4 steps to better retirement planning in midlife

When it comes to retirement planning in midlife, we all know we should be saving as much as possible. Our generation is likely to live longer than any prior generation. Meaning that lots of us should expect our money to last 30 or more years. But how do you break down the overwhelming goal of saving money for retirement into manageable pieces?

Top retirement fear = running out of money

According to a recent survey by the American Institute of CPAs (AICPA), people’s top retirement fear is running out of money. Nearly one-third (30%) of financial planners say their clients’ biggest concern is running out of money in retirement.

The next most-frequently-mentioned fear relates to the first. Twenty-eight percent (28%) of people say their top retirement fear is not being able to maintain their current lifestyle and spending habits. Another 18% name rising health care costs as their top retirement concern.

In short, at least 76% of clients expressed money-related fears for their upcoming retirement.

Here are some concrete steps you can take to improve your own retirement planning in midlife.

1. Get a baseline

Use one or more retirement calculators to determine where you are with your financial plan for retirement. You’ll find lots of retirement calculators online for free. They all ask you to input your age, when you think you’ll retire, how much you have saved to-date and how much income you expect to need in retirement.

The results from one calculator to another can vary, so it makes sense to compare results from two or three of them. 

Financial institutions like T. Rowe Price, Schwab, Fidelity and Vanguard all offer calculators. As you might expect, each suggests that working with its financial institution will help you reach your retirement goals.

Here are some other retirement calculators I like.

NewRetirement

NewRetirement has several calculators that help you plan for different aspects of retirement. In addition to their retirement calculator, they have one to help you estimate Social Security benefits, annuity payments, reverse mortgages and more. 

And yes, they require you to create an account. But NewRetirement offers lots of planning services for free and has an advanced planning set of tools for $6/month. They also have personalized planning with prices that start at $500. 

Here’s what I like about this tool:

• Easy to use, with a question/answer format
• Offers optimistic/pessimistic growth rates you can fine-tune. Helps you do sensitivity analysis on income and investment growth
• Provides more resources, including a modestly priced Planner Plus subscription ($6/month with a 14-day trial period)

Personal Capital

Personal Capital is a leading personal finance app. I reviewed it in an earlier post on apps that help you budget. Like other calculators, this one requires you to create an account. Consider what email and phone number to give them when you sign up. I received numerous calls and emails in the first month after registering.

Personal Capital makes its money by advising clients on their investments, which may be of interest to you. But many of their planning services are available for free.

Here’s what I like about Personal Capital’s planning tool:

• No data entry required. Set up your Personal Capital account to monitor your spending and investment accounts. Then data will be entered automatically.
• Lets you to run different scenarios. You can see what your retirement might look like if you save more, spend less, or make a one-time increase to savings
• Personal Capital’s integrated interface lets you see how financial changes you make will affect your bottom line
• Displays your data in appealing visuals: cheerful colors, graphs and charts

AARP

AARP’s calculator is more basic than the other two, but it doesn’t require you to fork over contact information unless you want to save your results. 

While less comprehensive, this calculator is a good one to start with. It will give you an overall snapshot of your predicted retirement income from Social Security and other sources. You can also evaluate how your anticipated expenses in retirement stack up against your expected income.

What the calculators taught me about retirement planning in midlife

• First off, I need better data
  To get a useful picture of what your retirement might look like, you need lots of info. Like the value of your retirement accounts, what you expect to save between now and when you retire, and what you think your expenses will be.
• Retirement will require me to trim expenses A LOT
  Everyone kind of knows this, but seeing it on the calculator sharpens your perspective!
• Semi-retirement may be a good idea
  Stopping your paycheck all at once is scary. Lots of retirees are working part-time to boost their income. There are other advantages to semi-retirement, as well – we’ll talk about them in a future post.

2. Pay down debt

Once the paychecks stop, that monthly mortgage or credit card bill might start to sting. You’ll have to use part of your retirement income to cover principal and interest from spending decisions you made back when you were still working. This will leave you less money for current expenses.

You can increase your future cash flow by reducing debt now. Conventional wisdom suggests you pay down the loans with the highest interest rates first. This generally results in the greatest interest expense savings.

Mortgage elimination may make sense

Lots of people pay off their mortgages by the time they retire. This may or may not be practical. For example, people in areas with high housing costs often have large mortgages they can’t pay off without selling their home.

Moreover, if you live in an area where home prices are rising rapidly, different rules may apply to your decision about paying off your mortgage. You may regard your home as an investment whose value is increasing at a higher rate than you’re paying on the money you borrowed to acquire it. 

To decide whether it makes financial sense to pay down your mortgage, compare your expected savings from reducing your monthly mortgage expense to the gains you think you could earn by keeping those funds in your retirement account. 

Home appreciation across the US is 3-5% on average. Thus, in much of the country, your home is not a particularly strong investment. Depending on where you live, it may make sense to pay down your mortgage so you can reduce the principal and interest expense going forward. Consult your financial advisor to see what’s best for you.

3. Create an emergency fund

According to the Center for Financial Sevices Innovation, 45% of Americans haven’t set aside enough money to cover three months’ worth of living expenses. Some experts advise you to save even more for emergencies. Unemployment, health crises, major car or home repairs can wreak havoc with your day-to-day finances.

Personal finance education website Investopedia takes issue with financial gurus’ admonitions to create emergency funds, however. Like other experts, it emphasizes the importance of paying down debt before creating an emergency fund. 

But Investopedia also suggests that you don’t need to create a separate emergency fund apart from your other savings. It advises against putting emergency cash into a low interest-bearing savings account. It suggests you invest it somewhere else in your portfolio where it will earn a greater return.

As with debt reduction, the directive to create an emergency fund applies differently to different people. Consider what works in your situation. But in any event, make sure you have funds somewhere to cover emergency expenses. 

As you’re working through retirement planning in midlife, it will increase your peace of mind to know how you’ll cover an emergency.

4. Consider tax implications

Online retirement calculators don’t usually allow for precise adjustments to income or tax rates. Moreover, taxes on different retirement income sources vary. Up to 85% of your Social Security benefits can be taxed depending on other income you receive. Roth IRA distributions aren’t taxed, but distributions from traditional IRAs and 401(K)s are.

If you have a pension or annuity, different taxation rules may apply. Capital gains tax may apply if you sell your principal residence. Currently you pay tax on all but the first $250,000 (single) or $500,000 (married) of gain.

Tax law changes in 2019 further complicate your effort to do retirement planning in midlife. Higher standard deductions may mean that retirees will owe less tax than before. But if you’re still making payments on a mortgage or home equity loan, deductions for them are being limited. 

The bottom line is that before you retire, you need a better estimate of your whole budget, including taxes that will apply to you at that time. Your taxes may go down when you retire, but they’ll probably never go away.

Start retirement planning in midlife (if you haven’t already started)

These four steps will put you on your way toward setting financial goals for your retirement. Doing them will require you to do research, make tradeoffs and probably shift some of your priorities. As a recap, the steps are:

1. Get a baseline
2. Pay down debt
3. Create an emergency fund
4. Consider tax implications

Step #1, the retirement calculator, may jolt you into action. It may also make you so fearful that you want to give up on retirement planning in midlife.

But don’t be afraid. Just get started. 

Retirement planning in midlife will give you a greater sense of control over your financial future. And it will help you map out a path toward a financially secure retirement.

It’s not too late to start. Yet starting now is better than waiting until later. So dive in, take stock of your situation and choose the goals you want to strive for.

Images via: Shutterstock, Pixabay