"My wife and I are 60 and 62. We're self-employed, renting the house we raised our kids in and have no retirement plan beyond an IRA and a little savings. We gross over $110,000 a year, but almost 30 percent goes to income taxes. What are our retirement options at this stage of our life?"
Hypothetical situations like this are not uncommon. But take heart, there are always retirement options available enhance your retirement prospects. Creating a retirement plan is all about creating retirement income - one that eventually doesn't require you to work. The three legged stool of retirement is based on generating income from your pension (a defined benefit plan), your savings (including your defined contribution plans), and your social security.
Tom hasn't a pension but he has an IRA and he'll get social security. Tom and his wife must commit to saving as large a portion of their income now while they can work. This is the most obvious of retirement options, but we will consider others momentarily.
They should contribute $6,000 a year to an IRA -since they're both over 50 and are permitted the "catch-up" contribution. Since they pay a lot of taxes, they can contribute to the traditional IRA. And by creating a SEP IRA - a retirement savings account designed for the self-employed - they can contribute much more than they can to their traditional IRA - as much as 25 percent of their self-employment income --after deducting their SEP IRA contribution - up to a maximum of $44,000. This way money lost to taxes is, in part, redirected to their savings.
A retirement option to maximize savings and eventual social security income is to both put off retiring. A few more years generating income can also grow their nest egg and this retirement option will save many baby boomers. A 65-year-old with just $50,000 saved who puts off retiring for three years and saves $500 a month during that time could have $78,000 by age 68, assuming a hypothetical 7.5 percent annual return.
By working a few more years, our hypothetical couple can postpone taking Social Security, which means they'll qualify for significantly higher payments. Delaying beyond age 62, social security payments increase by roughly 7 percent each year until one reaches full retirement age. If they put off taking benefits beyond full retirement age, their payment rises anywhere from 5.5 percent to 8 percent annually, depending on the year they were born. The retirement option to delay social security as long as possible is a sensible one because of the significant payment increases from each year's delay.
Invest aggressively. As a general rule, someone in their early to mid-60s might keep between 40 percent and 60 percent of their retirement savings in equities and the rest in fixed income. But they don't have the retirement option to be conservative. They are forced to keep a high percentage, say 60-70% of their funds in equities. This can however be done conservatively with a low risk strategy such as the Dow Dividend Strategy.
They should also look to reduce their expenses now. And when they do finally retire, perhaps they should move where living costs are significantly less expensive.