'My spouse and I are sixty and sixty two. We're self-employed, renting the house we raised our children in and also have no retirement strategy beyond an Individual Retirement Arrangements along with a small financial savings. We gross more than $110,000 a year, but almost thirty percent goes to income taxes. What are our retirement options at this stage of our existence?'
Hypothetical situations similar to this aren't uncommon. But take heart, there are usually retirement options to improve your retirement prospects. Creating a retirement strategy is mostly about identifying or creating sources of retirement revenue - one that ultimately does not need you to work (or hopefully, only part time). The three legged stool of retirement relies on generating income from your pension (a defined benefit plan), your financial savings (including your defined contribution plans), as well as your social security.
Tom hasn't a pension however , he has an IRA and he'll get social security. Tom and his spouse must decide on saving as large a portion of their income at this point while they are able to work. This is actually the most evident of retirement options, but we'll think about others momentarily.
They should contribute $6,000 a year to an IRA -since they're both over 50 and therefore are allowed the 'catch-up' contribution. Because they pay lots of taxes, they can contribute to the traditional IRA (the traditional IRA provides a tax deduction at the time of contribution). And by making a SEP IRA - a retirement savings account designed for the self-employed - they are able to contribute much more than they can to their traditional IRA - as much as twenty five percent of their self-employment income -after deducting their SEP IRA contribution - up to a maximum of $44,000. By doing this, money lost to taxes is partly redirected to their personal savings. Of course, this retirement option for a high rate of savings will likely require the couple to cut back on discretionary expenditures.
An additional retirement option is to postpone retiring. More years generating income can also increase their nest egg and this retirement choice will save many baby boomers. A 65-year-old with just $50,000 saved who puts off retiring for 3 years and saves $500 a month during that time could have $78,000 by age 68, assuming a hypothetical 7% annual return.
By working a few more years, our theoretical couple may put off taking Social Security, which means they'll be entitled to considerably higher payments. Postponing beyond age 62, social security payments improve by approximately seven percent every year till one reaches full retirement age. If they postpone using benefits beyond full retirement age, their payment increases anywhere from 5% to 8 % yearly, based on the year they were born. The retirement option to delay social security as long as possible is a sensible choice due to the substantial payment increases from every year's delay.
Invest aggressively. As a general rule, anyone in their early to mid-60s may keep between 40 % and 60 % of their retirement savings in stocks and the rest in fixed income. But they don't possess the retirement option to be conservative. They are required to maintain a high percentage of their money in stocks. This can however be done cautiously with a reduced risk strategy such as the Dow Dividend Strategy.
They should also want to decrease their expenditures now. And when they complete finally retire, maybe they should relocate where retirement living costs are lower.