Monday, August 8, 2011

6 Money Rules For A Successful Retirement

Retirement is a fact of life, an event that someday will happen to all of us. We budget and plan for other situations like college costs, home purchases and life events but often we put off preparing for the longest lasting time of our lives. 

If I told you that you would be unemployed for more than 25 years of your life, wouldn't you prepare for such an event. Yes you would, but being it's so far away when we are younger we tend to put it off. I have listed 6 money rules that must be considered to have a great retirement.

Save Early For Retirement. Waiting to save for retirement is the biggest mistake you will ever make. When you get that first job always be putting money away for the future. Paying off debt is a a top priority, but don't let it get in the way of your long term goals. If your employer offers a 401(k) with matching, save at least enough to get the matching. It's free money and you can't get a sweeter deal than that. 

Your ideal goal is to save 15 % of your income. If you have maxed out the 401(k) then start a Roth Ira. Start small with a 3% contribution and work your way up slowly to 10%. As you eliminate debt bump up your savings.

Cut your debt, but not your credit cards. Cutting your debt to zero is a great idea. But don't cancel your credit cards, you could take a big hit on your FICO score. You still need to maintain a good credit score even in retirement. Also the cards are a safety net of last resort. Sure having a large emergency fund is important, but your credit cards are a second line of defense in an emergency. But never to be used unless for dire emergency.

Reasonable housing, not Beverly Hills mansion. Let's face it your home is not an investment and the less you put into it the more you will have for investing and retirement. The typical rule of thumb used to be, you could afford a home 3 times you annual salary. But that rule went by the wayside,  your house payment including principle, interest, insurance, and taxes should be no more than 28% of your gross income. This also goes long with a 20% down payment. 

You will find many mortgage brokers allowing you to borrow a lot more but you have to be smart and stay away from a too large home. You will end up putting too much money into your payment and don't forget all the never ending maintenance of your home. After making the mistake of not saving for retirement, buying a to expensive home will crash your financial plan leaving your retirement sorely lacking.

An emergency fund built for your individual situation. It was always called a savings account but it's better known as your emergency fund. We all can agree an emergency fund is a necessity, but how large a fund is the the question. If you work on a commission basis, have irregular income, or think your job is going to be eliminated you need a larger fund. It should be at least 6 months of expenses. If your job is stable then you only need 3 to 6 months of expenses. The goal is to keep enough cash available to see you through the emergency with out having to cash in investments or use credit cards. 

Renting is sometimes better than buying. In a environment of rising home prices, buying a house is better. If prices are falling or flat, like they are today, then only buy if you can get the house for a steal. Renting may be an option if you don't want to deal with the extra costs of home ownership or maybe you are tired of the constant work of owning a home. 

Renting does have it's advantages in lower costs and hassle. Find a renting vs. buying calculator and do the math before doing either. But home ownership is the American dream, but with the extra costs and hassle it does come at a price.

Quit your mortgage when you quit your job to retire. It makes sense to lower costs in retirement and finishing your mortgage when you retire would be the right thing to do. Many people argue that having all your money tied up in a paid for house is the wrong thing to do. They think you need to have your money working for you in investments. 

But for many, not having a mortgage gives a sense of peace that your home will never be lost through foreclosure. But mathematically, we all agree that reducing expenses in retirement is the safest thing to do.

Making good retirement decisions means following a plan. The plan must be based on a good financial foundation. 

1 comment:

  1. I'm a long way away from retiring but these are some tips I will have to keep in mind. I am also using to help me plan. Since the future is always fluid, I hope I get it right.


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