Monthly Archives: February 2012

5 Costly Retirement Surprises


I have mentioned quite a number of times that retirement planning will not end just because you have actually retired. Just as we are assured of taxes almost all our life, you’ll have to plan for your retirement till you take your last breadth on God’s green earth. Sorry for being too blunt. But most people have this notion that planning for retirement involves just ensuring that you have enough funds to cater for your desired lifestyle, but millions of retirees have been caught unawares because of small blunders that will cost you big time. Retirement is full of surprises, and as the following article by Rachel L Sheedy explains, there are 5 retirement surprises that can prove to be costly.

Most people dream of retirement long before they get there. Perhaps you imagine hours spent on the golf course, taking a class on a subject that has always intrigued you or volunteering for your favorite cause. Of course, that’s the idealized version of retirement. And then there’s reality.

Kiplinger’s asked financial planners from the National Association of Personal Financial Advisors what retirement surprises their clients most often encounter, and queried our Facebook community as well, to come up with this list of five top financial surprises. Pre-retirees, you are forewarned.

Health care costs.

The cost of health care came up most often as a top retirement challenge among retirees on our Facebook page. According to Fidelity Investments, the average 65-year-old couple will spend about $400,000 out-of-pocket throughout retirement until age 92, not including long-term-care costs.

Those new to Medicare may find it’s more costly than they bargained for, too. While Part A of traditional Medicare, which covers hospital benefits, is free, you’ll pay a premium for Part B to get coverage for outpatient services and a premium for Part D to get prescription-drug coverage. Add in the premium for a private Medigap policy, which helps cover the costs that Medicare doesn’t cover, and a couple can end up paying $6,500 a year in Medicare premiums alone.

High-income beneficiaries get an extra shock — they are subject to a premium surcharge. Even if your income isn’t always high, you can land yourself in surcharge territory if you spike your income in one year with a Roth conversion, for example, or exercised stock options. The surcharge starts to kick in if your annual adjusted gross income (plus tax-exempt interest income) tops $85,000 if you are single or $170,000 if you are married filing jointly.

Keep in mind that Medicare does not cover long-term-care costs — an additional expense you must plan for.

Higher spending.

You no longer have to budget for work clothes or commuting. But you may have to start paying for some things that you used to receive as perks through work, such as a company car, meals, travel or computers. “Small business owners and professionals who retire are often surprised how many of their expenses were picked up by their company,” says Bert Whitehead, president of Cambridge Connection, in Franklin, Mich. “It is a jolt when they discover how much it adds up to.”

Many retirees plan to see the world in their first few years of retirement, but traveling is pricey, and the costs of transportation, lodging and entertainment can add up quickly. Retirees’ actual “travel budgets tend to be at least 10% to 20% higher than what had been budgeted,” says certified financial planner Debra Morrison, of Trovena’s Roseland, N.J., office. Even if you stay put, you’ll have lots of free time to fill, and activities, such as golf or fixing up the house, cost money, too. “We tell clients that the ‘common wisdom’ that retirees spend 75% of what working people do is a dangerous thing to believe. We do goal setting to discover how they actually picture their retirement, and then try to place a price tag on it,” says certified financial planner Barry Kaplan, of Cambridge Southern Financial Advisors, in Atlanta.

Those first few years in particular may be expensive as you enjoy your freedom from work, so budget accordingly when drawing up your retirement income plan. “Retirees desire to travel and become more active in the lives of their children and grandchildren,” says certified financial planner Lazetta Rainey Braxton, of Financial Fountains, in Chicago. “It’s hard to plan for activities and ‘unassigned gifting’ when a retiree has never set aside these ‘line items’ in their budget.”

Social Security taxes.

Most people realize that they are paying a tax into the Social Security system during their working years, but did you know that you may also have to pay tax on your benefits once you start receiving them? Up to 85% of Social Security benefits are taxable, and the income thresholds that trigger Social Security income taxation are low — $32,000 for a married couple, for example. “Retirees have a difficult time adjusting to the taxability of Social Security income and the low-income thresholds. Most retirees don’t see Social Security as taxable deferred income since they paid into the government fund using after-taxed dollars during their employment years. In their minds, retirement income shouldn’t be taxed twice,” says Braxton.

You’ll also forfeit some benefits if you continue to work before you hit full retirement age — in 2012, you give up $1 in benefits for every $2 you make over the earnings limit of $14,640. The good news is that once you pass full retirement age, your benefit will be adjusted upward to account for the forfeited benefits. To learn more about the ins and outs of Social Security, check out our Special Report: Maximizing Social Security Benefits.

Taxes on nest-egg withdrawals.

