Once you reach age 62, you can begin collecting Social Security benefits. Before you file for these benefits, it’s important to take stock of your financial situation.
While it is generally advised that Social Security should not be a retiree’s sole source of income in retirement, soon-to-be retirees might run into additional warning signs that these benefits won’t be enough for funding their retirement lifestyle. Watch out for signs you may need more than Social Security benefits to properly retire.
You Have Underfunded Retirement Plans
Let’s say you have a 401(k) plan through your employer or an IRA. You have some money in these accounts, but there were a few years where you skipped out on maxing out contributions.
The good news about underfunded retirement plans is that retirees can still contribute to these plans. Make up for lost time with additional catch-up contributions. According to the IRS, individuals age 50 or over can make annual catch-up contributions up to $6,500 in 2022 to their 401(k), 403(b), SARSEP or governmental 457(b). Those 50 or older contributing to their traditional IRAs and Roth IRAs may max out contributions at $7,000.
You Haven’t Diversified Your Investment Vehicles
There is a popular retirement strategy known as “bucketing.” In this strategy, a retiree buckets financial goals based on the time horizon for respective needs and allocates risk based on these time horizons.
Bucketing is usually done in a two-bucket or three-bucket model. Savings and emergency funds are prioritized in the first bucket while the second and third buckets emphasize long-term retirement funding in the form of stocks and investments for your retirement portfolio.
Retirement accounts such as an IRA and a 401(k) are certainly helpful in planning for retirement, but retirees are recommended to diversify their savings and investment vehicles.
Diversified portfolios include stocks, bonds, commodities and alternatives. If you’re not sure where to begin in diversifying your portfolio, meet with a trusted financial advisor to learn more about investment funds that may be right for you to purchase.
You’re Carrying Bad Debt
Transitioning into the retirement lifestyle of your dreams is not going to be easy if you’re in debt. This is especially true for individuals who carry bad debt, such as maxed-out credit cards, medical loans and payday loans.
Soon-to-be retirees will want to pay off any outstanding debt prior to retirement. If you have any high-interest debt, such as student loans, look into refinancing, consolidation or repayment methods to eliminate this debt and earn interest rather than pay interest.
You Don’t Have Enough Money in Your Emergency Fund
How’s your emergency fund doing these days? If you answered this question by saying it was recently depleted and not replenished or you don’t have a fund at all, now is the time to build up a bit of financial stability for yourself.
If you’re following the bucketing model for retirement, an emergency fund would be kept in the first bucket. This is a savings vehicle in the event of emergencies, usually made up of three to six months’ worth of savings. You can keep this fund in a high-yield savings account and enjoy the peace of mind in knowing it is part of the diversified vehicles bringing you one step closer to a secure retirement.
You Don’t Know Your Financial Situation
If you don’t know your financial situation, you might need more than Social Security to get through retirement. You will need an objective third-party advisor to review your financial picture.
An advisor or planner is a major asset for anyone looking to retire. They can help you create a retirement plan based on your needs and lifestyle, monitor and manage a financial plan for your retirement years and provide additional guidance and support as you transition into retirement.
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