year of retirement and then increase subsequent withdrawals by the annual rate of inflation. This increases the likelihood that your savings will last through retirement.
Managing Your Money in Retirement
Managing your money in retirement is critical. You’ll need to balance the need to keep your money invested and growing with the need to keep it safe, since you can’t easily go back to work and earn more. A financial advisor can help you build a comprehensive retirement plan and calculate how much you can afford to withdraw from savings each year.
Planning for Taxes and RMDs
You’ll also need to plan for taxes and required minimum distributions (RMDs). You’ll need to pay income taxes on withdrawals from a traditional IRA, and your tax rate will depend on your adjusted gross income (AGI). RMDs will also dictate how much money you’ll need to withdraw from your IRA. A popular retirement tax strategy is to use a Roth conversion to settle up your taxes with the federal government now rather than in retirement.
Finding the Right Balance
Your retirement budget is based on two main factors: your assets and your spending. To create a sustainable budget, you’ll need to make sure those numbers meet in the middle. Start by assessing your assets and determining how much income they can generate. Then, examine your spending needs. If those numbers don’t match, you’ll need to make some changes.
Seeking Professional Guidance
If you need help planning and saving for retirement, consider working with a financial advisor. They can help you build a comprehensive retirement plan, calculate how much you can afford to withdraw from savings each year, and plan for taxes and RMDs. With the right guidance, you can create a sustainable retirement budget that meets your needs and ensures a comfortable quality of life.
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