If you’re about to retire or planning on retiring within the next five years, you need memorize this list. Take it to heart. This list will determine if your retirement is one filled with travel, relaxation and enjoyment or if you are filled with a constant dread or fear of running out of money. Here’s the short list with explanations to follow.
- Figure out when to leave your employer and if you should tap into retirement accounts
- Determine what you will spend each year and how long it should last
- Decide when to Take Social Security
- Decide When and If to Buy Life Insurance
- Create or Revise Your Estate Plan
That’s it. Now to the explanations. I’m going to throw in apps, tips, and tricks for each section.
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When to leave an employer and how to use your retirement accounts
What types of retirement accounts exist and how should you use them:
401(k) or 403(b) offered by your employer. For most people, this is the easiest and best place to start investing for retirement. The money is withheld through payroll deduction, and you can save up to $18,500 of your pretax income in 2018 ($24,500 if you are 50 or older). If you leave your job, you can roll the account over into a new employer’s 401(k) or your own IRA. A 401(k) is usually offered by a for-profit company, while teachers and other employees of nonprofits may be offered a 403(b) instead.
Solo 401(k). A sole proprietor can set up an individual 401(k) and make contributions as both the employee and employer, up to a total of $55,000 in 2018 (or $61,000 for someone over 50).
SEP IRA. SEP stands for simplified employee pension, and this kind of account is used primarily by the self-employed or small business owners. As the employer, you can contribute up to 25 percent of your income or $55,000, whichever is less, in 2018.
Simple IRA. This plan allows small employers (fewer than 100 employees) to set up IRAs with less paperwork. Employers must either match employee contributions or make unmatched contributions. An employee can contribute up to $12,500 in 2015, with an extra $3,000 allowed for those over 50.
IRA. Anyone can contribute up to $5,500 a year to an IRA ($6,500 if you’re over 50). The money grows tax-free. You can contribute to both an IRA and a 401(k), but if you’re covered by a retirement plan at work, you can’t deduct your IRA contributions from your taxable income if you earn more than $71,000 annually (for single filers) or $118,000 (married filing jointly).
Roth IRA. With a Roth IRA, you are contributing after-tax dollars, and you get no tax deduction for your contribution. The money you earn grows tax-free, and you pay no tax on withdrawals after you reach 59 1/2. Plus, unlike with regular IRAs, there is no mandatory withdrawal at age 70, but you can withdraw the amount you contributed (but not your earnings) at any time with no penalty or no taxes due, which is not the case with traditional IRAs. To contribute to a Roth IRA, you must make less than $131,000 (if you’re single) or $193,000 (if you’re married filing jointly). If your income is more than $116,000 (single) or $183,000 (married filing jointly), your allowed contribution is reduced.
Health savings account. Those with certain high-deductible health insurance plans can save money tax-free in a HSA. You can contribute up to $3,350 a year for an individual or $6,650 for a family. If you’re 55 or older, you can contribute $1,000 more. You can withdraw money from your account to pay allowable medical expenses, including copays and items such as eyeglasses. If you don’t spend the money, it rolls over indefinitely. Once you’re 65, you can withdraw money for any reason without penalty, but you have to pay income taxes on money you withdraw.
When to Leave An Employer and When to Take Pension
Our retirement plans in America were designed for workers to retire at age 65 and live less than a decade. Most of our pensions are defunct and very few employers offer lump sum retirement plans. Social security pays out an average of around $1,600 a month per person and this is rarely enough for a person to survive on. My advice is to continue working as long as possible. Instead of taking full retirement, choose to decrease your hours and travel or relax more often. Consider your work days as the rarity. If you do decide to retire, max out any and all pension options you have and try to work until full retirement age (usually around 70). This way you maximize social security payments and you also make sure that you have more years to earn money and save in retirement accounts.
Should you cash out retirement plans? If you had a crystal ball, you could calculate exactly how long you will live and how much your pension is worth on a monthly vs lump-sum plan. If one of you has that power, let me know and we can start a website. Better yet, we can add that to our site! Until I hear from that gifted person, I’ll assume we don’t have crystal balls.
Instead, here is the math I would use to determine hen or if to take a lump sum payment from a pension plan. Don’t. See what I did there? If you retire between ages 65-70, odds are that you will live another 10-15 years. With modern medicine and our ability to save lives with technology, you will probably live closer to 20-25 years. Heck, maybe someone will invent some crazy pill that lets us live to age 150. Those monthly payments will come in handy and will supplement your social security. The average person wont be able to spend the lump sum wisely. Some employers even let the surviving spouse to continue monthly payments on pension plans.
Finally, just because you leave your long-term employer, this doesn’t mean you are barred from working or volunteering ever again. A recent study shows that socialization, relationships, and avoiding loneliness can greatly extend your lifespan. This is especially true in men. Fellas and ladies, keep exercising your brain and keep making friends and building relationships. If you do plan on leaving an employer, either by choice or because of forced retirement, make sure you find something to do with your newly found free time. Get a job that you truly enjoy (like working in a specialty retail store) or go volunteer in your community. Spending time at the library can help you exert use your brain and your body. Local libraries also usually let volunteers check out books for free.
Stay active. Use your brain. Plan on retiring at age 90 and living until you are 150.
Stay rational
-B&T