Paying For Your Retirement
At the end of long years of work, you may be looking forward to one thing: retirement. That retirement will be a lot more rewarding (and fun) if you have money to pay for it. Planning for retirement is one of those things you should do long before you need it. Let’s look at some ways you can pay for your retirement years.
Social Security Payments
Many people expect to live on Social Security payments after they reach retirement age. In fact, it is the most common way we pay for retirement. Although Social Security has been around since 1935, it’s still a mystery to many people.
How Payments Are Calculated
Your social security payments are based on money that you, as an employee, paid into the program. Federal Insurance Contributions Act (FICA) contributions were deducted from your paychecks. People may also receive Social Security payments:
- if they become disabled,
- if their adult child became disabled before age 22, and
- if they are eligible to receive Social Security survivor benefits.
To receive benefits, you must have accumulated enough “work credits.” You can earn up to four credits per year, based on your income. The number of credits you need to receive benefits depends on your age. Older people naturally are expected to have more credits because they have been in the work force longer.
You must be at least 62 years old to receive Social Security retirement benefits. However, you can wait until age 70 to start receiving your Social Security payout. Medicare benefits start at age 65, as long as you have at least 40 work credits.
It’s possible to work full-time or part-time and still receive benefits. However, your payouts will be reduced according to the Social Security Administration’s formula.
Ways To Increase Social Security Payments
There may be ways to get more out of your Social Security benefits:
- To get a larger monthly payout, don’t start your benefits at age 62. Monthly benefits can be substantially higher if you wait until you are at least age 67 to collect.
- Are you divorced? If you were married at least 10 years, you may be able to claim Social Security on your ex-spouse’s work record.
- Don’t earn too much money working. Your Social Security benefits will be reduced $1 for every $2 you earn over the annual limit. In 2018, retirees could earn up to $17,040 before a reduction in benefits sets in.
- Watch your income from other sources, like annuities or retirement funds. If that income plus your Social Security benefits is over a certain limit ($25,000 for individuals, $32,000 for couples), some of your Social Security benefits could become taxable income.
- Check your Social Security account at least once a year. You can do this by setting up an account on the Social Administration. You’ll be able to estimate your expected monthly Social Security Income based on your work credits.
Social Security benefits are not the only way to pay for retirement, though.
Homeowners have another way to pay for retirement – reverse mortgages.
A Different Type of Loan
With reverse mortgages, the bank pays the homeowner. Payments can be made monthly or in a lump sum. This is still loan, however, so the money will have to be repaid. Typically, the entire loan balance is due if the homeowner dies, moves away, or sells the home used as collateral.
Interest on the loan is usually rolled into the balance of the loan. That way, the borrower does not have any costs upfront.
Borrowers choose how to receive payments. Usually, the following options are available:
- One lump sum,
- A line of credit (borrower only pays interest on the amount received),
- Equal monthly payments,
- Equal payments plus a line of credit,
- Payments for a set period of time or term, or
- Payments for a set period of time plus a line of credit.
The homeowner also gets to retain title to the home. For some, a reverse mortgage could be a great way to remain in their homes while receiving some much needed cash to fund their retirement.
The loan amount can’t be more than the home’s value. Also, the borrower is not held responsible if the loan balance exceeds the home’s value for any reason.
This type of loan is particularly helpful to people whose net worth is tied up in their home. However, there are disadvantages to getting a reverse mortgage.
The Downside Of Reverse Mortgages
As with any program, there are pros and cons. The pros include having money for retirement. The cons include:
- Not being able to pass the home down to your heirs,
- Tying up home equity,
- Anyone living with you at the time of your death will have to move out,
- Outliving the term of your loan or using up all your loan payments while still living at the home,
- Not being able to use your home equity to pay for medical bills or nursing care,
- If you move into a nursing home for more than 12 consecutive months, the lender may foreclose on the home.
- You must be able to continue paying for costs like insurance, maintenance, and taxes.
A reverse mortgage may be an option after a certain age. However, there are things you can do earlier in life that will help your retirement days be more comfortable.
Retirement Accounts & Annuities
Some ways to pay for your retirement may begin decades beforehand, but it’s never too late to start.
Many people are able to contribute to retirement plans like:
- 401(k) or 403(b) – typically offered by employers;
- SEP IRA – Simplified Employee Pension, may be used by small business owners or self-employed people.
- Simple IRA – used by businesses that employ fewer than 100 people, requires less paperwork.
- IRA – investment retirement account that allows money to grow tax-free.
- Roth IRA – limits and regulations apply.
There may be limits to the amount you can contribute annually to a retirement account. For example, the IRS 2018 limit on contributions to a 401(k) plan is $18,500. Restrictions for withdrawals are common, with penalties being paid on early withdrawals. Some plans allow for tax-free withdrawals after a certain age.
Retirement plans are not the only way to save for retirement income.
An annuity is an insurance product purchased to provide income at a later time. What you do is invest in the annuity, then receive payments on or more future dates. Annuities can be paid out in a lump sum or in monthly, quarterly, or annual payments.
- Fixed annuities offer a guaranteed payout.
- Variable annuities offer payments determined by the success of your annuity’s investments.
Annuities are not always the best choice. Expenses can be very high. In addition, brokers receive a commission and you may have to pay a stiff fee if you take out your money at an early date.
Some trusts – like charitable remainder trusts – may provide annuity payments to the grantor of the trust. Fund remaining in the trust at the grantor’s death pass to the charity named in the trust document.
And, finally, there are a couple of ways to pay for retirement that can be done at retirement age – or even after!
Downsizing & Continued Income
Do you really need that 4-bedroom, 3000 square foot house anymore? Probably not. Although it may have sentimental value, the monthly costs for maintenance, insurance, and mortgage may be tying up money that could be used for other things. Consider selling but consider all the consequences before you do it.
When it comes to automobiles, keeping one car may help some couples by reducing annual insurance, registration, and maintenance expenses.
Finding ways to reduce costs can go a long way toward making your retirement more comfortable. Increasing income is another way.
In addition to the other income-producing retirement ideas mentioned above, retired people could consider another option: continue working. Whether you work part-time or as a consultant, a few hours a week could add increase your bottom line.
It’s important – very important – to consider the effect your income may have on your public benefits. There are limits to how much you can earn. For example, your Social Security benefits may become taxable if you earn more than a certain amount of money per year.
Still, part-time work, especially for something you are passionate about, may put a little extra spending money in your pocket.
Your Estate Planning Can Help Your Retirement Also
Some estate planning strategies – trusts, for example – may offer ways to reduce taxes and provide income in your golden years. Also, as always, estate planning can help you provide for loved ones after you’re gone.
We work tirelessly to help our clients plan for and enjoy their retirement years. Call us at (480) 418-8448 or use our convenient Contact Form. You can also check out one of our free seminars. We offer services for clients throughout Arizona, including Chandler, Gilbert, Sun Lakes, Tempe, Phoenix, Mesa, Scottsdale, and Apache Junction.