Retirement requires careful planning and preparation.
Despite the hardships caused by the COVID pandemic, life expectancy is much higher today than a generation ago, and people are now spending 20 years or more in retirement. Ensuring you have enough income during these years is critical for maintaining the quality of life you want.
So, how do you get started? Here are a few key steps you can take to better prepare for your retirement.
Understand how much money you need for retirement
Research shows that many Americans are unprepared for retirement. While some have saved enough for a comfortable retirement, a recent study by the Federal Reserve shows that 28% of non-retired adults have no retirement savings or pension.
It's important to be proactive when planning and funding your retirement and not only rely on Social Security. The first step is to determine the every year income you'll need to cover your living expenses and miscellaneous spending.
To maintain a similar quality of life in pre- and post-retirement, many experts recommend individuals secure 70%-80% of their pre-retirement annual income for and during retirement every year. However, certain factors such as debt load, spending behavior, and health care costs can influence your income goals. If you plan to travel frequently or expect to have a mortgage in retirement, for example, you may need to aim for a higher income level.
You can also use an online retirement calculator to estimate the income you'll need to achieve your dream retirement. You’ll need to factor in such information as your present income and assets, anticipated retirement age, approximate monthly expenses, yield on return on investments, types of retirement accounts, inflation, and more.
Plan for taxes in retirement
Taxes can greatly affect your retirement cash flow, and they represent a key aspect of retirement planning. Even if you're in a lower tax bracket than you were in your working years, taxes will impact you in various ways:
- 401(k)/IRA withdrawals
These are taxed as ordinary income unless it is a Roth IRA or Roth 401(k).
- Pension/Social Security
About 85% of this income may be taxable.
- Required Minimum Distributions (RMDs)
After the age of 73 you’ll be required to take minimum withdrawals from retirement, which will raise your taxable income.
- Ongoing investments and interest payments
Proceeds from non-retirement investments and accounts are subject to capital gains taxes.
To reduce your overall tax liability, consult with one of East West Bank’s financial advisors. We can help you strategize ways to avoid penalties and plan for these situations.
Diversify your retirement income sources
You can’t depend on Social Security or pensions alone! You need to create additional income streams for a secure retirement. Consider several of the following retirement income sources:
- 401(k)s and IRAs
Maximize contributions to tax-advantaged retirement accounts.
- Investment portfolio
Focus on long-term growth when building a diversified portfolio.
- Home equity
Explore reverse mortgage loans, and tap into your home equity.
- Rental property income
Generate cash flow from investment properties.
- Hobbies
Monetize your skills and passions by teaching, consulting, and freelancing during retirement.
When you have multiple income sources, you’re better protected if one income stream falls short.
Start planning and saving early
Starting your retirement plan in your 20s and 30s will help you capture the benefits of compounding returns over decades. As a rule, for every 10 years you delay saving, you will need to increase your contributions by two or three times as much than you would have had you started earlier. Of course, this varies depending on returns and how much investment risk you take, but the fundamental principle is the same: the earlier you start saving, the better!
Time in the market is invaluable, even when you start small. You can automate the process by diverting a small portion of your paycheck to start and then increase your contributions over time to compound your interest even more.
Partner with a bank that understands your needs
Although it's possible to plan for retirement on your own, partnering with professionals who can deliver sound guidance can provide peace of mind. Having a financial professional by your side helps validate your progress and celebrate your success. Wealth managers can use their expertise to customize an approach to help you meet your financial aspirations.
Whether you’re planning to retire in 10 years or 40, East West Bank can help analyze your current situation and offer tailored wealth-management solutions to secure your future. Contact us today, and start planning so you can retire with confidence and ease.
East West Wealth Management is a marketing name of Cetera Investment Services.
Securities and insurance products are offered through and advisors are registered with Cetera Investment Services LLC (doing insurance business in CA as CFG STC Insurance Agency LLC), member FINRA/SIPC.
Advisory services offered through Cetera Investment Advisers LLC. Both firms are under separate ownership from East West Bank and its affiliates. East West Bank will not provide or be responsible for any tax or advisory services and/or legal information services given at the seminar.
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