Written by Gary Foreman
From his column Life Stewardship
Ecclesiastes 3:1 reminds us: "There is a time for everything, and a season for every activity under the heavens" (NIV).
When we're young we start careers, get married, and have children. As we get older our children grow up and leave home. We slow down and begin to think about a time when we will end full-time employment and maybe even retire.
That's a big change. Especially after spending 30, 40, or more years working. And, like most big changes, the transition goes easier if we plan for it. So let's examine some steps we must take before leaving full-time employment.
The first thing we want to do is get out of debt. Credit card minimum payments, auto loans, student loans (for children or grandkids), and mortgages must be paid no matter how tight our budget. In all likelihood our income after retirement will drop—perhaps by a significant amount. If we’re unable to repay those debts now while we are earning income, what chance will we have with reduced income? We must take bold steps if necessary. That might mean finding a lower rate mortgage or credit card, or trading in a too-expensive vehicle.
The next step is to estimate how much income we’ll have. To do this, we total up estimated Social Security, pensions, retirement plans, part-time income, etc. Note: to get an estimate of how much you'll receive from Social Security, visit their estimator. For investment accounts, advisors generally estimate that we can safely make withdrawals of 4% of the account's value annually.
Knowing how much income we’ll have is important because we can't plan a post-retirement lifestyle without knowing how much money we’ll have to spend.
An important question to consider is when to begin receiving income from our different accounts. Some accounts, like SS, will pay us more if we delay when we start to receive payments. There is no “one size fits all” situation. A lot depends on how long we live, and we aren’t privy to that information. Only the Lord knows for sure. We also want to consider tax implications. Some withdrawals will increase taxable income; others will not.
Before we can plan a post-retirement budget, we need to estimate future expenses. Some experts suggest that we use the amount of 70% of current expenses as an estimate. It's an easy calculation, but the answer could be misleading.
A better method is to take current expenses and add/subtract expenses that will be affected by any changes in lifestyle. For instance, we might be able to sell a second car—a big savings. But we might also plan an extra trip to visit the grandkids or to hire others to help maintain our home. Downsizing to a smaller residence or moving to a community with reduced cost of living can also affect expenses.
Now is the time to estimate what a post retirement budget will look like. Don't worry if it's not 100% accurate. You can fine tune it later. At this point we just want to make sure our dream retirement doesn’t turn into a financial nightmare.
If you find that your retirement plans exceed your resources, now is the time to make adjustments. You might want to consider reducing expenses now to increase the amount you have in your retirement savings plans. Or even consider taking on part-time employment now or after retirement. No matter what change you make, the results will be more effective if you start now.
It's always a good idea to save for the future. Most of us haven't saved enough for retirement. Fidelity investments suggest that we have eight times our annual salary saved by the time we reach age 60. Unfortunately, according to the U.S. Census Bureau, the average net worth of Americans aged 55 to 65 is $45,447. So most of us are nowhere near the ideal goal. Boosting savings might require a sacrifice. But skipping an all-expense paid vacation now could make the trips we want to take after retirement much more affordable.
It’s a good idea to take advantage of “catch up clauses” that allow us to put more into our retirement accounts in the last years we work. Those 50 or older, can add thousands of dollars above the normal maximums to retirement accounts. This is especially important if we haven't saved enough. Not only will we increase the amount we have in savings after retirement, we’ll reduce taxable income in the year that we set aside the funds.
Finally, don't forget to review your estate plan. Every adult should have a will, power of attorney, and appropriate medical directive. It's especially important as we age. With the lifestyle changes we experience in retirement, it's an ideal time to review end-of-life planning. By the way, make sure that you get competent advice when creating your legal documents. You don't want your heirs to find out that the DIY will you prepared with a computer program isn’t valid.
King Solomon was right when he said that everything has a season. If you're nearing retirement age now is the season for preparation.
Gary Foreman is an assistant pastor, author, former financial planner, and founder of TheDollarStretcher.com and After50Finances.com. If you have questions or suggestions for columns, send them to us at email@example.com.
Editor’s Note: For U.S. ministers, the Nazarene 403(b) Retirement Savings Plan is an excellent way to save on taxes now and in retirement when withdrawals can be designated as housing allowance. For more information, visit this link.