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Save as much as possible in your working years, ideally at least 15% of your earnings. There is general consensus that pre-retirees should aim for 70-80% of gross income replacement in retirement. Other experts recommend a multiple of pre-retirement income as the required initial nest egg, usually between 10 and 15 times. Take advantage of employer matching in qualified retirement plans. Save in a diversified way among tax-deferred, taxable, and tax-free accounts. Studies have shown that asset allocation, not security selection, determines 90% of a portfolio’s return.
Your retirement budget and expenses might be different than in your working years. Some expenses will be lower (payroll taxes, retirement contributions) and some may be higher (medical costs, travel, hobbies). A detailed look at your expenses and appropriate inflation rates for different categories of expenses is a critical part of retirement planning.
Prepare for retirement by examining your liabilities and paying down (or off) higher interest loans. Refinancing debt prior to retirement is likely easier to do than after retirement. Also consider a possible reverse mortgage as an additional safety net.
Many recent studies have shown the importance of reasonable and sustainable withdrawal rates in retirement. Making withdrawals from your assets in a tax efficient manner can also reduce taxes and make your savings last longer. An analysis of your assets and the order in which they are used for retirement income is an important part of retirement planning.
You are eligible to receive Social Security benefits beginning at age 62. However, waiting to receive benefits until your full retirement age (66-67 depending on the year you were born) will increase your benefits. Waiting until age 70 to collect your benefits will give you the highest possible monthly payout. Social Security claiming strategies can have a big impact on how long your retirement savings lasts.
Medicare eligibility begins at age 65. Medicare does not cover 100% of your medical costs so many purchase supplemental coverage called Medigap. In order to pay the lowest costs for both Medicare and Medigap, you must meet the enrollment deadlines. Your retirement health insurance should be analyzed before you turn 65. Planning for possible long term care expenses is also critical.
Prior to retiring you should review your will, power of attorney, health care proxy, and health care directive with an estate planning attorney and your family. Also, be sure to review your beneficiary designations on your retirement accounts and insurance policies.