Uncle Sam not only wants a piece of your Social Security benefits, but he’s ready for his slice of your pretax retirement savings. When you withdraw money from a traditional IRA or 401(k), those dollars stashed away pretax have a tax bill attached to them when they come out of the account, says certified financial planner Burt Hutchinson, of Fisher & Hutchinson Wealth Advisors, which has offices in Wilmington and Lewes, Delaware. Money you pull from tax-deferred retirement accounts is taxed at your top ordinary-income tax rate, which can be as high as 35%. So if you need $30,000 to buy a new car and you are in the 25% tax bracket, you’ll need to withdraw $40,000 from your IRA to cover the cost of the car and the $10,000 tax bill on the withdrawal.

You can leave the money in tax-deferred retirement accounts until you hit 70 1/2. Starting at that age, seniors are required to take minimum withdrawals from IRAs and 401(k)s. If you have a large amount of money in those accounts, a sizable RMD may push you into a higher tax bracket than you thought you’d end up in upon retirement. To mitigate the tax hit, it could be advantageous to tap those accounts sooner than later. Another smart strategy: Start stashing money in a Roth IRA, which has no RMDs for account owners and can be tapped tax-free. Learn more about the retirement tax trap by reading Prepare for the Retirement Tax Bite.

Loss of income for a surviving spouse.

Estate planning is critical to make sure your assets are passed down as you wish. But another critical component of estate planning for couples is making sure that the surviving spouse will have enough money to live on. “One thing people don’t plan for is the reduction of income if a spouse or partner dies — without corresponding reduction in expenses,” says certified financial planner Kathy Hankard, of Fiscal Fitness, in Verona, Wis. For example, if both spouses are both receiving Social Security benefits, a significant chunk of that income stream will disappear.

The surviving spouse can switch to a survivor benefit if that is higher than her own, but the survivor benefit will not necessarily make up for the lost income of going from two benefits down to one. This is one reason why boosting the potential survivor benefit through delayed retirement credits is a smart strategy for couples. The higher-earning spouse can wait to take his benefit, which can earn up to 8% a year in delayed credits up to age 70, and at that spouse’s death, the survivor can switch to a benefit worth 100% of the deceased spouse’s benefit, including the delayed credits.

The same income reduction can happen if a spouse who receives a pension hasn’t signed up for a joint-and-survivor annuity. If the annuity is only based on his life expectancy, at his death, that income source will dry up with no payments for the surviving wife. Choosing the joint-and-survivor option may result in less money monthly, but it will provide income for the surviving spouse if the pensioner dies first. Learn more about pension payout options by reading Pension Quandary: Lump Sum or Annuity?.

Hankard says one client’s income dropped about 35% as a result of lost Social Security income and a drop in pension income from his spouse’s death, while expenses decreased only about 10%. A big change in cash flow thus may require a change in lifestyle. Plan ahead to ensure that your spouse will have enough money to maintain his or her standard of living.

Retirement Gotchas Experts Rarely Talk About


We hear and read about retirement advice every now and then, but this advice is always generalized to fit everyone. Now, as we all know, every individual is facing a different situation, even though we may be facing the same retirement circumstances, for example, the same retirement age or having the same amount of funds in our retirement portfolio. But just because we are in the same retirement circumstance, does not necessarily mean that we are facing the same financial situation. Thus, as you consider the retirement advice from the financial experts, always try to tailor it to fit the financial situation that you are facing. This will ensure that the advice is beneficial to you, and not simply a matter of copy pasting. Consider the following article by David Ning, that explores some of the retirement advice that you should try and fit into the financial situation that you may be facing at that particular time.

Retirement planning is full of rules of thumb. The 4 percent rule can help you to decide how much to withdraw from your retirement savings each year, and aiming to replace a certain percentage of your pre-retirement income can give you a rough idea of how much to save. However, this well-intentioned advice sometimes gets slowly twisted into something else that does more harm than good. Here are some ways following expert advice can actually harm your financial future.

You are unlikely to implement the 4 percent rule.

The 4 percent rule is based on withdrawing 4 percent of your assets annually and adjusting the amount based on inflation every year. So even if the market does really well or drops precipitously, you stick with a 4 percent withdrawal based on the original nest egg and ride out the bumps. But can you imagine anyone actually doing this throughout retirement? Say you are 20 years into retirement. By then, even the most stubborn and disciplined person has probably come up with a new percentage to draw based on market performance and personal circumstances. In reality, people end up twisting the 4 percent rule, perhaps to withdraw more money when they incur an unexpected expense or skip a withdrawal while the market is down. This may or may not work for them, but it’s not the 4 percent rule.

