When you retire, you'll need enough money every year to meet your most basic needs. The total amount you’ll need to cover these basics is called your “retirement floor.” Some of this expense may be offset by Social Security and possibly pension payments. But there may still be a gap each month — it’s important to consider that gap along with your basic needs when building your retirement floor.
Below are four steps you can take to help make sure your retirement floor is solid once you take that next step in your life.
Think about things like children, careers, lifestyle, savings and future inheritance. These are important issues and will help you figure out how much of your income you’ll be able to contribute to retirement. If you have a spouse or partner, understanding common standards for retirement — like travel expectations or if you’ll downsize your home — are important to agree on early.
Once you have a direction based on your goals and comfort level, develop your strategy for building your retirement floor. Think about investment risks and plan for unforeseen events, like medical expenses or periods of unemployment. Most experts agree that three to six months of wages should be set aside in an emergency fund. Decide how much you can save in addition to your emergency fund — a good starting point is 10% of your after-tax income. No matter how much you can save, it’s important that you decide what you need for your retirement floor and how much discretionary income you’d like to have.
Decide where you’ll keep your money, how you’ll pay bills each month and — if you’re married or both work — how much each of you will contribute toward your retirement savings. Have a conversation with your financial advisor at least once a year to evaluate your life situation, examine your finances and decide whether you need to make any adjustments to your spending or saving to meet your goals. These simple steps will help keep you on track.
Now that you have a plan, you can start to follow it. Consider diversifying your assets in a mix of investment types that is appropriate based on your needs. In other words, don’t put all your eggs in one basket. Consider purchasing stocks in different industries and other investments like bonds, fixed annuities or mutual funds.
Traditional pensions that many earlier generations enjoyed are becoming a thing of the past. Most companies offer 401(k) or 403(b) retirement or investment plans to employees. These plans usually have five to ten different investment options. Many employers offer a match on what you contribute to your retirement plan. You should consider contributing the full amount that will qualify for the match. If you don’t contribute the full amount, you’re missing out on free money from your employer.
Another thing to consider are life insurance and disability insurance policies. Life insurance will provide a death benefit for your family or other beneficiary and can help offset contributions that the policy owner would have made to a retirement fund. Disability insurance can supplement your emergency account to pay bills, and even help you maintain saving levels during a time of temporary or permanent qualifying disability.
Now that you’ve planned, organized and established your retirement floor, think about steps you can take to help protect your wealth and make sure your floor remains solid for years to come. Your first step to maintain control is to establish a budget. You should understand exactly what expenses you will have each month, how much you will have to draw from your funds to meet those expenses and how much you will have for discretionary spending such as travel.
It’s also important to consider ways to keep your retirement floor there for life, such as the purchase of an annuity that guarantees a stream of retirement income that you can’t outlive.1 Take the time to talk these options over with your financial advisor and decide on a strategy that works best for you.
1Any guarantees under annuities are subject to the issuing company's claims-paying ability. Payments from variable accounts will fluctuate based on investment performance.
The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons.
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Annuities are designed for retirement and other long-term goals. When you contribute to an annuity, your money must remain in it until you reach 59-1/2. If you make a withdrawal before then, the money will be taxed as ordinary income and you may be subject to an additional 10% early withdrawal penalty.
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