Barbara O’Neill, Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension
Plan Now for Financial Security in Later Life
One of the most frequently cited financial goals of investors is having a comfortable lifestyle in later life. Ideally, investing for retirement should take place over four to five decades to maximize the awesome power of compound interest. With a long time frame, investors can also ride out inevitable downturns in the stock market.
Later life financial planning is typically not a single event, but, rather, a process that involves a series of decisions over time. Below are ten recommendations to consider during your working years:
Develop Multiple Sources of Income- Possible income streams in retirement include Social Security, public and private employer pensions, personal savings and investments (e.g., 401(k) plans, IRAs, and annuities), earnings received by working after retirement, and liquidating assets.
Appreciate the Large Power of Small Savings- Even small amounts of savings over long periods of time will add up. For example, starting at age 25, a bi-weekly deposit of $100 that earns a 6% average annual return will grow to $431,490 by age 65 according to the Advantage Publications Why Save for Retirement? calculator. Weekly $100 deposits over 40 years will grow to $862,979.
Develop an Investor’s Mindset- The value of most investments that are set aside for retirement will go up and down, unless money is placed in cash equivalent assets with no growth potential, which is not a wise long-term strategy. Investors also need to accept the fact that there are also no guarantees that they will make any money.
Pay Yourself First- Make investing for retirement a high priority in your household budget. Consider savings for retirement and other financial goals a “fixed expense” like a car payment, rent, or a utility bill. Try to make investment account deposits automatic via payroll deduction or enrollment in an automated investment plan.
Pay Off Debt- Aim to leave full time employment debt-free. Doing so will provide “breathing room” for health care and other expenses. “Debt-free” includes a mortgage, student loans, and credit cards. Getting out of debt on time may involve prepaying mortgage principal and making larger than required credit card and loan payments.
Kick Savings Up a Notch- Over time, earnings from a job are likely to increase with promotions and/or cost of living adjustments (COLAs) or some household expenses (e.g., child care and car loan payments) will end. Take advantages of these opportunities to adjust your savings upward without having to cut back on household spending. Save more money now and your “future self” will thank you later.
Save Windfalls- Windfall income is any money that is not normally part of your routine household budget such as a tax refund, overtime or retroactive pay, gifts and prizes, and an unexpected bonus. When extra money from windfalls is received, resolve to put all or part of it into savings.
Consider Working a Little Longer- A 2018 study found that, for older workers, those saving for retirement are better off working less than a year longer than planned vs. increasing their savings rate by one percentage point. Their retirement savings will stretch out longer through a combination of increased savings plan deposits, a higher Social Security benefit, and delayed withdrawals from savings.
Become Knowledgeable About Medicare- Medicare is the federal health insurance program for people age 65 and older. It has several key parts to understand including Part A for hospital and skilled nursing care, Part B for medical care and preventive services, and Part D for prescription drug coverage. A good source of information about Medicare is www.medicare.gov. Also, take time to learn about available Medicare supplement policies.
Consider Hiring a Financial Planner- The number and complexity of decisions that people have to make with respect to their personal finances often increases with age. Financial planners can help you take a broad view of your finances and assist with investment plans, insurance coverage, tax savings, and referrals for legal matters.
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