The best time to think about taking care of your finances in retirement is before you retire. This gives you time to arrange for your money to look after you. While you can, of course, take steps to take care of your finances if you’ve already retired, it will be far more challenging to secure enough money for all your needs.
Here are five steps to take before you quit being an employee to set you on the path to a comfortable financial retirement.
See how much you’ll get every month from social security.
Using a paper copy of your social security, you can get a fairly accurate estimate of how much you’ll receive. Your benefits will be based on a number of factors, including your earnings history, or that of your spouse, and the age at which you start collecting your benefits. Before tapping into your social security, it’s always a good idea to review social security requirements. For instance, you can start your benefits as early as 62 years of age, but you will get less than if you wait until age 66 when you will be eligible for your full retirement benefits. The reduction in amount is based on calculating the number of months you start getting benefits before you reach the full age of retirement.
Sort out your health insurance.
Your biggest expense when you retire might be paying for any medical expenses. The way to manage high medical costs is through health insurance. If you’re under 65 years of age, your employer may let you stay on the company plan when you retire in good standing. A second option is to use COBRA to stay on the company’s health insurance plan for 18 months. And, a third option is to qualify for guaranteed health insurance through The Patient Protection and Affordable Care Act (often referred to as Obamacare.) If you’re over 65 years of age, then you will probably qualify for Medicare.
Create a retirement budget.
Most people regard the word “budget” with the same disdain they feel for the word “diet.” This is because both words appear to place a restriction on freedom. While a diet will restrict your choice of foods and limit your calories, a budget will restrict your choice of things to buy and limit your spending. Still, it’s important not to procrastinate on either. While a diet will assure your physical health, a personal budget will improve your fiscal well-being. Just as overeating can be dangerous, so can overspending.
Here’s how to create a budget:
- Collect all the records you have about your income sources. Review bank account statements, credit card statements, your pay stubs (the last two is enough), and your last year’s tax returns.
- Make a list of all your fixed expenses. Break this down into essentials, like food; non-essential monthly expenses, like cable TV; and required non-monthly expenses, like gym membership.
- Account for any expected changes in your insurance premiums.
- Calculate how much money is coming in and how much is going out every month. If too much is going out and too little coming in, then you have to figure out ways to increase your income and decrease your expenses.
Think about investments.
If you’ve already started a few investments, then just keep on doing what’s working. If, however, you haven’t started on investments, then you must start by saving up money to begin investing. Your first investments should be low-risk like mutual funds and ETFs. These allow you to choose how much you want to invest. Since you’ll be buying small stakes in many stocks at once, you will have a higher chance of getting positive returns and a lower chance of suffering losses.
Standard home loans come with repayment requirements involving monthly installments. In the case of a reverse mortgage, as the homeowner, you will actually receive those payments based on the value of your home, rather than having to make them to your lender. In fact, your reverse mortgage lender will not require any sort of immediate repayment of your debt. You can continue to borrow against the equity in your home up to a certain percentage, and full repayment will not be immediately required unless you move away or pass away. In the latter case, your heirs can repay the loan balance immediately and keep the property or it can be sold, with the lender keeping proceeds up to the remaining amount owed.
You worked throughout your career for your hard earned money, and if you plan it right, then your money will start taking care of you in your retirement.