Americans are living longer than ever. The following life expectancy study from the Brookings Institute illustrates this point.
For married couples, there is an 88% chance that one will live to age 80, and a 45% chance that one will live to age 90. Living longer requires our money to last longer. Outliving our money is one of the biggest fears for those planning for retirement.
Here are five things you can do to make your money last longer.
Reducing spending seems obvious. But many people believe they can enter retirement spending the same amount of money as when they were working full time. You do not want to wait until you retire to figure this out. Make plans on how much you will spend well in advance of your actual retirement. Consider moving to an area with a lower cost of living. Not sure where that is? Learn more at Sperling’s Best Places to Live – bestplaces.net.
Reduce or eliminate debt
Another obvious point, yet many people entering retirement still have massive amounts of debt. Pay off high-interest credit card debt. If possible, have your mortgage paid off at retirement. If you are empty nesters living in the same house as when your kids were home, it is likely more house than you need. Consider downsizing. Use the cash from the home sale to pay for a smaller home. Retiring without a mortgage can substantially reduce your monthly costs.
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Maximize your Social Security Income
For most, Social Security is the only guaranteed retirement income option. This Social Security Bulletin estimates that 40% of baby boomers retirement income will come from Social Security. Research sources indicate about half of all Americans file during their first year of eligibility, typically age 62. Starting at age 62 gives you reduced benefit but for a more extended period, assuming average life expectancy.
Waiting for full retirement (age 66 for most baby boomers) increases your Social Security income by 25%. If you can wait until age 70, your income grows by another 32%.
If married, divorced or widowed, you have other options to increase your Social Security income. Make sure you thoroughly analyze your options before making a decision. It is essential to get it right the first time. A 2010 rule change prohibits changing your Social Security election after twelve months.
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Free Social Security Cheat Sheet
Social Security is confusing, isn't it? If you're willing to give up your email address, I'll send you a cheat sheet with some of the most common terms to help remove at least some of the confusion around the subject.
Make smart decisions when withdrawing from investment accounts
Conventional wisdom says to take income from taxable accounts first, and then retirement accounts (IRAs, 401(k)s, etc.). However, that may not be the best option.
As much as 85% of Social Security income may be subject to tax. The income thresholds and tax consequences are as follows:
Fifty percent of social security for singles earning between $25,000 and $34,000 and couples earning between $32,000 and $44,000 are subject to tax. Eighty-five percent of social security for singles making over $34,000 and couples earning over $44,000 are subject to tax.
Consider withdrawing from retirement accounts first. To minimize taxes, limit withdrawals to amounts that don’t exceed the 15% marginal bracket. If this income means you can delay filing for Social Security, your benefit will grow, ideally, until age 70 (see above example).
If you need additional income, consider selling stocks or stock mutual funds held longer than a year in taxable accounts. Under the current tax code, you pay these taxes at capital gains tax rates (15% or 20%).
This strategy reduces IRA account balances, ultimately, reducing the amount of required minimum distributions (RMDs) from your IRAs. RMDs must begin in the year following the year you reach age 70 ½.
Converting those IRAs to Roth IRAs is another consideration. Though you pay taxes in the year of conversion, withdrawals from a Roth IRA are tax-free.
Get the right assets in the right accounts
Pay attention to which type of accounts you place your assets. Since you pay ordinary income tax on bonds, bond funds, and real estate investment trusts income, they belong in retirement accounts. Conversely, stocks and stock funds get taxed at capital gains rates and should be in taxable accounts. Reducing taxable income and minimizing taxes on that income help your money last longer.
Preparation is the key to success in retirement. Following these five steps significantly improves the probability of not outliving your money. If you feel overwhelmed with the choices, consider hiring an advisor, one committed to acting in your best interest, to help.
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