If you were born after 1960, your full retirement age (FRA) is 67, according to the Social Security Administration. When we think about retirement, most of us imagine retiring at our FRA, even though we may dream about retiring earlier. If 67 is your goal, then there are steps you should take to ensure that you can retire at 67. You may have to adjust your retirement plan as you go through life, but these steps will give you a general idea of what you should do to prepare to retire at 67.
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Step 1: Establish an Emergency Fund
Most advise that when you start investing, you invest in your own financial security by creating an emergency fund for yourself. Although everyone’s needs are different, the safe thing to do is to save enough so that you can cover six months of your monthly take-home pay. For example, if your take-home pay is $2,500 per month, you should save $15,000 to fully fund an emergency fund that would cover six months. If you are laid off or otherwise find yourself out of work, you have a worry-free six months to find a job. If your employer offers a retirement plan with a matching contribution, you should be able to save for retirement while you build up your emergency fund. The same is true if your employer offers a defined benefit retirement plan, although those are not common now.
The two most popular options for your emergency fund are the high-yield online savings account and the money market mutual fund. Your emergency fund should be held in assets that you can liquidate quickly. High-yield online savings accounts are offered by banks and other financial institutions. They pay more in interest than your traditional branch bank.
There is a wide selection of money market mutual funds. Money market mutual funds invest in fixed income securities with short maturities and low credit risk. In 2022, we are in an inflationary, rising interest rate environment which means that bond yields will be low. You might consider an investment in a mutual fund that offers Treasury Inflation-Protected Securities (TIPS), which protect your principal from inflation. Remember that even though the risk of money market mutual funds is low, they are riskier than high-yield online savings accounts. Another option is the Series I Savings Bond. They are currently paying a high interest rate compared to other fixed income investments.
Step 2: Estimate How Much You Will Need to Retire at 67
According to the U.S. Bureau of Labor Statistics, the median income of American’s is $51,480 in 2021. According to the United Nations, the average life expectancy in America is 79 years. That includes men and women and does not include the impact of COVID-19. If you retire at 67, you will have approximately 12 years in which you have to fund your retirement. During retirement, you may have more expenses for travel, entertainment and medical issues, but you may have less for housing and utilities if your mortgage is paid off or you choose to downsize.
It’s estimated that most people will need 70% to 90% of their current income when they retire. Using the above-mentioned median income, this is one calculation of how much money you will need in retirement. You can multiply the median salary of $51,480 by 80% since the expectation is that you will need 70% to 90% of your income. Then, multiply your answer by 12 years:
$51,480 x .80 = $41,184 x 12 years = $494,208
That is the amount you will need to retire at 67 minus your Social Security benefits. There is some uncertainty about Social Security benefits after 2035. It’s possible they may be reduced at that time. The average Social Security benefit in 2022 after a large cost of living adjustment (COLA) is $1,657, according to the Social Security Administration, subject to change in the future.
If you have a working spouse or partner, that will also affect the amount of money you have to save if your spouse or partner also has a retirement plan. If you expect your income will be either more or less than the median U.S. income for an individual, the estimate of your retirement requirement will change.
Another method to estimate how much money you will have to save for retirement is to establish a budget now and keep diligent records of how much you spend. After some months, you will have an estimate of what you spend monthly. Multiply that by 12 months in a year and you will have your yearly financial requirements. Multiply your yearly financial requirement by the 12-year average life expectancy. You will discover the amount of savings you need to have to cover your expenses for the average lifespan in the U.S.
You can use SmartAsset’s Retirement Calculator to estimate your financial needs at retirement.
Step 3: Understand Social Security and Medicare
If you plan to retire at 67, you still should sign up for Medicare when you turn 65. You should sign up for Medicare Parts A and B, although you don’t have to enroll in Medicare Part B at this time. There is a catch. If you don’t enroll in Medicare Part B by your 65th birthday, you may face a higher premium and delayed coverage when you do enroll. The enrollment period for Parts A and B begins three months before you turn 65.
It’s possible that you could qualify for a “Special Enrollment Period” for Medicare Part B. It allows you to wait to enroll in Medicare Part B, but you still must enroll in Medicare Part A at 65. To qualify for the special enrollment period, you must be covered by either your or your spouse’s healthcare plan through employment. The special enrollment period ends eight months after you retire and, at that point, you would enroll in Medicare Part B. This allows you not to waste money on the premiums for Medicare Part B before you need it.
Since your FRA is either 66 or 67, if you retire at 67, you will apply for Social Security benefits either at FRA or one year after it. If your FRA is 66, you will have earned delayed retirement credits for the year until you retire at 67. Delayed retirement benefits will increase your Social Security benefit amount. To get the maximum benefit from Social Security, you can even wait until after you are 67 to start drawing benefits.
