Take any money issue and you’re sure to find detailed guidance—some so complicated that it’s largely ignored, regardless of its potential benefit.
The following is not intended to make light of the difficulty some people have with money. Still, a little straightforward information helps. Let’s strip personal finance down to its basics:
1. “I can’t afford to save.” It’s easy: Put savings first, and then figure out what you can and can’t afford.
2. “Where do I invest my money?” Low-cost stock index mutual funds. Start mixing in some bond funds as you close in on retirement. Also check out the target-date funds you’ll probably find in your 401(k) plan. If you’re a tad more of a risk taker, buy a few stocks with good dividend-paying records and build an income stream.
3. “I don’t make enough money.” Look for a better job, up your skills, get a second job, start a small side business, work overtime. Perhaps even collect scrap metal with that F-150 you just had to have. Yup, I’m being sarcastic.
4. “How much can I withdraw from retirement savings before retirement?” Do you mean how much should you withdraw? That money isn’t an emergency or vacation fund. It’s for retirement.
5. “I don’t know what to expect from Social Security.” Why not? Go to the Social Security website and run an estimate.
6. “How do I avoid running out of money in retirement?” Start with sufficient savings. Live within your means after you retire. Having zero debt upon retirement isn’t a bad idea, either.
7. “How do I calculate what to take from retirement funds?” Well, there’s the 4% guideline, which says start by taking 4% of your retirement assets in the first year of retirement and thereafter increase that amount by inflation each year.
8. “How much money will I need for retirement?” It isn’t $1 million, $2 million or $5 million. It isn’t any number someone else can give you. It’s about 25 times the amount of money you need each year from your portfolio to live the way you want in retirement. Don’t forget to consider what Social Security will also provide.
9. “When should I start taking Social Security?” When you absolutely need the money to live on. That may mean age 62 or 70, or somewhere in between. Don’t take it simply because you can or because you think it won’t be there for you later. Remember, when you’re 75 or 80, the highest possible Social Security benefit may come in handy.
10. “What do I do if the stock market takes a big tumble?” Nothing, except keep up your periodic investing. It isn’t a disaster, it’s an opportunity. It’s also why you minimize risk when you’re close to retirement by diversifying into nonstock investments.
11. “How much will Medicare cost me?” The basic monthly individual Medicare Part B premium is projected to be some $144 in 2020, a $9 increase. Individuals with incomes of $85,000 or more will see increases of about $25 to $30 a month. You can find the premium schedule on CMS.gov. A Part D prescription drug plan will cost most people about $30 a month in 2020. But like Medicare Part B, it’s based on income.
12. “Is Medicare all I need?” Probably not. Medicare has deductibles and copays, plus there’s no out-of-pocket limit. Most people have some form of supplemental Medigap coverage. Only 23% don’t.
13. “I heard some guy harping on about an emergency fund in retirement. What gives?” That would be me. Here’s the deal: You have $800,000 in your retirement fund and you expect to use $32,000 a year to live. Next month, your car dies or your roof needs replacing. Take that money from your nest egg and your retirement income plan is kaput. Need I say more?
14. “I say we don’t need life insurance when we retire. My spouse disagrees. What do I do?” Simple. If you have folks dependent on you for support, how will you provide for them upon your demise? You might do so with life insurance, a survivor annuity or lots of savings, or some combination thereof. If a married couple makes it to age 65, there’s a 45% chance one of them will reach 90.
15. “I don’t have much, so I don’t need a will, right?” Wrong. The fact is, you need a will and maybe a living trust. Those beneficiary designations you may have made are crucial, but not sufficient.
16. “Is giving up my daily latte really going to help me in retirement?” Not by itself. Rather, it’s all about your spending mind-set. My simple formula is save, don’t charge to a credit card what you can’t repay in full each month, and then spend as you like.
17. “What’s the big deal with compound interest?” The big deal is you make money on the money you previously made, and the whole thing snowballs over time. Say you’re 25 and you invest $1,000, earning an average annual return of 7% between now and 65. That’ll give you $14,974—and you didn’t lift a finger to earn it.
18. “My wife and I are considering moving to the Island of Wheretheheckarewe. They say living there is so much cheaper. Does it sound like a good move?” If moving to a lower cost location is necessary to retire, you may have missed a few planning steps.
Consider a few questions. Could you afford to move back if needed or desired? How’s the health care? Remember, there’s no Medicare outside the U.S. What will you do with your time? How does your family feel about the move? Will you have funds to visit home? Is your spouse or partner truly on board with this idea?
19. “I’m not going to retire, or at least not until around age 75, so why should I worry about all this planning and saving?” Because you may not have a choice. A layoff, deteriorating health and caregiver duties could all get in the way. Or you may later change your mind and decide you’d like to retire earlier. Don’t get me wrong: If you enjoy working and figure out a way to never stop, best of luck to you.
20. “OK, I’ve got it. Now what do I do?” You plan. You may want to talk to an adviser to guide you. Get your head out of the sand. You can’t go through your working life and suddenly decide at age 50 that you need to think about retirement. You reap what you sow, to paraphrase Paul. Think about the negative things that could happen in your life and strive to minimize those risks. In other words, think about the “what ifs?”
This column originally appeared on Humble Dollar. It was republished with permission.
Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous blogs include Healthy Change, Saving Ourselves and Required Irritation. Follow him on Twitter @QuinnsComments.
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