You put money in your 401K. You’re working toward paying off your mortgage before retirement. You think you’re doing everything right to get ready for your golden years.
But do you really know the proper way to plan for this critically important period? A new study suggests you may not. Just one in four people passed the American College’s Retirement Income Literacy Quiz, which assesses knowledge of housing issues, Medicaid, budgeting and more.
Perhaps more alarmingly, just 18 percent of women passed the test. That suggests a huge gap in understanding of common retirement necessities, which could lead to unpleasant surprises when you hit your 60s.
Is your retirement IQ up to par? Here are three things you may not know about retirement that can help you plan for the future.
1. You May Be Underestimating the Importance of Social Security
Did you know that, for the majority of retirees, Social Security accounts for more than half of their income? Most people don’t realize this. The average person receives $1,200 per month in Social Security benefits.
Because of this gap in knowledge, many people approaching retirement age think picking the right investments represents their key retirement decision. While this is still important, it will not make the biggest difference in your retirement budget.
2. You Can Put Off Receiving Social Security Benefits
The earliest you can collect Social Security is age 62. But you don’t have to get it then. Many people don’t realize that you will receive more if you put off your benefits for a few years.
By deferring benefits until age 70, you will gain 7 to 8 percent more each year. This will give you higher checks when you finally begin collecting. Almost half of respondents to the survey were unaware of this.
Of course, if you opt to delay these benefits and you retire from your full-time job before age 70, you may need to find other ways to supplement your income, such as a part-time job or using the equity in your home.
3. You May Benefit From Taking Your Retirement on a Month-by-Month Basis
It’s tempting to cash out your employer-sponsored retirement funds into one lump payment. You may want to use them to pay off your home or a car or take a dream vacation. But you may want to consider a life annuity, which pays out on a regular basis over time, over the lump sum.
It can be difficult to budget for the long term when you receive a lump payment. You may feel tempted to use it too quickly, which will leave you in a pickle down the road.
People who have a steady stream of income tend to feel more confident about their retirement. They know they always have money on the horizon, making them more comfortable with their long-term financial picture.
Being knowledgeable about your finances will help you avoid common mistakes many people make when they approach retirement. Need help figuring it all out? Contact Go Comprehensive, and we can help you solve the puzzle of retirement.