Everyone doesn’t need the same percentage of pre-retirement income.

Some studies have calculated that most people will need a specific percentage of their pre-retirement income to live comfortably in retirement, such as 75 or 80 percent of working income. This is another rule that could help you get a sense of how much is needed for your retirement years, but it may not work in practice. There are just too many expense variables to say that everyone will be able to get by on a given percentage of their pre-retirement income. For example, many people have a mortgage payment that consumes around 25 percent of their income. Obviously, people who pay off their house before they retire will have a vastly different expense situation than those who are still making payments. Therefore, the only way to come up with any realistic retirement budget is to know your own situation and track your expenses. There’s no other way to determine how much you need to save for retirement.

There’s inflation between now and retirement too.

While most people consider how inflation will impact their nest egg during their retirement years, not enough people account for inflation eroding their purchasing power from now until the day they decide to start their retirement. Of course, this problem is worst for younger folks who have decades until they retire. But workers nearing retirement should acknowledge that they will probably need a bigger nest egg to account for inflation. Once you figure out your expenses, you need to remember to add inflation into the calculation too. For example, if your expenses are currently $40,000 a year, the same level of consumption could cost as much as $54,000 in 10 years.

Social Security is a big help.

It’s true that the Social Security system has a long-term deficit. But there is almost no chance that the program will be eliminated in its entirety. This means that, for the vast majority of Americans, there will be some sort of check coming to you on a monthly basis for the rest of your life, and it will be adjusted each year to keep up with inflation. The program won’t replace all your working income, but the monthly payments will give your retirement standard of living a significant boost.

Instead of writing the whole scheme off completely, you should make sure that you are doing what you can to increase your retirement benefit. This means at least 35 years of paying into the system, and taking some time to figure out the pros and cons of claiming your benefits at various ages. Married individuals should explore ways to maximize their lifetime benefit as a couple.

Retirement Savings Low on Priority List


I know nearly everyone is wondering when this financial misery will end, because it seems when we take one step forward we take another three steps backwards. Hey, That’s life, always full of surprises. But there are other surprises that we can always avoid, for example, ensuring that we have taken care of our future through regular contributions to one’s retirement fund. A recent report found out that many Americans are saving less towards their retirement, and with the current economic woes, many people may have genuine reasons why they are saving less. My argument is, eventually we’ll all retire someday, and hence we’ll require enough funds to sustain the kind of retirement you had envisioned for yourself, but this may not be achieved because you will have less funds in your retirement portfolio, which means you’ll have to cut back on some expenses, which will eventually lead to lower standard of living than you had set for yourself. As the following article by Sheyna Steiner explains, by cutting back on your retirement contributions, all you’re doing is setting the stage for a lower standard of living due to lack of enough funds to sustain the kind of lifestyle you may want.

While the recession, followed by a moribund recovery, may have imperiled Americans’ future retirements, market volatility is not the only culprit. A new survey from has found that many Americans have curtailed or decreased contributions to their retirement savings accounts this year compared to a year ago.

Nearly 3 in 10 employed Americans (28 percent) are saving less for retirement than they did the year before, while 15 percent are saving more and 48 percent are saving about the same amount.

Time is of the essence

In the best of times, most people are woefully underprepared for retirement. Clearly these are not the best of times for everyone, which puts retirement savings even further behind the curve. With no quick solution to the economic malaise on the horizon, it may be time for many people to downsize their lifestyles to save money.

The key to amassing a substantial sum for retirement is consistent saving and investing over time. With millions of Americans out of work and the economic doldrums occupying the nation’s collective psyche, more people are focusing on survival rather than planning for the future.

This leads to a new set of worries. Nearly half of Americans, 47 percent, report feeling less comfortable with their level of savings than they did one year ago. That’s up considerably from a low in May — just three months ago — of 35 percent reporting discomfort with their level of savings.

“They probably feel that they don’t have the ability to save because either they fear being out of work or maybe their spouse is out of work. These are tough times,” says John Burke, CFP, owner of Burke Financial Strategies in Iselin, N.J.

Trade-offs in financial decisions

“People could have decreased their savings to pay off more debt,” says Robert Fuest, COO and head of investment research at Landor & Fuest Capital Managers in New York.

Data from the Federal Reserve indicate that Americans have succeeded in reducing household debt burdens. The household debt service ratio illustrates the relationship between debt payments to disposable personal income. It peaked at 13.95 in the third quarter of 2007 and fell to 11.51 in the first quarter of 2011.

