Planning to Live on a Fixed Income

Estimates show that you will need 70-80% of your current income to sustain your current lifestyle after retirement. That means that if you’re currently living on $50,000 yearly, your retirement plans should give you at least $35,000 – $40,000 per year. Do you have solid plans to secure an income after retirement? Will you be able to maintain your current lifestyle on 70-80% of your current income? If you haven’t considered these aspects, consider them now.

Retirement plans

401k – A 401k is a retirement savings plan made possible through your employer. You set up a contribution plan with your employer to pay a certain amount of money from your paycheck into a retirement plan. The government limits the total annual contributions to $17,500 a year. Taxes are deferred from this money until money is withdrawn years later.

A catch-up provision is available to help people over age 50 catch-up to where they should have been years ago. There are limits to “catching-up” too. In 2011, that limit was $22,000. 2012 showed an increase to $22,500. That number could increase in 2013.

This money has rules and limits attached to it. For example, your account owner must begin distributing the money from their accounts after turning age 70 and ½ or April 1 of the calendar year after retiring. The requirement takes effect on whichever of these comes later. You can also be forced-out of the plan if your account if your balances are too low. Most plans have a force-out provision allowing you to be removed for these purposes. The current limit is $1,000. Just as long as you keep the limit above that amount, you can keep your account.

You may be wondering why that would ever be an issue. How could you ever drop below that limit if you’re just depositing money? It turns out that you can take loans from your 401k when you need them. Taking out too much in a loan can drop your balance below $1,000, putting an automatic force-out into effect.

The name was created based on the law labeled 401(k) in the IRS tax laws.

Simple IRA Plan – A simple IRA plan stands for Savings Incentive Match Plan for Employees. This plan acts as a tool to set aside money and invest it for retirement. The difference here is that investments are made separately and privately, unlike the 401k (which is a profit-sharing plan).

It still goes through employers. They must meet certain criteria to be considered “eligible” to take part in a SIMPLE IRA plan. An employer must employ no more than 100 employees to qualify. If the business established an IRA in its infancy and grows past that number, they have 2 additional years to continue using it, but then are kicked out.

Annual contribution limits are $12,000 for people under the age of 50, and $14,500 for people age 50 or over. As of 2009 and 2010, the catch-up limit was $25,000.

Like the 401k, it is a tax-deferred plan (meaning you are responsible for less when tax season comes around again).

Social Security – Simply put, everyone in America pays a certain percentage of their income to social security with every paycheck. That money goes to help the current retired population that needs a source of income to survive.

The benefits of social security is that the money your follows you no matter where you work. Just as long as your money is contributed, you build credits for your social security throughout your life. All you have to do is be a working American to receive this benefit.

Credits are received every time you earn $1,120 (in 2010; the total changes annually). You get a max of 4 credits every year. You become eligible to withdraw from social security once you receive 40 credits (if you were born after 1929.

You contribute to Social Security on income below $113,700 a year.

Social security is the hot topic of debate right now. A lot of people are worried that there won’t be a social security system by the time the baby boomers are done with it. The baby boomer population is retiring right now. This is the population of children that revitalized the youth of America. They have led the country for years now and are ready to call it quits. With such a large population retiring and a relatively smaller number of people left in the working force, people fear that the account will run dry. Whether or not it lives or fails though will be determined in the coming years. That is the big risk with not pursuing a traditional 401k or Simple IRA.

Other retirement plans include the 403(b), SEP, payroll deduction IRAs, profit-sharing plans, money purchase plans, various other governmental plans, etc. If you’re interested in learning more, talk to your employer or do some more research on the internet to find a plan that will work for you.

Not enough can be said about saving your own money to ensure you have something to tidy you through (especially since there is the possibility that your plan will run out before you die—if you live a long life).

You can increase the amount you save personally every year by practicing money saving techniques now.

Live below your means

You can start by learning to live below your means. Not just within them, but learning to only use 75% of your income for your necessities. Save 25% of your income for non-necessary expenses. You can divvy that money into savings/travel/hobby money as you see fit. Living like this will (1) build up a savings account with every paycheck, and (2) teach you how to live once you do retire.

Say you earn $50,000 a year. Saving 25% of that every year for 20 years will give you $250,000. Work for 40 and you’ve got half a million to use on top of your retirement plan. Even only saving 10% of your total income will give you $200,000 at the end of 40 years. Every little bit helps, especially as kids begin caring for themselves.

Living below your means will help you create disposable income that could be used to bring fun, enjoyment, and security to your family. That skill will transfer to how you spend your money post retirement.

Never buy anything on impulse

Too many purchases are made on impulse. Candy bars, movies, and sometimes TV’s and cars are bought on impulse. They aren’t needed by any means, but they mean just a few more dollars out of your bank account. Say you made an impulse purchase of $5 every week for 40 years; you would spend $10,400 on things you can’t remember anymore. Learn to shop with a purpose and avoid buying things on impulse as often as possible.

Get out of debt before retirement

Debt combined with high interest rates can be detrimental to seniors. They spend so much of their needed income on expensive mortgages. Do your best to take care of these debts while you’re still contributing to your retirement funds (not withdrawing from them). Everything works better when you’re debts are all paid going into retirement.

Also try not to get into debt once in retirement. Cut up credit cards. Don’t take out a loan for a car. Avoid debt at all costs.

Downsize life

A great way to reduce debt is to downsize your house, car, and other property. Once the kids are gone, you won’t need a house with 3 or 4 unused bedrooms. Keeping the place clean is a nightmare and takes you forever. Downsize into a more manageable size. Let a newer family use the space like you did. It’s true that the place hold memories, but your kids are the epitome of those memories. You will have a house for your needs and can relive your memories when your kids come by to visit. You got a bigger house for the size of the family. Readjust when it starts to shrink again. It’s a normal part of life.

Eat healthy

Now this tip can actually cost you more throughout your life, but eating healthy has wonderful consequences that make the price you pay worth it. The human body was built to function properly on a healthy diet. Just like a car, the better you take care of it, the longer it will run and the fewer problems it will give you. Getting into a habit of eating healthy now will extend your strength, health, and life.

Practice living on a budget

Living according to a budget is still the best way to ensure you spend your money wisely. When you practice a tight budget throughout your working years, it will be a no-brainer when your income is cut by 20-30% annually.

If you haven’t already, look into your retirement plans and get those moving. You can never start too early to prepare for retirement. Also begin learning how to spend your money wisely. Downsize when necessary, live below your means, save as much as you can, eat healthily, and practice living on a budget. These are all habits that will help you do well in retirement.