3 Key Decisions That Could Leave You Richer in Retirement
1. The age at which you file for Social Security
The monthly Social Security benefit you’re entitled to in retirement will hinge on what your earnings look like during your 35 most profitable years in the workforce. But that’s not the only factor that goes into determining benefits. Your filing age will also play a role.
Once you reach full retirement age, or FRA, you’re entitled to your full monthly benefit based on your wage history. But you don’t have to wait until FRA to sign up for Social Security. You’re allowed to claim your benefits as early as age 62, but for each month you file ahead of FRA, those benefits get reduced.
The opposite will happen if you delay your filing past FRA. In that case, every month you hold off will result in a boost to your benefits, up until the age of 70.
It’s crucial to pick a Social Security filing age that aligns best with your plans and goals, and also, with your circumstances. If you fear that your nest egg will fall short, you may want to err on the side of filing later. And if you have a healthy pile of savings at your disposal, filing earlier might suit you just fine. But take plenty of time to land on the right age to start collecting those benefits.
2. The retirement plan you choose
Taxes are a huge burden for some seniors. So it could pay to choose a retirement savings plan that minimizes them.
If you house your retirement savings in a traditional IRA or 401(k), you’ll get an up-front tax break on your contributions. But your withdrawals will be subject to taxes during retirement.
On the other hand, if you choose to keep your savings in a Roth IRA or 401(k), you’ll forgo a tax break on your contributions but benefit from tax-free withdrawals during retirement. And if you expect to have a lot of other taxable income sources, a Roth could be the better bet.
Of course, you don’t have to choose just one or the other. You may decide to keep some of your money in a traditional retirement plan and house the remainder in a Roth account. Doing so could allow you to enjoy the best of both worlds from a tax perspective.
3. The way you invest your retirement savings
Playing it too safe with your retirement savings could lead you to fall short once your senior years arrive. Even if you’re the risk-averse type, you may want to step outside your comfort zone and load up on stocks in your IRA or 401(k) while retirement is still many years away.
Imagine you contribute $500 a month to your savings over a 40-year period. If you go heavy on stocks, you might manage to snag an average annual 8% return, which is a bit below the stock market's average. That would, in turn, leave you with a 1.5 million nest egg to enjoy.
But if you go heavy on bonds, instead, you might only see an average yearly 4% return in your retirement plan. All other things being equal, that would shrink your nest egg down to $570,000. That’s not pocket change, but it’s worlds away from $1.5 million.
Weigh your options carefully
The choices you make ahead of retirement could heavily influence your senior years. Be mindful of when you claim Social Security, where you keep your retirement savings, and how you invest the money you diligently sock away. With any luck, you’ll make a series of smart decisions that allow you to enjoy retirement to the fullest.