If you can get by on income from sources besides Social Security, you can earn delayed retirement credits until you need to start drawing your benefits or age 70, whichever comes first. Delayed retirement credits can add to your Social Security income stream. You accrue two-thirds of 1% for every month you delay your benefits after FRA. It is often a good tax strategy to delay your Social Security benefits since you can be taxed on up to 85% of your benefit. Your tax liability will be lower on retirement accounts.
Step 4: What Type of Retirement Accounts Will You Use to Invest Your Savings?
If you have a workplace 401(k) or comparable plan, such as a 403(b), that is usually for educators, and your employer gives you free money by a matching contribution, it’s a no-brainer. You should invest in the 401(k) to get the matching money. Most 401(k)s have several investments you can choose from in whatever proportions you want to invest. You can invest a maximum of $20,500 in a 401(k) for 2022 with a $6,500 catch-up contribution for employees 50 or older. Income limits also apply.
Even if your workplace 401(k) does not have a matching contribution, it will have a contribution limit for you that is higher than the contribution limit for an individual retirement account (IRA). An IRA is capped, for 2022, at $6,000 per year with a $1,000 catchup contribution if you are 50 or over. You can choose the type of IRA which suits you best. If you need a tax write-off, you may want to choose a traditional IRA. You don’t pay taxes until you withdraw the funds after age 59 1/2. Your tax bracket may be lower into retirement. You also have the option of a Roth IRA.
There are two other investment vehicles that you may want to consider. The college 529 plan is an excellent savings instrument if you have children who will need help in paying for college or if you need help paying for educational expenses prior to college. Your contributions are in a tax-advantaged account. You can invest in potentially high-growth stocks, ETFs or mutual funds. You can change the beneficiary in case the original beneficiary doesn’t go to college. The beneficiary can pay off $10,000 in student loan debt with the funds.
A health savings account (HSA) is another alternative account in which you may be able to invest. You are eligible to establish a HSA if you have a high-deductible healthcare plan (HDHP) and are under 65 years of age. They are tax-advantaged accounts offered by financial institutions and, often, employers. The money in them is yours and it rolls over each year. You must use them for qualified medical expenses.
There are several retirement savings vehicles to choose from and can mix and match your options. Here are some of your options:
- 401(k) or 403(b)
- Traditional or Roth IRAs
- SEP or Simple IRAs if you are self-employed
- HSAs and college 529 plans (accounts for specialized purposes that can add to your retirement savings)
- Taxable brokerage accounts
- High-yield savings accounts, money market mutual funds and CDs
If you want to do your own financial planning and not depend on a financial advisor. If you want to take the DIY approach, there are software choices to assist you.
Step 5: Funding Your Retirement Accounts
There are three issues to consider when thinking about what types of investments you want to use to fund your retirement accounts. How much time is there until you retire? What is your tolerance for risk? What are your investment goals? The types of securities you fund your retirement accounts with depends on your answers to these questions.
You should not have all your money in one type of investment like stocks. Instead, you should diversify your portfolio by investing in a mixture of financial assets like stocks, bonds, mutual funds, exchange-traded funds (ETFs) and real estate. You should also diversify within each type of financial asset. You don’t want all technology stocks, for example, in your portfolio.
Usually, as you get older, it’s a good idea to become more conservative in your approach to investing. If you have had mostly a stock-based portfolio, you might want to add a larger percentage of fixed income securities like bonds. You may even want to invest in some real, tangible assets like real estate. If you gradually switch a portion of your portfolio to more conservative assets, be aware that your return on your investments may not be as high as it is on investments with more risk.
Step 6: Consider Buying Long-Term Care Insurance
As you move along toward age 60, consider buying long-term care insurance. No one knows what the future holds. We typically don’t want our children to care for us if we can’t care for ourselves. If you invest in long-term care insurance, you may be able to take care of yourself and still leave something for your beneficiaries. Compare quotes from several insurance companies and make sure you understand what the price of a long-term care policy will buy for you. At a minimum, you want a policy that will provide financial help for nursing home care, assisted-living care and in-home care.
The Bottom Line
Planning for retirement should start early in your career. If you’ve waited, don’t despair. You can pick up a part-time job and save your earnings to make up some of the money for retirement you will need. Many retirees work after retirement in either an encore career or on a gig basis. Start planning now to retire at 67 and enjoy a happy, comfortable retirement.
Tips on Retirement
- A financial advisor can help you make a plan to be ready for retirement at 67. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- SmartAsset’s inflation calculator will help you determine the purchasing power of your retirement savings over time for your planning purposes.
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