Thinking about that retirement
These days everyone is taking a new look at their finances and no one is looking more closely than the millions of people who are nearing retirement age.
While some are expected to retire at one of the traditional milestones, such as age 62, the current economy is forcing many of them to re-evaluate their plans.
Social Security is the foundation for a secure retirement, but was never intended to be the sole source of income for those who apply for it.
While Social Security replaces about 40 percent of the average workers pre-retirement earnings, most financial advisors say that you will need 70 percent or more of your pre-retirement income to live comfortably.
Social Security's online retirement estimator provides immediate retirement benefit estimates. You can key in some basic information and get a quick and accurate estimate of your benefit amount using different scenarios. The retirement estimator gives estimates baed on your actual Social Security earnings record. To use the retirement estimator visit socialsecurity.gov/estimator.
Your choice of a retirement age, from 62 to 70, can dramatically affect your monthly Social Security benefit amount.
If you choose to start receiving benefits early, the monthly payments will be reduced based on the number of months you receive benefits before you reach your full retirement age. That rate of reduction will depend on the year that you were born.
For instance, those born between 1943 and 1954 receive a maximum reduction of 25 percent. The amount you receive when you first get benefits set the base for the amount you will receive for the rest of your life.
Social Security pays widow or widower's benefits based on a percentage of the deceased workers benefit amount. So your choice to take a reduced benefit may affect your survivor.
If you wait until your full retirement age, your benefits will not be reduced. If you decide to delay retirement your benefit will increase up to eight percent per year from your full retirement age until age 70. However there is not an additional benefit increase after you reach age 70.
Once you know just what to expect from Social Security in retirement there are tools to help determine if you will have enough money to live comfortably when you retire. And excellent resource is the Ballpark Estimator at www.choosetosave.org/ballpark.
This online tool takes complicated issues, like projected Social Security benefits and earnings assumptions on savings and turns them into language and mathematics that are easy to understand.
In addition the www.mymoney.gov website creates an online point of access to financial information from 21 federal agencies, departments and bureaus.
Working with benefits
You can get Social Security retirement or survivors benefit and work at the same time. But if you are younger than full retirement age and earn more than certain amounts, your benefits will be reduced.
If some of your retirement benefits are withheld because of your earnings, your benefits will be increased starting at your full retirement age to take into account those months in which benefits were withheld.
Social Security counts only the wages you make from your job or your net profit if your self-employed. Bonuses, commissions, and vacation pay are also counted. We don't count pensions, annuities, investment income, interest, veterans or other government or military retirement benefits.
This is the formula used to calculate if the benefit must be reduced.
If you are under full retirement age for the entire year Social Security will deduct $1 in benefits for every $2 earned above the annual limit. For 2013 that limit is $15,120.
In the year in which you reach full retirement age, Social Security will deduct $1 in benefits for every $3 you earn above $40,080. However they only count the earnings before the month you reach your full retirement age. Once you reach full retirement you can earn as much as you want and still receive your monthly Social Security check.
Sometimes people who retire mid-year already have earned more than the yearly earnings limit. That is why there is a special rule that applies to earnings for one year, usually the first year of retirement. Under this rule, you can get a full Social Security check for any whole month you are retired, regardless of your yearly earnings.
In 2013, a person under full retirement age is considered retired if monthly earnings are $1,220 or less. For someone attaining full retirement age in 2013, the amount is $3240.
If you are self employed, you also cannot be performing substantial services. Substantial services in self-employment mean that you devote more than 45 hours per month to the business or between 15 and 45 hours to a business in a highly skilled occupation.
If you are eligible for retirement benefits this year and still working, you can use the earnings test calculator. That can be found at http://www.socialsecurity.govACT/COLA/RTeffect.html. This calculator will help you to see how your earnings can affect your benefit payments. If you are not already receiving benefits be sure to contact Social Security at the beginning of the year you are full retirement age.
Even if you are still working you may be able to receive some or all of your benefits for the month before you reach full retirement age.
Planning well is important to comfortable living
Retirement can simultaneously excite and distress men and women as they approach the day when they end their careers. Anticipating the freedom can be exciting, while concerns about maintaining financial independence can be stressful.
Though there are no guarantees that men and women who prioritize retirement planning will not outlive their finances, those who do arrange their priorities in such a manner are far more likely to enjoy a comfortable retirement without worrying about their finances. As men and women approach retirement age, certain steps with regard to preparing for retirement can put them in position to enjoy their golden years to the fullest.
Assess your resources. An honest assessment of your assets will help you determine a retirement lifestyle you can afford. Assets can include any property you own, investments, savings, and retirement accounts. Your property may be your biggest financial asset, but unless you plan to sell that property or take out a reverse mortgage, then you won't be able to rely on that property to fund your lifestyle. When assessing resources, keep in mind that you might have to pay potentially steep taxes when attempting to access any retirement accounts, such as a 401(k). Factor in any such taxes when assessing your retirement resources.
Make a list of your monthly expenses. Once you have assessed your resources, make a list of your monthly bills. Mortgage payments, healthcare costs, taxes, and food are among the essentials, while additional expenses like travel and entertainment will need to be factored in as well. When considering monthly expenses, keep in mind that some of those expenses, including mortgage payments and commuting costs, will likely disappear, while others, including healthcare costs, are likely to increase significantly. Once you have assessed your resources and expenses, you can then begin to paint a picture of the retirement lifestyle you can afford to live.
Compare the lifestyle you want to live versus the one you can afford to live. Considering your finances several years before you retire affords you the opportunity to make changes if you determine the retirement you can afford does not exactly match up with the retirement you want to live. After you have figured out what you can afford, compare that lifestyle to the one you hope to live. If they are one and the same, then you did a great job planning for retirement. If they are slightly or significantly different, then look for ways to close that gap. If necessary, consult with a financial planner, who might be able to help turn your dream retirement into a reality. Closing the gap between your dream retirement and the one you can afford to live may require you to work an extra year or two, so be prepared to make that decision if need be.
Plan on continuing to grow your money. Just because you're retiring does not mean your money has to stop working as well. You will still need to combat inflation during your golden years, so plan on continuing to grow your money even after you retire. Though it's best to reduce investment risks as you age, many retirees still need to keep a toe in the investment waters. Find a balance you're comfortable with so your money continues to grow, but be conservative at the same time. As you grow older, continue to reduce your risk. While conventional wisdom long suggested retirees should completely eliminate risk from their portfolios, today's retirees are living longer than ever before, so you likely can't afford to follow the advice of yesteryear.
As retirement draws closer, men and women must start making important decisions to ensure their nest eggs can support the lifestyles they want to live throughout their golden years.