Retiring comfortably, and on your own terms, is the quintessential American dream. Unfortunately, this dream is seemingly becoming tougher than ever to achieve.
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According to a survey commissioned by Wells Fargoand conducted by Harris Poll in 2014, the median middle-class household has just $20,000 saved for retirement. This also includes the 34% of respondents who weren't contributing anything to retirement savings plans, and were instead choosing to simply work longer or save later. You could arguably say that Americans, as a whole, may have a retirement problem on their hands.
The perfect retirement strategy for seniors in their 60s
There's a simple, but perfect, retirement strategy that can be implemented to ensure that people in their 60s stay on track, regardless of whether they're readying to retire, or they've hung up their work gloves for good. Best of all, while this perfect retirement strategy has five critical components, the path you take remains unique to your financial needs.
Here's what the perfect retirement strategy looks like.
1. Retirement/transition budget laid out
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The first thing seniors in their 60s need to have in place is a working monthly budget.
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A budget should be something you've prepared on a monthly basis for decades, but it keeps its importance during retirement, even if you're not necessarily looking to funnel a lot of money toward investment accounts. The reason for this is that your income during retirement will likely drop off from what you were earning when you had a job. For some retirees, it can be difficult to make this sudden transition to a lower-income environment, causing them to potentially burn through their retirement savings at a faster rate than they'd anticipated.
The solution is twofold. First, you should use budgeting software, as well as a handful of these pertinent tips, to improve your saving habits. Avoiding the temptation of overspending and thinking long term are especially important tips during retirement, with the average 60-year-old having a life expectancy of greater than two decades lying ahead.
Secondly, consider a transition into your retirement budget from the budget used during your working years. This might mean slowly adjusting to a lower spending environment months, or even years, in advance. However, when you do decide to retire, you'll remove the income shock that can sometimes accompany leaving your job.
2. Continue investing for the future
Secondly, you'll really want to consider continuing to invest for your future. Life expectancies have risen by nine years over the past five decades, according to the Centers for Disease Control and Prevention, thanks to improved health education and pharmaceutical products. If we're living longer than ever, it means we need our money to last longer, too. This means continuing to build upon what we've been saving and investing for decades.
What's the best way for seniors in their 60s to invest? There's certainly no one-size-fits-all strategy, because the answer to this question depends on your risk tolerance and lifestyle; but a smart strategy is likely going to include at least a portion of your retirement nest egg remaining invested in high-quality stocks. While the stock market does have its moments of volatility, it's also been one of the best historical wealth creators, with an average annual rate of return of roughly 7%, including dividend reinvestment. If the stock market continued to return 7%, you may be able to double your money twice during retirement.
Curious about what stocks could be right for retirees in their 60s? Here are three examples of solid companies that could offer everything a senior in their 60s could be looking for in an investment.
3. Withdrawal plan firmly in place
The perfect retirement strategy also needs to take tax implications into consideration. On top of saving and investing, you'd like, in theory, to keep as much as possible of the money you earn via wages, Social Security, and/or your retirement accounts. The optimal way to do this is to have a clear withdrawal plan in place prior to retiring.
What should you know? The key factors to keep in mind include how much you plan to withdraw from your retirement accounts each year, as well as what your federal and state tax implications might be. For instance, all 50 states seemingly have different rules regarding what sort of retirement income is taxable. Some states give retirees a pass, while other states have no income exemptions when it comes to taxing retirement income (which can include Social Security benefits).
Additionally, withdrawing money from a tax-deferred retirement account, such as a 401(k), can directly impact how much you owe the federal government come tax time. While it might seem like fun to take out large sums, it could come back to bite you in April every year. Having a withdrawal plan which works hand-in-hand with your retirement budget will allow you to optimally withdraw your money so as to avoid paying more in taxes than you need to. This helps your money stretch even longer.
One final note here: A Roth IRA remains a smart consideration at pretty much any age. Money invested in a Roth IRA over the long term doesn't count toward your annual income, making it a completely tax-free retirement tool. Plus, with a Roth IRA, there are no age restrictions on contributions, or minimum-distribution requirements.
4. Social Security strategy chalked out
Another key aspect of the perfect retirement strategy is understanding the ramifications of your decision on when to file for Social Security benefits. With 59% of current retirees claiming that Social Security makes up a major source of their incomes in Gallup's Oct. 2015 poll, it's arguably one of the most-important decisions you'll ever make -- and it's all based on your financial needs.
Consumers really have three choices to make: file early (age 62-64); wait for their full retirement age (FRA) (age 65-67); or wait until after their FRA (age 68-70). Each has its own advantages and disadvantages.
Filing for benefits early means gaining access to added income as early as age 62. For seniors looking to pay down debt, wealthier individuals who want to travel and aren't reliant on Social Security benefits, or sicker folks, claiming benefits early might make sense. However, those people claiming early need to understand that they'll be receiving less than 100% of their FRA for life, which isn't necessarily optimal if Social Security is your primary source of income.
On the flip side, waiting until after your FRA can really juice up your monthly payment potential. Social Security benefits grow by 8% for each year that you hold off on signing up, culminating in a maximum benefit payment by age 70. Waiting can be a smart strategy for couples with a higher-earning spouse, or persons with very little in retirement savings. Of course, if you're not in good health, then waiting until age 70 may not make sense.
There's always the option of taking benefits around your FRA, as well, which sort of softens the negatives and positives of these aforementioned strategies a bit.
5. Make your Medicare vs. Medicare Advantage decision
Finally, seniors in their 60s need to decide how best to handle their medical care during retirement. Upon turning 65, seniors become eligible for Medicare or Medicare Advantage, an alternative plan to Medicare offered by private insurers. Understanding which route better suits your needs can be just as important as deciding when to file for Social Security benefits.
Original Medicare has been around for more than 50 years, and its greatest allure is that more than 90% of doctors and hospitals around the country accept it. If you enroll in original Medicare, you probably won't have to change doctors, which can be important when establishing a medical history with your primary care physician. Additionally, no referrals are needed to see specialists with original Medicare.
The downside to original Medicare is that it's not one encompassing plan. You have to enroll in separate components, including Plan D, a prescription drug plan. You'll also find that basic care for vision, hearing, and dental isn't covered by Medicare, and that there are no annual out-of-pocket limits for medical expenses.
Medicare Advantage plans do have annual out-of-pocket limits, and they may offer all-encompassing plans that roll all the services original Medicare offers, along with prescription drug plans, and basic hearing, dental, and vision plans, into one neat package. You'll also have plenty of choices when it comes to Medicare Advantage, because it's run by private insurers.
The downside is that Medicare Advantage plan networks can change year to year, meaning your physician isn't guaranteed to stay in your network. It's also possible these more-encompassing plans could cost more.
As noted throughout, there are no right or wrong choices as a whole; just a right choice for your needs. Ensure you're getting everything you deserve in retirement by sticking with this perfect retirement strategy.
The article The Perfect Retirement Strategy for Seniors in Their 60s originally appeared on Fool.com.
Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool owns shares of and recommends Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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