You’ve finally reached the age of retirement. You’re looking forward to a life of boating, golfing, or traveling. However, for most retirees, these dreams far exceed reality.
US News and World Report says that around 86% of retirees only receive approximately $12,000 per year from social security, which isn’t always enough to live on – much less finance those pie-in-the-sky dreams. In fact, many retirees must continue working even after retirement, which adds about $20k per year to their income. But what’s the point in retiring if you must continue to work?
Retirement can be expensive. The longer you live, the more medical bills you stand to face. Plus you no longer have steady income, but you do still have your regular expenses. Regardless, there are some retirement income solutions and things you can do to reduce the costs of your golden years.
Retirement Income Solutions You Can Start Using:
When you’re working, you must be responsible with your money and save up for your retirement. However, putting money away for your nest egg is only part of it.
You must also take the time to figure out how much money you will be able to pull from that nest egg after your final paycheck has gone through. This is where budgeting comes in – you must take some time and create a budget for your retirement years in order to make sure your post-work life is financially secure.
First of all, long before you retire, you should have your budget for your retirement in place. If you don’t know how much you are going to spend in your retirement, you’ll have no idea if your nest egg will get you through.
Take the budget you have now and use that as a jumping off point for planning your retirement budget. However, you will need to make some adjustments along the way. Some of your expenses will surely go down, but others will go up considerably.
Sit down and figure out your guaranteed income sources for your retirement years. This includes things like pension payments, Social Security, and even annuities from your investments. Once you have figured out where some of your money will be coming from, you can start to narrow down the other retirement income solutions you’ll need to meet your monthly expenses.
There are lots of different online income calculators for retirement- use one of those to figure out how much you will be able to expect to take from your retirement accounts: IRA and 401K once you have officially retired.
Its best to look at several different retirement income calculators (like this one here) since each of them uses different formulas to show how much you will be able to pull out without running out of money early on.
Most experts say that you shouldn’t pull out more than four percent your first year and you can increase that according to the inflation rate each year.
Once you have made the determination about how much you can pull from your IRA and 401K accounts for your retirement, you will be able to use that to determine if you need to make adjustments in how much you save.
If there is a shortage between what you can pull from those accounts and what you’re going to need to spend, you’ll need to make a few adjustments, including possibly working a few more years at your current job, getting a part time job after you retire, or even reducing your spending.
Don’t worry. Even if you’re age 50 or older and just getting started saving for retirement, you can still pull together enough resources to have a healthy retirement.
Once you are 70 ½, you will have to start taking RMDs, or required minimum distributions, from your IRA. Of course, you can build these into the budget you have created- taking that out first and then supplementing the RMD with extra withdrawals as you need them in order to maintain your lifestyle.
It’s very smart when it comes to your taxes to make that RMD the baseline of your budget, because if you don’t withdraw it, you will be hit with a fifty percent tax penalty on the money that you should have gotten.
Early Withdrawal of Retirement Funds:
In the case that you happen to retire early, you may end up having to pull funds from your IRA or 401K before you reach the retirement age. You will have to pay a penalty on the early distribution of these funds, when it comes around to tax time.
The penalty is ten percent of the balance that you pull out. You will also be taxed on the amount that you withdraw when it comes tax time. The amount you pull out will be added to your income and you will be taxed at the rate of tax margin you’re in.
If you want to be able to withdraw your money without paying penalties, you can use SEPP or substantially equal periodic payments. Through SEPP, you receive equal payments from your retirement plan for five years or until you reach the age of 1/2, whichever time is longer- which is great if you opt to take an early retirement.
The caution with SEPP is that if you start taking those distributions too early, you will end up totally depleting all your retirement income solutions before you reach the age of retirement. No matter what age you are, you can use this plan. It allows you to pull money from your retirement account through periodic distributions. You should only use SEPP in the case of early retirement, not in the case of a quick one-time fix for financial issues.
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