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Retirement is supposed to be an exciting new chapter in our lives. We’d like to think we can live well within our means once we stop working. But when we hear that most Americans will never be able to retire, our alarm bells go off – even when the rational side of our brain tells us to stay calm, that things will work out.
It doesn't help to realize how much of the situation is completely out of our hands: ordinary individuals can’t change the direction of interest rates or stock prices. All the same, we have more control over how our retirement will play out than many people think, even as it's about to start. Four decisions you make can have a huge impact on how comfortable you will be in this next chapter of your life. And they have nothing to do with the stock market or the economy.
Start by Taking Stock
If you really want to know how much you weigh, at some point, you have to step on a scale. It's even more important to know the truth about how much your assets weigh – and how heavy your debt load is. How much do you have in your savings? How much debt are you carrying?
Americans may be finding it a challenge to learn Donald Trump’s real net worth, but for most of us, finding our own real net worth is far simpler. In the best case, you can subtract your total debts from your total assets, with a substantial sum left over. Negative numbers are not what we're seeking.
Timing for Retirement Success
Knowing where you stand financially, then using those data as a starting point, will help you figure out when to trigger each of these four events. Timing is everything.
- When to quit working – Work out the math, or consult a fiduciary financial advisor who specializes in retirement income planning, to determine when or if you can stop working (see Retirement Doesn't Mean You Have to Stop Working). Work doesn’t have to be a grind if you do something you truly enjoy – nor does it always need to be full time. The longer you can bring in outside income, the longer you can leave your own savings alone to grow. Deciding to work an extra two or three years can add as much as 30% to your total income once you do stop working.
- When to start tapping your nest egg – It’s bit like trying to land an airplane at just the right spot on the runway. Most retirees don’t know precisely when to start withdrawing from their savings and investments, but The Wall Street Journal reported in 2005 that many start withdrawing at the age of 62. For most people, that’s too early. Many experts now use age 95 for financial forecasting purposes. According to Andrew Nigrelli, a wealth advisor at Northeast Planning Associates, “It all depends on how much you have saved and what types of outside income sources you have, but even at age 65, most people probably have another 30 [years] to support themselves after they stop working,” he explains.
- When to start taking Social Security to get maximum benefits – Understanding how Social Security works before you're eligible to start taking will help you make a good timing decision. Right now, the earliest age you can start taking Social Security is 62, but full retirement age is usually 66. Every year you can hold off on taking benefits between the ages of 62 and 70 increases your monthly check. The Social Security Administration's website explains how retirement ages work here, but if you have complicated financial family relationships – or you’ve lost a spouse or have remarried – it can be worthwhile to get some solid advice. A qualified fee-based fiduciary advisor can run "what if" scenarios using sophisticated software that can pinpoint the optimal time to start taking your benefits. How Social Security Works After Retirement can help you think more about these issues.
- When to start giving money away – Legacy planning is a key driver in determining much you can afford to spend during your later years. Much has been written about the huge sums of money future generations will receive from parents. Don’t let the idea of leaving behind a big inheritance cloud your judgment on how much of your savings you will really need to support yourself. No one wants to become a financial burden on their own children, but it can happen when parents underestimate the real cost of retirement. If you’re certain you’ll have more than enough money to cover your own lifestyle, and healthcare, then consider giving some of it to your future heirs right now. This is beneficial to you and your heirs because it helps reduce the inheritance tax. In the U.S., the IRS allows you to give away up to $14,000 per year per person (as of 2016) before the gift tax kicks in. This amount changes every year, so if you're going to do this, stay up to date on the amount of annual exclusion. Married couples can double their gifts, which means they can give up to $28,000 to each child per year before the gift tax is charged. Use the same kinds of considerations to decide about what you'll have left for charitable giving.
When you've scheduled in these four events, you can estimate what you'll have to live on and what kind of adventures that will buy you. You can also think about whether to stay where you are, downsize (or upsize: see 5 Reasons Retirees are Upsizing Instead of Downsizing Their Homes) and plan other parts of the way you will live your life. (Read The 4 Phases of Retirement and How to Budget for Them.)
There's one last step: Not keeping all this a secret.
Dividing Family Assets Without Dividing the Family
If you care enough about your family to include them in your will after you've passed away, include them in your planning process while you're alive. Call a family meeting, but prepare your remarks first. Say something like, "We need to discuss how we plan to allocate our money to cover our retirement and then talk about whatever might be left."
The goal here is to avoid a big family fight over what you leave behind by setting everyone’s expectations in advance and not leaving unanswered questions. Remember, when it comes to an inheritance, the kids may not work it out amongst themselves later.
Pam Krueger is the founder of "WealthRamp," co-host of "MoneyTrack" on PBS and national spokesperson for The Institute for the Fiduciary Standard.