Once you determine how much income you need in retirement, you can base your projection on the type of lifestyle you plan to have and when to retire. But as you are growing closer to retirement age, you may find that your income will not be enough to meet your needs. If you find yourself in this situation, you must adopt a plan to address this expected income difference.
Delay retirement: 65 is just a number
One way to handle a projected revenue deficit is to stay in the workforce longer than you had planned. This will allow you to continue to support yourself with a salary rather than dipping into your retirement savings. Depending on your income, this can also increase your Social Security retirement benefit. You could also wait to take your Social Security benefit or distributions from retirement accounts.
At normal retirement age (which varies, depending on the year you were born), you will receive your full Social Security retirement benefit. You can choose to receive your Social Security retirement benefit as early as age 62, but if you begin receiving your benefit before your normal retirement age, your benefit will be reduced. Conversely, if you delay retirement, you can increase your social security benefit.
Also remember that income from a job that can affect the amount of Social Security retirement benefit you receive if you are under normal retirement age. Your benefit will be reduced by $ 1 for every $ 2 you earn over a certain earnings limit ($ 13,560 in 2008, up from $ 12,960 in 2007). But when you reach normal retirement age, you can earn as much as you want without affecting your Social Security retirement benefit.
Another advantage of delaying retirement is that you can continue to build tax-deferred funds in your IRA or employer sponsored pension scheme. Remember however that you may be required to begin taking minimum distributions from your qualified plan or traditional IRA after you turn 70 ½ if you want to avoid harsh penalties.
And if you are covered by a pension plan at work, you could also consider retiring and then seeking employment elsewhere. This way you can receive a salary and your pension at the same time. Some employers, to avoid losing talented employees in this way are beginning to offer "phased retirement" programs, so you can receive all or a portion of your pension while still working. Make sure you understand your pension options.
Spend less, save more
You may treat a lack of income by adjusting your spending habits. If you're still years away from retirement, you may be able to cope with a few minor modifications. But if retirement is just around the corner, you may need to drastically change your spending and savings habits. Saving even a little money can really add up if you do it consistently and earn a reasonable return. Make permanent changes to your spending habits and you will find that your savings will last even longer. Start preparing a budget to see where your money goes. Here are some suggestions of ways to stretch your retirement dollar:
* Refinance your home mortgage if interest rates have fallen since you took the loan.
* Reduce your housing expenses by moving to a cheaper house or apartment.
Sell * one of your cars if you have two. When your remaining car needs replacing, you might consider buying one used.
* Admission to the equity in your home. Apply the income from a second mortgage or home equity line of credit to pay off a higher interest rate debt.
* Transfer credit card balances from higher interest cards to a low or zero interest card and then cancel the old accounts.
* Ask about insurance discounts and review your insurance needs (such as your need for life insurance may be reduced).
* Reduce discretionary expenses such as lunches and dinners out.
Earmark the money you save for retirement and invest the same. If you can take advantage of an IRA, 401 (k) or other tax-deferred pension, you should do it. Funds invested in a tax-deferred account will generally grow faster than funds invested in a non-tax-deferred account.
Reallocate your assets: consider investing more aggressively
Some people make the mistake to invest conservatively to achieve their retirement goals. It is not surprising, because as you take on more risk, your potential loss is also growing. But greater risk also generally entails greater reward. And with life expectancy rising and people retiring earlier, the pension funds to last for long.
It is, therefore, if you are facing a projected revenue deficit, you should consider moving some of your assets to investments that have the potential to significantly overtake inflation. The amount of investment dollars you should keep growth-oriented investments depends on your time horizon (for how long you have to save) and your tolerance for risk. Overall, the longer they have until retirement, the more aggressive you can afford to be. Still, if you are at or near retirement, you may want to keep some of your funds in growth-oriented investments, even if you decide to keep the bulk of your funds into more conservative fixed income investments. Get advice from a financial professional if you need help deciding how your assets will be distributed.
And remember, wherever you decide to allocate your money, rebalance your portfolio now and again. Your needs will change over time and so should your investment strategy.
Accept reality: lower your standard of living
If your projected income deficit is serious enough, or if you are already close to retirement age, you realize that no matter what measures you take, you will not be able to provide the retirement lifestyle you've dreamed of. In other words, you have to lower your expectations and accept a lower standard of living.
Fortunately, it may be easier to do than when you were young. Although some expenses, like health care generally increase in retirement, other expenses as housing and automobile expenses, tend to decrease. And it is likely that your days of paying college bills and growing-family expenses above.
When you are within a few years of retirement, you can prepare a realistic budget that will help you manage your money in retirement. Think long term: retirees often come into budget problems in the first year of retirement, when they adapt to their new lifestyle. Remember that once you are retired, every day is Saturday, so it's easy to start over.
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