Here are some ideas you can use to maximize your savings in the years leading up to retirement:
1. Start cutting back on expenses.
One of the big things you can do to stretch your retirement funds is to lower your expenses. One of the biggest and most effective things you can do is downsize your home. Even if you own your home, selling it and moving into something smaller saves on upkeep, expenses, and taxes, keeping more money in your pockets.
2. If you’re planning an early retirement, start preparing early.
Retiring early sounds nice but it requires long-term planning. There are a few reasons for this. Not only are you reducing the number of years you’re contributing to your retirement account but you’re also relying on it to fund a few extra years. Secondly, younger retirees are more active which means they’re likely to spend more money. Retiring early requires ambitious savings goals and you may need to rethink some of your plans to make sure you have enough to cover them.
3. Think about the advantages of retiring later.
If you want until you are 70 to start collecting Social Security, you can essentially earn 8% a year on your money. For example, someone who collects $24,000 a year in Social Security at age 62 can collect $42,000 a year at age 70. If you are healthy and able to continue working, this is definitely an option that can make retirement a little bit sweeter.
4. Reassess and be realistic about your target.
If you’re nearing retirement but your retirement account balance isn’t as high as you’d hoped, it may be time to reassess and re-plan. There are a lot of retirement calculators available but they all work the same way, assuming you spend the same amount every year. Usually, this is not the case. Retirees spend less as they get older. To get a more accurate idea of what you’re working with, it’s important to think about the essential costs versus those that are flexible to get a better idea of where you stand.
5. Have a backup plan in case you find yourself unemployed.
You never know what’s going to happen throughout your career. If you find yourself suddenly unemployed with only a few years left to go before retirement, it’s a good idea to have a backup plan. While going back to school or retraining for a new career might not be possible, you may be able to land some freelancing gigs or other short-term projects while you look for a full-time position.
6. Think carefully about investments.
You grew your retirement fund over an entire career but the most critical years are those last few working years before retirement and the first few years after. It’s commonly recommended to keep most of your retirement savings in equities. While the odds may be in your favor, you can never be 100% sure what’s going to happen. In the critical years leading up to and following retirement, dial back equities to half to lessen the risk. As time goes on, you can take on more risk when you don’t have quite as much to lose.
If you’re maxed out your 401(k) and IRA, try index and buy-and-hold equity funds with fewer trades and capital gains distributions. Use accounts that are tax-efficient to maximize your assets.
7. Think carefully about the rate of withdrawal.
Most retirees are told to withdrawal 4% of their savings the first year but there is evidence that this may be too much. Sticking to a lower amount gives you a better chance of your savings lasting as long as you need it. Aim for around 2.9%. If that’s not enough, start a little higher but watch the market and spend less in years when it’s under-performing to make up for it.
8. Be smart about taxes.
Some years, you may fall into the 15% income bracket. In this case, it can be beneficial to sell long-standing holdings. Why? The long-term rate for capital gains for people in the 15% income bracket is 0% or tax-free.
The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Thomas Fleishel and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Recommendations, specific investments or strategies discussed may not be suitable for all investors. Past performance may not be indicative of future results. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.