Note: This is the fifth in a series of Lifecycle Planning articles for every age group.
In this series of articles, we have been describing some of the personal financial planning challenges faced by Americans during different life stages. Here, we look at the 60s, which might be the most critical life stage of all from a financial planning perspective..
This is because the 60s are the decade when people have traditionally made the transition from full-time work to retirement. While many people are now retiring later, for the millions who do stop working in their 60s, the decade should be viewed in two parts from a financial planning perspective: the years immediately preceding retirement, and the years immediately following retirement..
The Early- to Mid-60s
While the U.S. has no official retirement age like some countries, the age of 65 has long been considered the traditional retirement age towards which people plan. (For decades, Social Security considered 65 to be “full retirement age,” although that began to creep higher for people born in 1938 and beyond.) If you are entering your 60s and would like to retire at 65, you have a very limited amount of time left to prepare financially for your retirement.
Therefore, for many people, the main financial priority in their early 60s is to continue contributing as much money as possible to their retirement savings accounts. One of the best ways to do this is to take advantage of the higher qualified retirement plan contribution limits (or catch-up contributions) that are available to you once you reach age 50.
Catch-up contribution limits allow you to contribute an extra $1,000 to your traditional or Roth IRA (or a total of $6,500 this year), an extra $2,500 to your SIMPLE IRA (or a total of $14,500 this year) and an extra $5,500 to your 401(k), 403(b), 457 or SARSEP (or a total of $23,000 this year). If you own a small business or are self-employed, you can contribute up to $52,000, or 25 percent of your compensation (whichever is less), to a SEP-IRA.
It is also smart to re-examine your asset allocation mix during the years leading up to your retirement. Many people nearing retirement want to lessen their exposure to more volatile investments like equities, since they have less time to make up short-term losses in the stock market. Many near-retirees learned this lesson the hard way after the financial crisis, when the stock market fell dramatically and their retirement accounts lost significant value right before they wanted to retire. This forced some of them to delay retirement for several more years.
Instead, consider gradually shifting your asset allocation away from equities toward less-volatile assets like fixed-income instruments (such as Treasury bonds and AAA-rated corporate bonds) and cash equivalents. In general, your focus during this life stage should be more on asset-preservation than on asset growth as you prepare to shift from the asset accumulation to the asset withdrawal phase of your personal finances.
Planning a Retirement Budget
As you inch closer to your anticipated retirement date, you should start planning your new retirement budget. Obviously, leaving the full-time workforce and forgoing a steady paycheck and benefits is going to have a drastic effect on your personal finances. So, plan to sit down with your spouse, and possibly a financial planner, to create a new household budget based on your post-retirement financial situation.
The first step is to estimate your monthly retirement income. For most retirees, this consists primarily of their retirement savings accounts, Social Security benefits and possibly an employer pension plan.
There are two main strategies for withdrawing money from your retirement accounts. The first is to withdraw a set amount of money every month, which offers a predictable amount of monthly income that can make personal budgeting easier. The second is to withdraw a percentage of the account balance each month, which provides more control over the portfolio’s overall drawdown and could enable you to stretch your retirement funds out further if you plan carefully.
There are also options when it comes to receiving Social Security benefits. You may be eligible to begin receiving Social Security as early as age 62. However, if you choose this option, your monthly benefit amount will be permanently reduced by up to 25 percent for the rest of your life. If you wait until your full retirement age (between 65 and 67, depending on when you were born), you will receive the full amount of your Social Security benefits. Moreover, if you want until after your full retirement age (up to age 70) to start receiving benefits, you may be eligible for delayed retirement credits that would increase your monthly benefit even more.
As you plan your budget, keep in mind that your expenses may be lower once you retire. This is due to the fact that you will no longer have work-related expenses (like commuting, clothing, eating lunch out, etc.), you probably won’t still be supporting children and you may have paid off your home mortgage (or be close to paying it off). Therefore, some financial experts suggest planning to need about 75 to 85 percent of your pre-retirement monthly income during retirement.
But this is just a generalization, as every retired couple or individual is different. If you plan to enjoy an active retirement traveling, entertaining, eating out often and playing a lot of golf or indulging in other expensive hobbies or recreation, you might need to budget more money for your monthly retirement expenses. The point is to anticipate realistically what your retirement expenses will be and then plan strategies for how you will meet these using the sources of retirement income available to you.
The Mid- to Late-60s
Once you cross over the threshold and officially enter retirement, your biggest financial priority will be to adjust your lifestyle to fit the realities of your financial situation. If you have planned your retirement budget carefully and realistically, this will primarily be a matter of maintaining spending discipline so you do not draw down your retirement savings accounts too quickly.
You should also continue to keep a close eye on your asset allocation. Here, it might be a good idea to work with a financial planner who can help you maintain the proper mix of assets that provides the right degree of asset preservation and growth along with an acceptable level of portfolio risk.
If you find that your post-retirement financial assets are not enough for you to live the retirement lifestyle you hoped for, you might consider going back to work on a part-time basis if your health allows it and the right opportunity comes along. Many older Americans are now going back to work as much to keep their bodies healthy and their minds sharp as they are for financial reasons.
As you can see, the 60s can be a very challenging, but also extremely rewarding, life stage when it comes to personal financial planning. By viewing your 60s in two parts like this, you’ll stand a better chance of successfully making the transition from full-time employment into retirement.
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