When it comes to planning for retirement, every financial adviser will tell you the same thing: Start early.
But what if it’s too late to “start early”? What if you’re already approaching retirement age and haven’t given it much thought?
According to a recent study, 31 percent of Americans have less than $5,000 in their retirement savings, and the average American only has about $85,000 set aside for their golden years.
If you have little to no retirement savings, you are not alone — but just because you’ve got company doesn’t mean you’re in good shape. If you haven’t started saving for retirement yet, you need to start as soon as possible.
Whether you’re just starting your career or approaching its end — whether your employer can help or you’re on your own — we have some advice. Below, check out a comprehensive guide to planning for your retirement, covering various savings options, government assistance, life insurance, and more.
Social Security is a taxpayer-funded government initiative designed to assist people who are too old to work. It is a safety net that guarantees payouts for retirees, but living on Social Security alone is not a retirement plan. If you have paid into social security for at least 10 years during your working years, you are eligible to receive social security benefits.
How much you receive each month depends on the age at which you start collecting your benefits. All Americans are eligible to receive benefits at the age of 62, but that doesn’t mean 62 is your retirement age.
Your retirement age varies depending on the year in which you were born. For example, if you were born in 1954, your full retirement age is 66. If you were born in 1957, it is 66 years and 6 months. If you were born in 1960 or later, it is 67. To determine your exact retirement age, view this chart.
If you opt to take your payments before your retirement age, your monthly payouts will be reduced. Before you decide to start receiving payouts, estimate how much income you will need each month to live the lifestyle you want. Can you afford to take less each month by taking your payouts early, or are you better off waiting until your retirement age to receive your full benefits?
Curious how much your benefits and payouts will be? The Social Security Administration has a benefits calculator you can use to estimate your monthly benefits. This is a great place to start when developing a retirement plan.
401(k)s and IRAs
If your employer offers a 401(k) plan, invest as much as you can afford. These plans come with a variety of tax benefits, and the earlier you start, the more time you give your investments to grow.
Some companies are generous enough to contribute to your 401(k) on top of your own contributions, but even if your company doesn’t, a 401(k) is still one of the best ways to build your retirement account.
401(k) plans allow you to make diversified investments in stocks, bonds, cash, and money markets. The younger you are, the riskier you can afford your investment portfolio to be. If the stock market plunges and you lose a chunk of your 401(k) in your 20s or 30s, you’ll have plenty of time for your account to rebound. As you get closer to retirement age, you’ll want to shift your money into safer bonds and stable value investments.
If your employer does not offer a 401(k) plan, start investing your money in an IRA. The amount of money you can contribute to an IRA is limited each year, but anyone under the age of 70 and a half years old can contribute on an annual basis.
There are two main types of IRAs: traditional IRAs and Roth IRAs.
With a traditional IRA, you pay taxes on the money when you withdraw it in retirement. You will also have to pay a 10 percent penalty if you withdraw from the account before you hit age 59 and a half years old.
Roth IRAs are a bit more flexible when it comes to making withdrawals. With a Roth IRA, you pay taxes up front and don’t have to worry about paying them when you take the money out of your account.
Regardless of whether you put your money in a 401(k), IRA, or Roth IRA, low-cost index funds are a smart way to invest. Index funds are large collections of stocks and are therefore less subject to volatility than single-company stocks.
Employee Pension Plan
Fewer and fewer companies still offer traditional pension plans. If you’re lucky enough to work for one of those companies, you’re one step closer to funding your retirement.
Depending on what type of pension plan you have, your monthly payout will vary based on how much you and your employer have contributed to the plan. When you retire, you’ll have the option to take your pension in one lump sum or in monthly payouts spread out over several years.
Steady, monthly payments are ideal if you want to ensure a guaranteed amount of income every month. Couple this with your monthly social security payouts and you can have a steady stream of funds throughout retirement.
Thinking about investing in the stock market or purchasing real estate? You can take a lump sum from your pension and put that money into the investments of your choice. However, having a large amount of money at your disposal can be a bad idea for people who aren’t good at budgeting for the long term.
There are a variety of ways to invest money to build your nest egg for retirement, including investment accounts, real estate, businesses, and more.
Anyone can invest in the stock market. With a good broker by your side, you can build a significant amount of wealth to carry you through your later years.
Real estate holdings can also be great sources of wealth. If you can buy a home when you’re in your 20s or 30s and pay off the mortgage before you retire, you’ll be in great shape. You can continue to live in your home without the hefty monthly payments, or you can sell your home, downsize, and put the leftover money in the bank.
