Answers to some of your most fundamental retirement questions
Most hardworking Americans dream about retirement. Yet the road to retirement can raise questions along the way. If you wonder when, where, why or how to fulfill your retirement goals, you are not alone. Here are some common inquiries my team hears from clients who are planning for this major milestone — whether it’s right around the corner or far off on the horizon. Remember that your dreams and financial situations are unique, and there is no one-size-fits-all retirement solution.
If you just started your career and have decades before retirement:
• “With all my current financial priorities, why should I worry about saving money for retirement?”
The sooner you start saving for retirement, the greater the opportunity for your money to grow. If you are in your 20s or 30s, you may not have as many assets as those who have been in the workforce for decades. What you do have is time, and that can be a powerful ally. Time allows you to take full advantage of the opportunity to compound growth in your investments. Even modest investment amounts that have years to potentially grow can make a significant difference in your retirement savings.
• “How much of my paycheck should I save for retirement?”
A reasonable goal is to save 10 percent of your pre-tax income in retirement savings vehicles. If you have the option, consider directing a portion from your paycheck to a 401(k) or another workplace savings plan. Check to see if your employer offers a matching contribution. Those with additional discretionary income may want to save extra money in a Roth IRA, if appropriate, which allows you to build retirement savings with after-tax dollars and potential tax-free income in the future.
If a retirement party is in your near future:
• “Should I pay off my home mortgage early?”
Paying off your mortgage may seem like a great idea, but there are a variety of factors to consider in the decision. One of the biggest is the cost of moving a large sum of money out of an existing investment to make your final mortgage payments. If the interest rate you pay on your mortgage is low, you may want to keep that money invested and continue making mortgage payments. On the other hand, as you near retirement, you might appreciate eliminating the debt to reduce your monthly expenses.
Also, holding a mortgage is key to many Americans’ tax strategy because the interest paid could potentially be tax deductible. If mortgage interest is part of your tax strategy, consult with your tax professional before making the decision to own your home outright.
• “How will I know if I saved enough money to last?”
The answer to this question will depend on your retirement dreams and current financial situation. The variables that come into play include the amount of money you’ll need to pay your expenses each year and other sources of income you have (such as a pension or Social Security). The biggest unknown is how long your retirement will last, but most people should be prepared to spend several decades in retirement. A financial plan lets you test different assumptions based on an appropriate retirement date.
• “Will Medicare cover my health care costs in retirement?”
Health care is one of the largest expenses most retirees incur in their later years, and Medicare only covers a portion of heath care expenses. It is broken up into different parts. Part A is offered at no cost, but mainly covers only expenses related to hospitalization. Part B requires a monthly premium, but makes medical services such as care from a doctor or tests more affordable. Part C is an alternative type of Medicare coverage provided through private insurers, at a cost. Part D is a prescription program that helps reduce the price of drugs. Medicare Supplement coverage is another form of coverage that charges a premium, but helps reduce out-of-pocket medical expenses.
• “At what age should I begin to collect Social Security?”
This varies by person. The earliest you can qualify to begin collecting Social Security retirement benefits is age 62. The longer you wait, the larger your benefit will be. The highest monthly benefit you can earn occurs when you reach age 70. If you continue to work, it may make sense to delay taking Social Security. When you retire, you’ll need to weigh the value of delaying Social Security against the cost of taking money out of your personal savings to make up the difference.
Whether retirement is a year or decades away, it’s important to craft a plan for how you will build your nest egg and fund your retirement dreams. If you have questions or want to discuss your personal situation, consult your financial adviser, estate planner and tax professional for guidance.
Randy Groff, ChFC, CLU, CRPC, is a financial adviser with Ameriprise Financial Services, Inc., in Marshall.