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Taking the Mystery Out of Retirement
Planning
Retirement Planning
Chapter 4
Closing the Gap
Few people will have exactly the amount of money they will need in retirement. Most will get a negative figure – a gap - when they do the math. If this is your situation, it’s time to figure how much more to save each month over the next 10 years until you retire. After you come up with your totals, comparing income with your expenses during retirement, read on to find out the difference a year can make, and the five ways to close the gap and boost your savings. Where will you find additional savings? Here are some suggestions for active workers and retirees alike.
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Most people haven’t thought about how long their savings will last in retirement or how much inflation will increase over time.
At the beginning of retirement, most people’s monthly income likely will exceed their expenses, but after a decade or so, expenses begin to exceed the monthly income. When doing a comparison of your projected income and expenses, keep in mind that the value of a dollar tomorrow is less than a dollar today. The goal is to stay ahead of inflation. For example, a dollar today is worth more than a dollar in 30 years if the rate of return, say 5 percent, is greater than the inflation rate, say 3.5 percent. Realizing this now will allow you to save and invest any extra income in the early years of retirement so that it will grow and can be used to cover increased expenses later in retirement.
Five Ways to Close the Gap
Where will you find additional savings? Here are some suggestions for active workers and retirees alike.
Number 1 – Work Your Contributions at Work
Without exception, retirement planners advise contributing the maximum to your retirement plan, especially if your employer contributes, too. Since your employer contributes to the ERB defined benefit plan there is no match for your 403(b) or 457 plan contributions. If your contributions are made by salary deduction, saving is easier to do and may seem almost painless. And contributing more means postponing or “deferring” taxes until you withdraw the money at retirement. Then you may be in a lower tax bracket.
Adding $200 a month, or $2,400 a year over 10 years, to a starting retirement savings balance of $40,000 would more than double your money, assuming a 5 percent rate of return and all earnings reinvested.
Catch-up provisions for some retirement plans allow you to contribute extra amounts if you’re over 50. Information about 403(b) and 457 catch-up contributions is available from your employer’s defined contribution administrator or on the Internet. If your plan has a catch-up provision, act on it now.
Number 2 – Work Longer, Retire Later
Staying employed as long as possible benefits your retirement finances in several ways. Having an income gives your retirement savings more time to grow. A regular income could mean more regular savings. Your health care premiums are likely smaller as an employee than as a retiree, especially if you are insuring a family.
You don’t have to stay at your same job if there are other opportunities. Maybe you want a new career, one that ties in to your personal interests. Longer life spans and better health mean many older people have the energy and enthusiasm employers are looking for, not to mention the skills and experience. Many people find the social benefits of working as important as the financial ones.
Number 3 - Cut Expenses Big and Little
Moving to a region with lower housing and living costs or moving to a smaller home can help narrow the savings gap. Another option is staying in your community, but downsizing to a smaller place like a condo or apartment. The same factors that drove up the value of your current house, however, will also have driven up overall housing costs, including real estate taxes. Housing is a major part of everyone’s budget so think carefully about where you want to be and whether you can afford it. Keep in mind, however, that moving includes its own financial expenses and means leaving friends and your community.
Number 4 – Social Security, Now or Later?
The amount of your monthly Social Security benefit goes up the older you are when you start receiving it. For example, a 61-year-old man earning $60,000 in 2004 and eligible for this early Social Security benefit at 62 would receive an additional $1,000 a year by waiting a year until he is 63, to collect his benefits. On the other hand, retirees who are seriously ill, who need the money immediately, or who feel comfortable investing their monthly checks may choose not to wait.
If you delay retirement beyond the full Social Security retirement age, you can earn retirement credits, increasing Social Security by a certain percentage (depending on date of birth) until you reach age 70. Regardless of the age you start receiving Social Security benefits, remember to sign up for Medicare at age 65.
Number 5 – Put Your Money Where the Returns Are
Educate yourself about investing and consider paying a professional to help you choose the right place for your money. Financial experts say too many people keep too much money in the wrong kinds on accounts, for example checking accounts, savings accounts, and money market funds, which typically have low interest or return rates.
This article contains information excerpted from “Taking the Mystery Out of Retirement Planning,” Dept. of Labor 2006
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ERB presents two seminars that help guide members to informed choices concerning their educational retirement options. Your Educational Retirement Benefits covers your retirement benefits and helps you to make wise decisions considering those benefits. It is presented in 2 ½ hours on a weekday evening, typically from 4:30 to 7:00pm.
Getting Your Ducks in a Row, in addition to the Retirement Benefits contents, includes information about Social Security, New Mexico Retiree Health Care Authority benefits, the New You – Aging Well, Estate Planning, and Financial Planning in Retirement. It is presented on Saturday mornings from 8:30 to 12:30.
Seminar materials including powerpoint slides and supporting materials help participants to make the most of their learning time. These seminars are for anyone even dreaming of their retirement in the distant future. Spouses are welcome.
All information in the seminars is of a general nature and specific, personalized, information should be requested from the ERB office nearest you.
register online - click here
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To learn more about NMERB go to our web site
www.nmerb.org
You can also find our printed newsletters online by clicking here
New Mexico Educational Retirement Board (NMERB)
Managing the Retirement Assets of New Mexico's Educators
Santa Fe 505.827.8030
Albuquerque 505. 888.1560
Las Cruces 575.647.3313 |
