Preparing for retirement isn’t just determining your last day of work and planning the trips you’ll take once you’ve left your job. If you look at retirement planning in this manner, you likely won’t have enough money to make any trips or possibly even to pay your most basic expenses.
You should start planning for retirement as early as possible and be prepared for some hard decisions. The Consumer Financial Protection Bureau (CFPB) has some guidelines you can follow to ensure that the money will be waiting when you’re ready to take this big step in your life.
The most important step is determining what your expenses and income will be once you’ve retired. You’ll be able to draw on Social Security payments, annuities, pensions, and similar savings, but on average this income is about one-third less than what you earned while working. Your tax bill will be lower since you aren’t making as much money. However, you may be paying more in health care costs as you age. You might even need to remodel your home to make it easier for you or a family member to navigate. Remodeling costs can run into thousands of dollars.
The biggest expense you’re likely to have throughout your working years is your home. Paying a mortgage when you’re retired and likely bringing in less money each month can be a hardship. For this reason, it’s a good idea to plan to pay off your mortgage before you retire. You should also avoid taking out home equity loans or new mortgages. Studies have shown that retirees who are still paying a mortgage generally spend close to $1,000 more a month than those who have paid off their mortgage.
By paying off your mortgage before you retire, you also build more equity that you can potentially use in a reverse mortgage. A reverse mortgage allows you to borrow money against the value of your home and then receive monthly payments of that loan amount. Although there are drawbacks, it can be a lifesaver if you’re in a financial pinch.
Before you’re ready to retire, it’s a good idea to become familiar with the pension fund you and your spouse will be receiving. If you have the option, you’ll need to determine whether taking the pension in monthly installments or as a lump sum payment is the best choice for you. The investment potential, as well as your spouse's eligibility for survivor benefits, can be impacted by the decisions you make. Likewise, be informed about Social Security benefits you and your spouse will be receiving. The amount you’ll ultimately receive will be impacted by the age at which you stop working, other investments you have and whether or not your spouse is still alive.
It’s easy to feel intimidated by all of the financial information you’ll receive once you’ve retired. If you don’t make an effort to understand it, however, you could potentially lose a large part of the retirement income you’ve worked so hard for. The Consumer Financial Protection Bureau can help you understand your investments and learn ways to protect the money you’ve worked so hard to earn.