Unfortunately, servicing debt requires resources that could be allocated elsewhere — for instance, for an emergency fund or your future retirement. Households have a finite amount of money that must be directed toward many different obligations, and the decisions are difficult when Americans are feeling squeezed.

“I would have expected the ‘saving less’ number to be higher,” says Dan Yu, managing director and lead retirement expert of EisnerAmper’s wealth division in New York. “There is so much pressure everywhere else on people. Just making ends meet can be difficult for some people these days with all of the constraints that we’re dealing with.”

Rejigger the priority list

You’ve heard the motto, “Pay yourself first.” When the financial going gets tough, the first thing people do is stop paying themselves. While the wisdom of that strategy is questionable — after all, a perfect credit rating won’t finance retirement — retirement savings needn’t be cut off altogether. But the definition of wants versus needs may have to undergo change.

“Make a list of everything you spend money on and then rank it in terms of importance to you,” says Burke. “Food will be at the top, certainly.” Burke suggests also putting savings near the very top, and cutting a bit from the least important expenses to make sure there’s enough money to fund it.

Every expense is a choice, “but the worst choice is to be 50 or 55 and not have any money saved for retirement,” he says.

If circumstances force you to decrease the amount you’re saving, at least try to save something, implore the experts.

“If you have a job, you can put money away. It really comes down to budget constraints,” says Yu.

“When times are hard and you can barely make ends meet, 2 percent of your income is not going to make that big a difference. Frankly, you’ll be able to reduce income tax by a bit if you can do more (saving),” he says.

Make saving less taxing

Only contributions to a traditional IRA or conventional 401(k) or 403(b) are made before taxes. For contributions to a Roth IRA or Roth 401(k), taxable income will not be reduced in the year the contributions are made. Instead contributions and earnings can grow unfettered and be withdrawn tax-free in retirement.

By prioritizing spending and cutting monthly expenses, families may be able to save while meeting other objectives. But savers will have their work cut out for them as they get older.

“For those who are more mature and deeper in their careers, I would forewarn them that sometimes you have to give up current pleasures to be assured of having a comfortable retirement. For instance, if that means not going on an extravagant vacation, you may want to make those compromises,” says Yu.

Savers who start early have a distinct advantage over late bloomers, but whether you’ve been saving since age 25 or just starting at 35 or even 40, retirement savings need to aggressively increase with age.

“Between the ages of 35 and 45 they should really be maximizing all of their retirement accounts: maxing out the IRA or 403(b) or 401(k). I think if someone is earning $100,000 they should be saving the maximum in their retirement plan,” says Fuest.

That recommendation can be scaled down for people with lower incomes. For instance, someone with an income of $50,000 could aim for contributing half the maximum every year.

In 2011, the maximum you can contribute to a 401(k) or 403(b) is $16,500, whether in pretax or after-tax accounts. Those 50 and older can add $5,500 to that amount for a total contribution of $22,000. The contribution limit for IRAs is $5,000; $6,000 for those 50 and older.

Plan now rather than later

No matter how much money you earn, increasing your retirement savings could take some budgetary strategizing. In good times and bad times, tracking spending and making prudent choices can lead to a more fruitful retirement down the road.

Besides Social Security and the unpopular option of literally working yourself to death, Americans have frighteningly few options for their retirement years if they neglect to plan during their careers. As uncomfortable as the present economic environment is, being forced to work into your 80s could prove more disturbing.’s Financial Security Index dropped to 92.3, the lowest level measured since the monthly poll commenced in December. An accompanying slideshow offers detailed results of the latest FSI survey. Check out the advice and analyses by selected experts to help you manage your money optimally during these times of uncertainty.

How to Strengthen Your Retirement End Game


Majority of us do whatever it takes to ensure that we at least have a decent life during retirement, but retirement planning does not end with accumulating enough funds that will sustain your lifestyle during your sunset years. Imagine saving for almost half your lifetime, only for you to live like a pauper because of not making the right financial decisions at such a crucial stage in your life. There are thousands of retirees out there who did everything right as far as saving for retirement is concerned, but only got messed up because of making the wrong moves in their retirement portfolio. Emily Brandon illustrates in the following article some of the ways of strengthening your retirement end game.

We spend much of our career saving and investing for retirement. And the challenges don’t end on the day we retire. We must then manage our nest eggs to make sure our retirement savings lasts for the rest of our lives. Here are some ways to improve your retirement end game.

Plan how you will draw down your savings.

