While the retirement planning basics have not changed in the past few decades, there are new problems that await baby boomers in 2023.
- Longer life expectancy and rising healthcare costs, which means you’ll need your money to last longer—potentially into your 90s.
- We’re in an era when bond yields aren’t as high as they used to be, so you can’t buy a few fixed-income instruments and make double-digit returns.
- More companies are switching from defined benefit pensions—which guarantee a certain amount of money in retirement—to defined contribution pensions, which are market-dependent.
Calculate how much you need to save
Perhaps the most daunting part of planning for retirement is calculating how much money you’ll need to save. And it’s not just a function of your current income and expenses.
Because life as a 70-something or 80-something will not be similar to what you have right now.
So you’ll want to write down everything you’ll need to spend including your housing costs, healthcare, food, and daily expenses,
Create a budget
Begin by consolidating all potential income streams you’re likely to tap into during your retirement years. This includes any pension funds, social security benefits, and other passive sources of income, such as proceeds from rental properties. Balancing these potential revenues against your estimated expenses will provide a clear picture of the annual savings needed to secure your retirement.
Once you have a handle on the numbers, let automation do the heavy lifting. For instance, you set up automatic payments through your banking app. So that it transfers your retirement savings on the same day every month to your retirement savings accounts.
Pay off your debt
At the age of 65 years, ideally, you should be debt-free. That includes credit card debt, car and mortgage loans, and any student loans. It’s simply because you don’t want to end up owing money in your non-earning years.
Tax considerations
Understanding and implementing tax strategies can help maximize retirement income and protect your assets.
Here are some key tax considerations:
- Tax-Advantaged Retirement Accounts: such as 401(k)s, Traditional IRAs, and Roth IRAs. These accounts offer tax advantages either on contributions or withdrawals, or both.
- Required Minimum Distributions (RMDs): Retirement accounts like Traditional IRAs and 401(k)s have RMDs, which are minimum amounts that must be withdrawn each year once the account owner reaches a certain age. Failing to take the required distributions can lead to substantial penalties.
- Social Security Taxation: Social Security benefits may be subject to federal income tax if your combined income exceeds certain thresholds. Understanding these taxation rules can help retirees plan for tax-efficient withdrawals.
- Health Savings Accounts (HSAs): HSAs can serve as a powerful retirement savings tool for healthcare expenses. HSAs offer triple tax benefits. The contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are also tax-free.
Pro Tip: Consult with an elder law and/or an estate planning attorney to create a comprehensive taxation plan but remember that tax laws are subject to change, and individual circumstances can vary.