Once you reach your 60s, you might feel as though you've finished running a financial marathon. Your nest egg has grown to a comfortable size, and you're anxiously eyeing your expected retirement date.
Does this mean you're finished setting and meeting financial goals? No, not really. The hardest part is probably behind you, but you should still strive to meet these financial goals at some point before you turn 70.
After years of hard work and steady saving, you have accumulated a sizable retirement fund. Then a life crisis hits, and you need money right away. Someone suggests tapping into your 401(k) fund to take care of the problem, and it's starting to sound like a good idea. After all, it's your money, right?
It's easy to see how a 401(k) loan could sound like a good idea. You're borrowing from yourself, not a bank, and it's money you've already earned. What could go wrong? Actually, you might be surprised at how many things could go wrong! Borrowing from your 401(k) fund could backfire in the following ways:
If you opened all of your mail from Social Security this past fall, you might already know that the administration will not be issuing a cost of living adjustment (COLA) for beneficiaries in 2016. On the other hand, if you haven't yet claimed your benefits this might come as surprising news.
Doesn't Social Security raise benefit checks at the beginning of each year? That is almost always true in January of each year. However, 2016 will mark the third time in history that Social Security did not issue a COLA.
Contrary to popular belief, COLA is not automatically granted each year. These small raises in benefit checks are meant to offset inflation, helping retirees cope with rising prices of necessities like food, housing, and gas. But since the Social Security Administration determines each year's COLA by looking at the Consumer Price Index, there are no raises in checks when the inflation rate remains flat.
How does this impact me? Using the Consumer Price Index to determine cost of living adjustments has long been a hotly contested issue. The Index measures prices on various goods and services, but it gives heavy weight to the price of gasoline. Since the price of gas dropped significantly during 2015, the overall measure of inflation was impacted. However, some experts believe that the Consumer Price Index is not an accurate reflection of the cost of living faced by retirees, because the retired population depends less on gas and consumes more resources such as health care. In other words, it's possible that the formula used by the Index does not accurately measure spending by retirees.
For example, the cost of health care rose by about 7 percent in 2015, and about 30 percent of Medicare recipients will pay higher premiums in 2016. Many older people will indeed spend more on their health care in 2016, but the drop in gas prices won't benefit those who no longer commute to work every day.
It's not just Social Security. Many pension plans base their cost of living raises upon the COLA issued by Social Security. So in years that retirees don't receive a raise on their Social Security checks, many also might not receive a raise on their pension checks.
What you can do. Whether you're preparing for retirement, or you're already retired, always remember that Social Security was meant to be a supplement to another form of retirement income. In most years, beneficiaries do receive a COLA, and these small incremental raises do help to offset the rise in spending. But it's better to create a diversified and secure form of retirement income so that you don't have to depend too heavily on Social Security. For more information on retirement planning, call our office to schedule an appointment.
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You already know that you should be saving as much as possible for retirement. Perhaps you contribute to a qualified retirement plan through automatic payroll deductions, and you feel that your savings plan is adequate. But because you can never be too prepared for the future, why not set a New Year's resolution to save just a bit more this year?
You might think it sounds like a lofty goal, but you could save an extra thousand dollars this year. And if you repeat this resolution in future years, just imagine the dramatic impact it could have upon your retirement fund!
Sound difficult? Keep in mind that 1,000 dollars per year is actually just 84 dollars per month. You could easily stash that much money, by following one or more of these steps.
Trim something off of your monthly budget. Many people are subscribing to services or publications that they don't really use. Perhaps you don't really need both internet and cable, or both a house phone and a cell phone. If you do need all of those services, bundling them might still net you a significant savings. Check out prepaid cell phone plans, which cost about half the amount of major networks and offer the same level of coverage. Compare home, life, and auto insurance rates to see if you can score a better deal by switching plans. Slash your entertainment budget by switching to lower-cost or free alternatives. If you're willing to get creative, you can earn most of that 84 dollars by making a few easy changes.
Stop purchasing things on impulse. Online shopping is often the big culprit here. We all store our credit card information in our favorite shopping websites or apps, and then we don't even think before clicking the “checkout” button. Delete shopping apps from your phone, and remove credit card info from your shopping accounts online. No one is saying you shouldn't enjoy online shopping, but taking these steps will slow you down and make you think before making impulse purchases.
Review your eating habits. Most of us eat in restaurants far more often than we admit to ourselves. Check your debit or credit card statements from the past two months, and you might realize this is true for you. Awareness of your habits is the first step. Now, learn to cook and freeze meals ahead of time, or stock up on easy options for busy weeknights.
Look for job perks. Many companies offer various perks and discounts to their employees, but these deals aren't always advertised. You might be able to dump your expensive cell phone plan in favor of a company phone, or your employer might offer free gym memberships and other perks.
A thousand dollars sounds like a lot of money, but when you view it as a challenge to save 84 dollars per month, it suddenly sounds like a reasonable goal! Stash that money in your retirement account, or if you're already contributing the maximum you might consider opening an IRA. Call our office for more information on saving for retirement, and we can help you decide upon the right investment vehicle for you. Over the course of a decade or more, you would be surprised how that money could add up to a much more comfortable lifestyle in retirement!
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