Most hardworking Americans dream about retirement, but the path to get there can be less than clear. For those relatively new to the workforce, the idea of retiring may feel distant and abstract. However, even people who are only a few years from retirement are often perplexed by the decisions they face. While everyone’s journey is different, I know from my years of experience as a financial advisor that there are common themes when it comes to questions about retirement.
For example, those who just started their careers and have decades before retirement may wonder:
■ “With all my current financial priorities, why should I worry about saving money for retirement?”
The sooner you start saving for retirement, the greater the opportunity for your money to grow. If you are in your twenties or thirties, you may not have as many assets as those who have been in the workforce for decades. What you do have is time, and that can be a powerful ally. Time allows you to take full advantage of the opportunity to compound growth in your investments. Even modest investment amounts that have years to potentially grow can make a significant difference in your retirement savings.
■ “How much should I save for retirement?”
A reasonable goal is to save 10% of your pre-tax income in retirement savings vehicles. If you have the option, strongly consider directing a portion from your paycheck to a 401(k) or another workplace savings plan. If your employer offers a matching contribution, even better. That’s essentially “free money” that you don’t want to miss out on. If you have additional discretionary income beyond that, you may want to save it in a Roth IRA, which could help you build retirement savings with after-tax dollars and create potentially tax-free income in the future.
On the other hand, if retirement is in your near future, you may be pondering these questions:
■ “Should I pay off my home mortgage early?”
Paying off your mortgage may seem like a great idea, and if you’re like a lot of near retirees, the prospect of eliminating debt and reducing your monthly expenses may be appealing. But there are a variety of factors to consider. One of the biggest is the cost and potential tax consequences of moving a large sum of money out of an existing investment in order to pay off your mortgage. If the interest rate you pay on your mortgage is low, you may want to keep that money invested and continue making mortgage payments.
Also, holding a mortgage is key to many Americans’ tax strategy because the interest paid could potentially be tax-deductible. If mortgage interest is part of your tax strategy, consult with your tax professional before making the decision to own your home outright.
■ “How will I know if I saved enough money?”
The answer to this question will depend on your retirement dreams and current financial situation. The variables that come into play include the amount of money you’ll need to cover your expenses each year and other sources of income you have (a pension or Social Security). Most people should be prepared to spend several decades in retirement. A financial plan can help you test different assumptions based on an appropriate retirement date.
■ “Will Medicare cover my healthcare costs in retirement?”
Healthcare is one of the largest expenses most retirees incur in their later years and Medicare only covers a portion of healthcare expenses. Medicare is broken up into different parts. Part A is offered at no cost, but mainly covers only expenses related to hospitalization. Part B requires a monthly premium, but makes medical services such as care from a doctor or tests more affordable. Part C is an alternative type of Medicare coverage provided through private insurers at a cost. Part D is a prescription program that helps reduce the price of drugs. Medicare Supplement coverage is another form of coverage that charges a premium, but helps reduce out-of-pocket medical expenses.
■ “At what age should I begin to collect Social Security?”
This varies by person. The earliest you can qualify to begin collecting Social Security retirement benefits is age 62. The longer you wait, the larger your benefit will be. The highest monthly benefit you can earn occurs when you reach age 70. If you continue to work, it may make sense to delay taking Social Security. When you retire, you’ll need to weigh the value of delaying Social Security against the cost of taking money out of your personal savings to make up the difference.
Whether retirement is a year away or decades down the road, it’s important to craft a plan for how you will build your nest egg and fund your retirement dreams. If you have questions or want to discuss your personal situation, consult your financial advisor, estate planner and tax professional for expert guidance.
MICHAEL W. K. YEE, CFP,® CFS,® CLTC, CRPC®
1585 Kapiolani Blvd., Ste. 1100, Honolulu, HI 96814
808-952-1240 | michael.w.yee@ampf.com
ameripriseadvisors.com/michael.w.yee
Michael W. K. Yee, CFP®, CFS®, CLTC, CRPC ®, is a Private Wealth Advisor, Certified Financial Planner ™ practitioner, with Ameriprise Financial Services, LLC in Honolulu, HI. He specializes in fee-based financial planning and asset management strategies and has been in practice for 39 years. Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation. Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. Investment advisory products and services are made available through Ameriprise Financial Services, LLC, a registered investment adviser. Ameriprise Financial Services, LLC. Member FINRA and SIPC. © 2023 Ameriprise Financial, Inc. All rights reserved
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