An annuity is a contract with an insurance company. The purchaser pays a certain amount into the annuity and, in return, they are guaranteed a payout. That payout can be for a specific duration or for the remainder of the purchaser’s life. The amount paid in can be made in one lump sum or in installments over a period of years leading up to retirement.
With an annuity, how much you receive each month depends on how much you put in and how long the insurance company expects you to live. There are different types of annuities and different types of payouts. You can opt for a fixed payment that remains consistent from month to month or a variable payment that fluctuates (and sometimes pays out more).
Most people prefer fixed payouts. Variable annuities tend to have larger annual fees, and those fees often negate the small gains a variable annuity can earn.
Annuities aren’t for everyone, and they have their fair share of pros and cons. On the plus side, annuities are secure. They guarantee additional income throughout your retirement. You can also pay into them on a tax-deferred basis, and they don’t have the contribution caps many IRAs have.
As for the negatives, annuities are contracts that are almost impossible to get out of. Before you enter into one, make sure it is the way you want to invest your money. Annuities tend to have steep commissions and high fees, and if you have to pull your money out early, you’ll have to pay surrender fees. The biggest downside? If you die young, you could lose big.
If you have dependents, life insurance is a must. If you’re single and don’t have any dependents, you may be able to get away without it.
When buying life insurance, make sure you take out the right kind of policy for yourself. Make sure you understand the terms, the conditions, and how the payout will work in the event of your death.
There are two main types of life insurance: permanent life and term life. Term life pays you for a certain period (10 years, 20 years, or whatever your specified term is). Term life insurance is typically less expensive than permanent life, but there is one main thing to keep in mind: If you have a 20-year term and you pass away at 20 years and one month, your beneficiaries will receive nothing at all.
Permanent life insurance, on the other hand, is more of an investment. With permanent life insurance, you pay more for your monthly premiums, but the policy pays out until the end of your life. It is ideal for anyone looking to protect their heirs or provide stability and income for a spouse or a child. Whole life policies also accumulate cash value, which you can borrow against as you age.
Regardless of what type of policy you take, make sure you get the proper amount of coverage. At the very least, make sure you can cover the cost of your mortgage and bills so your spouse won’t have to worry about those obligations when you’re gone.
If you’re nearing the end of your life and you need cash more than you need life insurance, it is possible to sell your policy in a transaction called a “life settlement.” In a life settlement, a policyholder cashes in on their life insurance policy, receiving more than the accrued cash value but less than the death benefit. This is an excellent option if you need the money more than your beneficiaries do.
Health Insurance and Medicare
There is no way around it: With age comes a decline in health. When planning for retirement, take your current health and future health risks into consideration.
The most obvious and affordable health insurance choice for most retirees is Medicare. Medicare Part A is free for most people, and all Americans are eligible to start receiving benefits at age 65. There are also Part B and Part D coverage options. Part B covers specific doctor’s services, outpatient care, and certain preventive services. Part D helps subsidize the cost of prescription drugs.
If you paid into Medicare through taxes for at least 10 years, much of the coverage is free, but the additional parts will cost you, and depending on your health, they can cost you big.
The standard Part B cost starts at $135 a month. Part D starts at $33.19 per month. If you have a hospital stay your deductible starts at $1,364 and can increase the longer you stay. The key takeaway is that Medicare is not entirely free.
Depending on your health, you may want to take out a long-term care insurance policy. Long-term care insurance is ideal for anyone who has a chronic illness, a disability, or a debilitating disease. It will cover you should you need nursing home care, an assisted living facility, or in-home care. Long-term care can be costly, and long-term care insurance is one of the best ways to protect your finances in retirement.
Financial planning for retirement can seem like a daunting task, so it is essential to break it down one step at a time.
Start by estimating how much money you will need. Determine what your monthly payouts from Social Security and pension plans will be. Invest money in a 401(k) through your employer or open up your own IRA.
Make investments in stocks, bonds, and real estate. If you want to ensure a steady stream of income, consider investing some of your savings into an annuity that will pay out each month. Protect yourself with life insurance to guarantee a payout a spouse or child can use when you’re gone.
Most importantly, don’t underestimate the cost of healthcare. Our health declines as we age, so make sure you are fully aware of the costs of Medicare and supplemental insurances such as Medicare Part B and Part D.
The final takeaway: The sooner you start to plan for retirement, the better off you’ll be. If you’re close to retirement age and haven’t yet formulated a solid plan, it might be time to consult with a financial adviser. The only way to enjoy retirement is to make sure you’ve got enough money to cover everything you’ll need.
Scott Abramson is the head of growth at Mason Finance.
Scott Abramson is the head of growth at Mason Finance. He graduated with a BS in economics from Duke University.