A great phase of life for many is retirement. Retirees can enjoy the fruits of their hard work and pursue their interests and hobbies more frequently. However, saving for the retirement they want can be a significant undertaking.
Therefore, people should build a solid retirement plan carefully and set aside money diligently to stay on track. This article will cover a few questions to help see if one is retirement-ready and some tips to meet one’s goals.
Questions to help determine whether someone is retirement-ready
Before taking action to get to retirement, people need to ask themselves a few questions about their retirement income and tax plans:
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1. Where will retirement income come from?
Once someone retires, income can be more complicated because various sources are involved. Retirees will need a clear plan for where their income will come from. There are multiple sources available, including:
- Social Security
- Retirement accounts
- Savings and investments
- Home equity
- Part-time work
- A business
- Life insurance policies
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2. How much income is needed?
After people know their income sources, they will need to figure out how much they’ll need — and that means examining their spending habits. Don’t guess at this. Track current spending, then consider what expenses to add or remove in retirement. For instance, someone may need to budget extra for travel if they plan to do so more in retirement.
3. What will someone’s tax burden look like?
Planning income also means planning tax burden. Someone’s overall tax burden will differ depending on where they live and what income sources they rely on. For instance, living in a state without an income tax and relying on tax-free Roth IRA funds could allow someone to draw on more assets without paying taxes.
How to prepare for retirement
Once people know where they stand regarding their path to retirement, here are some ways they can make sure to hit their goals so they can enjoy their golden years:
1. Get an accountant and financial adviser
People don’t have to plan their retirement alone. Consider working with financial professionals since they have the time and expertise to handle this for others.
For example, an accountant can help people plan their tax burden and find ways to help them reduce those taxes now and in retirement. Meanwhile, a financial adviser can help people develop a saving and investing plan that maximises the chances they hit their retirement goals.
2. Increase retirement contributions
Those who are employed can take advantage of their workplace contributions. Many employers offer a “match” up to a certain amount. Maximise that match because it’s essentially free money. After that, consider an Individual Retirement Account (IRA).
Traditional retirement account contributions are pre-tax, but withdrawals are taxed in retirement. Meanwhile, Roth IRA withdrawals are tax-free in retirement, but contributions are not tax deductible.
3. Pay down debts
Debt can occupy a portion of someone’s budget, and too much can strain their retirement savings when they need to rely on them. Therefore, people should look over their current spending habits, debt levels, and debt payments to see if they’re on track to be debt-free or have minimal debt in retirement.
The two most popular debt payoff methods are the debt snowball and debt avalanche methods. Debt snowball involves paying off debts in order of size, from smallest to largest.
For example, people can put all debts except the smallest on minimum payments, then put all extra money toward the smallest debt. This helps gain momentum since someone may quickly pay off that small debt.
The debt avalanche method starts with the debt with the highest interest rate, then works its way down. This method may have a slower start, but it can save people more on interest.
4. Get a life insurance policy
Life insurance pays beneficiaries a substantial death benefit if the policyholder passes away while the policy is in force. This can help loved ones replace the policyholder’s income and pay off any debts they leave behind. In addition, the death benefit is tax-free, helping people pass down more of their assets by potentially avoiding estate taxes.
There are various types of life insurance policies. Term life insurance is often more affordable, but keep in mind that it’s a temporary policy and may last 10 to 30 years. Permanent life insurance can come with higher premiums but lasts for life and offers another source of tax-advantaged retirement wealth with the cash value growth component. According to LIMRA’s 2022 Insurance Barometer Study, one of the top reasons people own a life insurance policy is to supplement retirement income.
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Prepare for retirement
The biggest questions people must ask themselves when planning for retirement involve their income — including how much they need and where it will come from — and their tax burden. This will help them decide where they’ll live and what their monthly budget should look like.
From there, people can take steps to plan for that retirement. That starts with getting an accountant and financial adviser and upping their retirement contributions.
Then, they should focus on reducing their debt and covering their loved ones with a life insurance policy. Taking these steps can help people have a comfortable retirement.
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Globe Newswire, Chicago
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