One of the more insightful quotes of baseball great Yogi Berra was, “If you don’t know where you’re going, you’ll end up someplace else.”
When you’re young, first starting out in life and career, the path to professional success and personal fulfillment isn’t always clear. Most people start out on a track and then adjust as they go along — based on what they learn, who they meet, and cultivate their choices given their opportunities.
Fortunately, the path to retirement need not be so nebulous. By the time you start thinking about retirement, most people have quite a few certainties in their life, such as career, family and assets they hold like their home and investment portfolio. Clearly, this is a great foundation for retirement planning. But it is only the beginning.
There are a lot of factors to be considered before entering this new phase of life. The following is Part 1 of a two-part series on the steps to take in pre-retirement planning.
1. Budget
Most people live on a budget, whether they mean to or not. That’s because, barring excessive spending on credit, most people can only spend as much as they earn. Once you retire and are no longer earning income, spending is generally reduced to match your new income sources, such as Social Security, a pension, investment interest, and dividends, etc. For most retirees, that means they need to spend less than they did before, at least in terms of regular monthly expenses.
Therefore, the first step in planning for retirement is to identify what your income sources will be, how much they will provide each month, and compare that to how much you will need. It is generally advisable to keep working until you have paid off major debts such as your mortgage(s), car payment(s), and any significant balances on credit cards, home equity or personal loans. The ideal plan is to retire when your annual household expenses match or are less than your long-term retirement income sources.
2. Goals
Just as you did as a young adult, you should establish goals for your retirement years. You may have already accomplished buying a house, having a family, and working a fulfilling career — but life doesn’t end at retirement, and neither should goal setting. Otherwise, days can turn into months and years, and you’ll wonder why you never landscaped the backyard the way you wanted or took that trip to Europe. Setting goals and funding sources before retirement gives you these projects to look forward to.
3. Finances
Up until now, your finances may be all over the place. You may have one or more 401(k) plans still managed by former employer custodians. You may have investment accounts in various places, having been persuaded to open new accounts by different brokers, college savings plans, and health savings accounts. If you’re married to someone with lifelong income and investments, double that scenario.
When you start thinking seriously about retirement, consider consolidation. It’s time to roll over old accounts into a Roth or traditional IRA. It’s time to think about whether it’s more efficient to pay taxes on tax-deferred money now or after you retire, depending on your current and future income tax brackets. It’s also time to buckle down and max out your current investment options, such as a 401(k) and IRAs. In 2024:
- Each spouse over age 55 may contribute up to $23,000 to an employer retirement plan (e.g., 401(k), 403(b), 457(b), or Thrift Savings Plan), plus an additional $7,500 in catch-up contributions, for a total of $30,500 on the year (up to $61,000 for a working couple).
- Each spouse over age 55 may contribute up to $7,000 to a traditional or Roth IRA (or combined between the two), plus an additional $1,000 catch-up for a total of $8,000 (up to $16,000 for a working couple).
For a two-income household behind on retirement savings, these opportunities alone offer the ability to save $77,000 a year until retirement. But you may ask: How can you afford to save that much and still maintain household expenses? Check out next month’s Part II: Pre-Retirement Planning Guide for additional steps on how to design a comfortable and secure retirement.
Consolidated Appropriations Act, 2024 (HR 4366) – On March 9, the president signed the latest appropriations bill passed in time to halt a government shutdown. While this bill does authorize funding through the end of the fiscal year (Sept. 30), it only addresses six of the 12 bills necessary to fully fund the government. The recent legislation covers Military Construction, Veterans Affairs, Agriculture, Rural Development, the Food and Drug Administration, the Commerce, Justice and Science-related departments, the Energy Department, the Department of the Interior and the Environment, and Transportation, Housing and Urban Development. On March 23, the president signed the Further Consolidated Appropriations Act, 2024 (HR 2882) in the nick of time to prevent a government shutdown. This subsequent budget legislation includes the remaining spending bills to fully fund the federal government through the end of the fiscal year (Sept. 30).
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Making further continuing appropriations for the fiscal year ending Sept. 30, 2024, and for other purposes (HR 2872) – Passed by both branches and signed by the president on Jan. 18, this is the third temporary resolution designed to avert a government shutdown until Congress can agree on appropriations for fiscal year 2024. The bill extends the government funding deadline to March 1 for four appropriations bills and another eight until March 8.
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For many, buying a home is the biggest asset they will ever own. However, you aren’t able to fully benefit from that asset until you pay off the mortgage; until then, it is technically a liability. The most common length of a mortgage loan is 30 years, but most people either sell their home, refinance their mortgage – or even pay it off before the end of that term.