Retirement planning can be equal parts stressful and exciting.
You finally get to sleep in on Mondays, enjoy your hobbies, travel and spend more time with family.
But creating a retirement plan is tricky. There are many moving parts to consider, from Social Security and Medicare to taxes and investments.
If retirement is on your radar in the next year or so, here’s a checklist of things to know and do before leaving the workforce.
- Figure Out How Much You Need and How Much You Have
It’s important to have a ballpark figure of how much money you’ll need in retirement before you exit stage left.
Several well-known formulas and guidelines attempt to help you figure out how much you need to retire.
Two of the most popular are:
25x Rule: Take your annual expenses and multiply them by 25.
70%-80% Rule: Many experts say you will need about 70% to 80% of your average income during your working years annually to fund your retirement.
While it’s nice to keep these numbers in mind, working with a financial planner and creating your own retirement budget will yield the most personalized estimate of your retirement income and expenses.
It’s important to consider how your financial situation and expenses will change in retirement. You won’t spend as much money commuting to work, for example, but your health care costs will increase as you age.
- Know Your Social Security Full Retirement Age
You can start collecting Social Security retirement benefits as early as age 62. But if you opt in early, your monthly benefits will be reduced significantly.
You aren’t eligible for full Social Security benefits until you reach what’s known as your full retirement age.
Full retirement age used to be 65, but that hasn’t been the case for a while.
The Social Security Administration now bases your full retirement age on the year you were born:
If you were born between 1943 and 1954, your full retirement age is 66.
If you were born between 1955 and 1960, your full retirement age increases gradually up to age 67.
Anyone born since 1961 has a full retirement age of 67.
You get a larger monthly benefit by working past your full retirement age.
Your benefit amount increases for every month you do not accept Social Security benefits, although this added benefit maxes out at age 70.
- Learn How to Maximize Your Social Security Benefit
Nearly every strategy that might increase your Social Security check boils down to this: Work longer, earn more money and postpone your retirement date as long as possible.
Work at Least 35 Years
Social Security uses your 35 highest-earning years to calculate your benefit, so it’s wise to stay in the workforce at least that long.
Report All Your Earnings
Make sure to report earnings you make from tips, freelancing and self-employment throughout your career. Failing to report these earnings could reduce the amount of Social Security you get later on.
Marriage and Divorce Make a Difference
For example, if you’re divorced and not remarried, you might be eligible to claim benefits based on your ex’s work record (provided that your marriage lasted at least 10 years). Doing so won’t impact their benefits.
Or if your current or ex-spouse dies, you could qualify for 100% of their benefit if you meet certain requirements.
This commentary was originally posted by Rachel Christian, CEPF® AUGUST 2, 2022
**Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.