Whether your retirement is rapidly approaching, or it is still just a distant idea, the time to prepare for a secure retirement is now. Here are five things you can do to prepare for retirement, no matter where you are in your career.
1. Plan for major expenses
Creating a budget is a good idea at any life stage but takes on added importance when thinking about retiring – especially when it comes to major expenses post working years. Basic expenses are the things you can plan for on a recurring basis, while major expenses may require dipping into your preretirement.
- Taxes: your PERA benefits will be subject to federal and state taxes.
- Monthly Bills and Utilities: from your cell phone to electricity bill, these expenses can add up quickly.
- Car/Transportation Expenses: think about how you will get to doctor’s appointments and activities in retirement.
- Health Insurance: you will now be responsible for the full cost of coverage when you are no longer on your employer’s plan; PERA does offer a premium subsidy to benefit recipients enrolled in PERACare.
- Food: eating in will cost less but you still may want to budget for going out to eat a few times a month.
- Housing: depending on your situation, you may have rent or a mortgage to pay, plus maintenance, insurance, and property taxes. Do you want to try to pay your mortgage off before retiring, or will you still have such payments in retirement?
- Entertainment/Hobbies/Memberships: one thing that will change in retirement is the time you have available for different activities. Your budget may need to change based on costs associated with how you are spending your time.
- Medical/Dental Bills: large, unexpected medical and dental expenses can have a big impact on your budget; having adequate savings to draw upon if needed will be essential to cover these bills.
- Travel: from the trip of a lifetime to regular visits with the grandkids, you will want to think about having money available to fund these excursions.
- Home Repairs: even if your house is paid off in retirement, you may still have substantial expenses resulting from the need for home repair.
- Emergencies: plan for the unexpected.
- Large Purchases: perhaps you’ve thought of buying an RV to travel around the country or simply need a new car to do errands in, either way you may need to have a substantial amount of money set aside in retirement to make large purchases.
- Inflation: inflation erodes your purchasing power over time; being able to offset the effects of inflation on your benefit will be important to fund prior to retirement (see below for more information on planning for inflation).
If you are interested in learning more about saving additional money for retirement to prepare for both basic and major expenses, tune in to a PERAPlus Webinar, which discusses PERA’s 401(k) and 457 plans. Topics include:
- Enrolling in PERAPlus: Provides information on your retirement savings plan options.
- Investing Made Simple: Helps you choose an investment path.
- Developing a Savings Plan through PERAPlus: Helps you develop a savings plan.
2. PERA and Social Security
Most Americans rely on Social Security to provide them with some income in retirement. For most PERA members, however, PERA serves as a replacement for Social Security and therefore anticipated Social Security amounts may be less than expected. You may want to learn more about PERA and Social Security before you finalize your plan to retire. Some highlights include:
- The average PERA defined benefit amount is two times the average Social Security benefit amount, and PERA members will come out ahead as a result of their PERA benefit – even after potential reductions to their Social Security benefit.
- The Social Security reductions apply to PERA Defined Contribution members as well, so having a plan to address longevity risk is a good idea. Annuities are one option that can help to mitigate this risk, several options are available to PERA members through Empower.
- Social Security’s Windfall Elimination Provision reduces a Social Security worker benefit for time you spent working for a non-Social Security employer. Social Security calculates this reduction, and you can learn more here.
- Your PERA benefit will never be reduced by Social Security or any other retirement plan.
3. Maximize Your PERA Income
Understanding how your PERA benefit will be calculated will help you maximize the benefits of your membership in PERA both while you are working and throughout your lifetime. From the financial security of survivor and disability benefits, to the monthly lifetime income you will qualify for in retirement, PERA has several resources to help you prepare for retirement.
- Your member dashboard includes everything from your account beneficiaries to your projected monthly benefit. You should log into your account on a regular basis to track your PERA benefit.
- One of the main factors in calculating your defined benefit is your Highest Average Salary (HAS). You can monitor it on your dashboard and be aware of factors that may affect it, including pre-tax contributions to things like health care premiums, dependent care, and flexible spending accounts if you were hired prior to 7/1/2019 (tax deferred savings to retirement accounts do not affect your HAS).
- Another key factor in your defined benefit calculation is your service credit, or the amount of time you have worked for a PERA employer. If you have worked for a non-PERA employer and want to add to your service credit calculation, you may want to consider purchasing service credit to increase your benefit amount or even retire earlier.
- PERA has several calculators available to you to help plan for retirement. If you log in to your member dashboard, the calculators will auto populate with your personalized information, including your HAS, service credit, and retirement eligibility. Check them out!
4. Reduce Debt
Everyone has different life circumstances and may be entering retirement with various levels of debt. If you can prepare for retirement by reducing the amount of debt you have, it may provide you with the following benefits:
- Reducing your debt reduces your expenses and provides more flexibility with deciding how to cover major expenses. Since you will have more money available to pay for the unexpected, you may be able to avoid incurring new debts.
- Taking on new debts in retirement may be unavoidable or just be a better financial option. Being prepared and having flexibility in your budget when you are no longer working may require you to really focus on eliminating most debt prior to retirement.
- You may miss a few “paychecks” between the time you stop working and your first retirement benefit check, so paying down your debt now can help you lower your expenses in retirement and continue your lifestyle without having to go back to work.
5. Plan for Inflation
Inflation is a decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services in the economy. This means that a dollar today will be worth less in the future because it will buy less. As a retiree, being prepared to offset the effects of inflation either through saving more money now or spending less later (such as by reducing debt), will help you live your best life in retirement.
- As of May 2022, the 10-year breakeven inflation rate was 2.86%, while the Federal Reserve aims for a 2% rate of inflation, on average.
- The Annual Increase paid to PERA benefit recipients will be 1% in July 2022. The Automatic Adjustment Provision can adjust the amount up or down, within limits.
- With a 2% rate of inflation, the cost of goods and services doubles in about 35 years, so think about how long you plan to be retired and ways you can prepare yourself – and your finances – for a rewarding retirement.