Retirement signals one of life’s biggest transitions. Still, many people delay preparing for it because it can seem so far down the road. However, personal events or external circumstances can upend a planned retirement date, so that’s why it’s important to get “retirement ready” now.
According to the California State Teachers’ Retirement System (CalSTRS), in the second half of 2020, there was a 26 percent increase in retirements compared to the same period in 2019. The vast majority of those surveyed cited COVID and the issues surrounding it as their reason for retiring early.
It’s impossible to predict events--like a global pandemic--or personal ones, such as an accident or illness. But the one thing most everyone can control is their ability to plan ahead.
To become eligible for a pension in California, educators need to put in a minimum five years of service. Beginning at age 62, they can start drawing income from it. The state will allow early retirement at 55, again after having accrued five years of experience, but with the potential for reduced benefits. Unlike other retirement programs that center on individual and matching contributions, California pension values are calculated based on years of experience and final salary.
Think about the retirement you envision. Does it involve traveling here and abroad? Indulging recreational pursuits or hobbies? Moving to a more desirable location? Whatever your dreams, will your income from CalSTRS or the California Public Employees Retirement System (CalPERS) be able to cover them?
Whether you define retirement by pursuing another occupation or in its purest form of not working at all, it’s wise to begin saving for it as early as possible. The earlier you begin to save, the more your money will compound and grow with the goal of ultimately providing you with added flexibility and financial freedom to pursue the possibilities in retirement.
As you prepare to ease into this next life stage, here are some important things to consider:
1. Enroll in a tax-deferred plan—Do you participate in a 401(k), 403(b), 457 or another savings plan in addition to CalPERS or CalSTRS? If you don’t, you might want to consider enrolling in one if it’s available to you through your employer. Tax-deferred plans are deducted directly from your salary before your employer withholds income tax—out of sight, out of mind. For 2021, you can contribute up to $19,500 and an extra $6,500 if you are 50 and older.
2. Create a budget based on the type of lifestyle you expect to have in retirement. As part of your budget, it’s critical to factor in retirement income distribution planning. Some things to consider:
Determining a safe withdrawal rate—There are many formulas for calculating a safe withdrawal rate. One of the more popular ones is the 4% rule. If you withdraw 4% of your savings in your first retirement year—then adjust for inflation in subsequent years—you should be able to ensure your savings won’t run out before 30 years. There are caveats, as with all formulas, such as your portfolio mix and market performance.
Estimating taxes—Most retirement income is taxable, but your annual income likely will probably be less than it was when you were working, putting you in a lower tax bracket. Also, certain taxes are no longer withdrawn, such those for Social Security, and you’ll want to work directly with your own accountant or tax professional to ensure that you fully understand all of your tax-related options and restrictions.
Ensuring income lasts as long as possible—The average life expectancy is 76 years for men and 81 years for women. If you plan to retire at 62, you want to make sure you can generate income for several years.
3. Think through carefully and deliberately how you want to provide for any beneficiaries. If you choose an option beneficiary under CalPERS and CalSTRS, once you make your selection, it cannot be changed. Also, your pension benefit could be reduced substantially depending on the option you take and amount you designate for survivors. Before making any decisions, you might want to consult with a financial professional to help you determine the best course of action.
4. Consider life insurance -- A permanent life insurance policy not only provides death benefit protection for your beneficiaries, but it can provide the potential for tax-deferred cash value growth over time and allow you to access your funds through loans and withdrawals for things such as retirement or long-term care. Keep in mind, however, that loans and withdrawals from a life insurance policy reduce the policy’s cash value and death benefit and increase the chance that the policy may lapse. If the policy lapses, matures, is surrendered or becomes a modified endowment, the loan or withdrawal balance at such time would generally be viewed as distributed and taxable under the general rules for distributions of policy cash values.
Working with a financial professional can assist you on the path to financial well-being down the road. They are committed to helping you identify and meet your current needs and priorities, as well as supporting and guiding you towards achieving the retirement you deserve.