Retirement Planning

While it's (almost) never too late to plan for retirement, the sooner you start, the less complicated it can be. And the more successful your retirement investment strategy, the more options you'll have when you're ready to start living "the rest of your life," whatever that looks like to you.

Here are a few key facts to consider when thinking about your retirement "nest egg":

  • Most people underestimate the amount they need to save for retirement.
  • People can expect to live 30 or more years in retirement, which could mean a significant risk of outliving their retirement savings.
  • The future of Social Security is uncertain.

The most effective retirement planning happens in stages. Take a look at where you should be and what you should be doing . . .

First Midwest Retirement Planning Stages

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Getting Started

Early in your working life, retirement may not even be on your radar. But this is actually the perfect time to start thinking about retirement and to set up your first retirement investment and savings accounts. Because you have such a long time horizon, your money will have years and years of growth potential. Small, consistent investments now have the potential to add up to significant savings over time.

Starting early and being consistent are some of the keys to a successful retirement savings strategy. If your company has a 401(k) plan, enroll in it as soon as you are eligible. Many employers offer to match a percentage of the money you put into the account, giving you additional incentive to invest – it’s like getting a bonus every month.

As you become more settled in your career and are making more money, life may also be getting a little more complicated. You may be getting married, or starting a family or buying your first house. Don't be tempted to cut back on retirement savings now. Keep your investment course steady, and make sure your contributions are keeping pace with your income. If you get a raise, give your investment savings a raise as well. Automatic payroll deductions should make it easier.

Take the time to learn about investment strategies if that interests you. Your First Midwest Financial Consultant can provide a wealth of information, as well as guidance for establishing, and periodically reevaluating, a well-diversified retirement investment portfolio.

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Along the Way

In your 40s and 50s you've likely reached a point of financial stability, maybe even with real financial breathing room. That gives you a lot more freedom now. But you may want to think about how to give yourself real freedom in retirement, and be able to choose the lifestyle you want to live. Will you still want the demands of full-time employment at 65? You might still be enjoying your career. But you might prefer to travel, or do volunteer work, or spend time with grandchildren, or maybe even start a business.

The point is, if you adopt and maintain a solid retirement investment strategy, and get regular financial checkups, the choice will be yours. That’s what financial freedom is all about.

The closer you get to retirement, the more every dollar counts. In early middle age you're probably earning more, but also may have college-age kids. Before borrowing from your retirement savings to help with college expenses – and losing interest that may never be regained – look at student loans and other options available for funding higher education. Your children will have many years to pay back the money they'll borrow for college, while the time you have to save for retirement is growing ever shorter.

In your 50s, retirement is starting to feel more real, so you need to focus on what you still need to do to make retirement a reality, pay close attention to how your investments are performing, and fine-tune them for optimal growth and appropriate levels of risk.

After reviewing your situation, you may find that you need to play “catch up” with your retirement savings. Even if you’ve done little to prepare for retirement, don’t be defeated by fretting about what you haven’t managed to accomplish. Instead, focus on what you can do from today forward to create a more secure financial future, and start saving now.

Here are some strategies that may help:

  • Additional retirement plan catch-up contributions are now available to workers age 50 and older for both tax-deferred employer plans and IRAs, so take advantage of that if you can.
  • Think about your investment time horizon as the rest of your life, not some arbitrary retirement date. So you still have many years to make up for lost time.
  • Take action before retirement to increase savings:
    • Increase contributions to tax-deferred retirement savings plans
    • Accelerate repayment of debt to free up money for savings
    • Consider taking a second job for additional income
    • Invest more aggressively to increase your potential for higher returns
    • Maximize tax breaks on investments
    • Reduce investment expenses
    • Fund multiple retirement savings plans
    • Don’t spend lump-sum distributions from tax-deferred plans when changing jobs – roll them over!

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In or Near Retirement

In your 60s, it's time to look at how you'll cover basic living expenses in retirement, or better yet, how you’ll be able to live the life you WANT to live in retirement.

These could be the best years of your life.  And, you'll need to have a plan for how you'll cover your own future medical needs, or maybe first being responsible for the care of your aging parents. (See "Becoming a Caregiver.") Now's the time to carefully sort through the details to make sure you’ve covered all your bases, and make sure you’re ready to retire, both psychologically and financially.

Start by making sure your basic living expenses will be easily met.

  • Check to see that your accounts are in order.
  • Make sure all your questions have been asked and answered, and you know what retirement will mean for you.
  • Figure out exactly how much monthly income you’ll need for your new retirement lifestyle.
  • Ensure you have a plan in place that provides that amount before you actually retire.

Plan to make your money last.1 Talk to your First Midwest Financial Consultant to make sure you have a plan that allows efficient access to your savings so you can do the things you want to do.

  • If 50 to 75 percent of your portfolio is in stock when you reach retirement, a "safe" annual withdrawal rate (to avoid outliving your savings) may be between 4 and 5 percent of assets.
  • More conservative investors may need to withdraw less than this, closer to 3 or 3.5 percent.
  • Many retirees tend to spend less in their 70s and 80s than they do in their 60s, so withdrawal plans should take this into account.
  • Asset withdrawals should be done in a tax-efficient manner, taking funds from taxable or tax-free investments first, and leaving tax-deferred assets to grow as long as possible (preferably until age 70½ when mandatory minimum withdrawals must begin).
  • Pay yourself on a regular basis.
  • Keep three to five years worth of cash withdrawals in liquid assets, such as a money market instrument, so you don’t have to sell stocks during a market decline or cash in bonds when interest rates are rising and bond prices are falling.
  • Replenish the cash reserve frequently, preferably when market conditions are favorable to making cash withdrawals from investments without loss of principal.

If you find that you don't have the assets you need to retire, there are some actions you can take near or even after retirement to extend the life of your assets:

  • Trade down to a smaller home or move to a less expensive location.
  • Continue working after retirement.
  • Tap into your home equity through a reverse mortgage.

Talk to your First Midwest Financial Consultant for help with all your retirement planning needs, no matter where you are in the retirement continuum. We can help you craft a strategy that will help you retire your way.

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Managing Healthcare in Retirement

Some estimates suggest that a couple without employer-sponsored retiree healthcare coverage will need more than $150,000 to cover their out-of-pocket healthcare costs in retirement. And with employer-sponsored healthcare coverage for retirees rapidly becoming a thing of the past, that figure would apply to most Americans who are currently in the workforce.

Expenses taken into account by this number include Medicare Part B and Part D premiums, Medicare copayments, co-insurance, deductibles, excluded medical costs, and out-of-pocket prescription drug costs. It does not include over-the-counter medications and most dental services. And it certainly doesn't account for the greatest potential expense retirees face, the cost of long-term care.

Clearly this needs to be taken into consideration when determining just how much money you'll need in retirement. There are solutions that can help you be prepared for the high cost of healthcare, including health savings accounts, and long-term care insurance.

Talk to your First Midwest Financial Consultant about incorporating solutions for covering healthcare costs into your overall retirement savings and investment strategy.

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