Add all these decisions together and they can be as important as Social Security, your 401(k) plan, or your corporate pension (if you're going to get one.) All these decisions work to increase retirement income or to reduce retirement expenses. If you can't raise the bridge, lower the water.
Here's my list. You can probably add to it.
• Pay off your home mortgage. At the risk of being terribly obvious, a check you don't have to write is income you don't have to have. Income you don't have to have is taxes you don't have to pay. As I've pointed out in many Q&A columns, retirees find that they must make IRA withdrawals to cover mortgage payments. Those withdrawals, added to income, make their Social Security benefits taxable. Since each dollar of additional investment income can make 50 to 85 cents of a dollar in Social Security benefits subject to federal income taxes, additional dollars to repay mortgage debt or other forms of credit are taxed at the equivalent of very high rates. Will it affect you? Start checking your expected retirement income against the taxation of Social Security income now.
• Move to a Smaller Home, Condo, or Apartment. Here's where downsizing can really help you. Suppose you own a house worth $180,000, free and clear. It probably costs about $9,000 a year to maintain even though there is no mortgage. Sell the house, tax-free, and move to a $90,000 condo and you'll have a $90,000 fund left for paying the $4,500 annual expenses of the condo. Basically, you'll have lifetime shelter expenses virtually covered.
• Move to a Smaller Home or Condo in a Less Expensive Area. Chances are you can do it without moving very far. But you can also do it by making a big change. The furthest extreme is to move to another country. While that may literally seem outlandish, thousands of Americans now live in Mexico where you can rent a home or condo inexpensively and gleefully cut your cost of living without feeling one whit of deprivation. Check the growing list of books on the subject at your local bookstore. Some people worry about losing access to Medicare by moving abroad. My personal bet is that so much access to Medicare will be lost in the next ten years that medical care for Americans will be a Mexican growth industry.
• Delay your retirement by a few years: Social Security. This is a powerful lever. If you were born in 1943 or later, for instance, each year that you delay retirement beyond full retirement age will increase your monthly benefit by 8 percent. The same person, thinking of retiring at 62, would see their benefits reduced by 25 percent from what they would receive at age 66. The decision to work to age 67 instead of age 62 eliminates years of private medical insurance expenses and increases Social Security benefits by 44 percent. Wring your hands over Social Security if you want, but unless you're earning mega-bucks, chances are Social Security is a major part of your retirement income.
• Delay your retirement by a few years: Private Savings and Pensions. Here's where money and income can really start to grow. The typical private pension benefit doubles from age 55 to age 65, implying an annual increase of 7 percent, compounded. During the same period, additional contributions to a company 401(k) plan can grow substantially. Suppose, for instance, that your 401(k) balance is only equal to two years of your income, e.g. your salary is $60,000 but your balance is $120,000. In that case, a typical plan with a 50 percent match on the first 6 percent of payroll would have you able to add 9 percent of income a year or 4.5 percent of the balance in your plan. Add 10 percent for the return on your account and your annual growth rate will be nearly 15 percent, allowing your plan balance to double in about 5 years.
The biggest returns in life are on tenacity and flexibility. Financial cleverness is barely in the race.
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