Develop a plan to draw down your retirement savings at an annual rate, such as 4 percent of the initial balance each year, with adjustments for inflation. “You can withdraw between 4 and 6 percent of your portfolio each year and still protect the principal,” says Stephen Overstreet, a certified financial planner in Winter Springs, Fla. The Congressional Research Service estimates that a 4 percent annual withdrawal rate for an investment portfolio with 35 percent in U.S. stocks and 65 percent in corporate bonds would be 89 percent likely to last 35 years or more. You can further prevent yourself from outliving you savings by withdrawing less in years when your investments perform poorly. “When there is a recession, clients should start spending less,” says Overstreet.

Retain an emergency fund.

Keep an emergency fund of immediately available cash so that an unexpected expense doesn’t disrupt your retirement draw down strategy. “You always need to have an emergency fund in another account that is not part of the investment portfolio, but in a bank or mutual fund,” says Overstreet. “If you are heavily dependent on a portfolio, you’re going to need two or three years worth of income sitting in some very safe place.”

Minimize taxes.

If the bulk of your retirement savings is in tax deferred retirement accounts including 401(k)s and IRAs, your timing of withdrawals could impact how much you pay in taxes. “If you take too much in one year your tax bracket could go up because you have a big chuck of money boosting your income,” says Overstreet. “I believe in trying to stretch things out so you don’t have too much income in any one particular year.” Withdrawals from traditional retirement accounts generally become required after age 70½. Those who fail to withdraw the correct amount must pay a 50 percent tax penalty on the amount that should have been withdrawn.

Maximize Social Security.

The monthly payment you are eligible for from the Social Security Administration increases for each month you delay claiming between ages 62 and 70. “If you retire later you will have more money coming in from Social Security,” says Gerald Cannizzaro, a certified financial planner for Retirement Planning Services in Oakton, Va. “If you don’t take your Social Security at 62, you make about 8 percent more per year for every year you don’t take it.” There is no additional benefit for delaying claiming beyond age 70.

Pay off your mortgage.

You will be able to get by on a much smaller income in retirement if you can eliminate your mortgage. “When you retire and have no mortgage to pay it greatly improves your retirement income,” says Cannizzaro. Consider a mortgage payment of $2,000 per month. “Without that payment going out that’s $24,000 a year less you need to spend,” says Cannizzaro.

Sign up for Medicare on time.

You can sign up for Medicare beginning three months before the month you turn 65. Sign up right away to avoid a premium hike for late starters. If you don’t sign up for Medicare Part B during the seven-month window around your 65th birthday, your premiums may increase by 10 percent for each 12-month period that you delay enrollment. Those who are still working and covered by a group health plan at work must sign up within eight months of leaving the insurance plan to avoid the premium increase.

Minimize fees.

Pay attention to the costs and fees you are paying to invest and take steps to minimize them whenever possible. “It’s very common for retail investors who are managing their own money to have multiple layers of underlying expenses that they don’t even know about,” says Bryan Hancock, a certified financial planner for Timberchase Financial in Birmingham, Ala. “The average expense ratio is about 1.5 percent, but there are very low-cost options that can do the same thing for a tenth of that cost, such as low-cost ETFs.” Hancock recommends shopping around for expense ratios of less than 1 percent on your investments.

Combat inflation.

Most people have only one source of inflation-protected retirement income: Social Security. Social Security payments increase each year to keep up with inflation as measured by the Consumer Price Index. Consider adding some additional inflation-fighting investments to your portfolio, such as Treasury Inflation-Protected Securities (TIPS), or some exposure to commodities, real estate, or the stock market.

Consider part-time or seasonal employment.

A part-time job, even if you only make a few thousand dollars per year, allows you to spend your savings more slowly. You can also use part-time income to pay for gifts and trips and other non-necessities that you don’t want to use your nest egg to finance. Spending less in the early years of your retirement allows you to preserve assets for the latter part of your retirement when continued employment may no longer be an option.

Why Your Retirement May Not Be Permanent


The reasons for retirement are pretty obvious, but how one retires is an entirely different matter. Sometimes cutting back on the number of hours worked from 8 or more hours to zero, can have not a so pleasant experience after calling it quits. Such a drastic move sometimes requires a more gradual way of retiring from your employment. As employees try to adjust their life to accommodate the change in their job status, people are coming up with innovative ways to lessen the impact of the sudden change in their work life. Emily Brandon explains in the following article some of the ways employees are finding appropriate to leave their place of employment, rather than the abrupt change in employment status of yester years.

Retirement is no longer a one-time, permanent event. Exits from the workforce are becoming more gradual, and many employees move to another job before leaving the labor force completely. In fact, an abrupt retirement that continues for the rest of your life is now the exception, rather than the rule, according to a series of studies recently published by Joseph Quinn and Kevin Cahill of Boston College and Michael Giandrea of the U.S. Bureau of Labor Statistics. Here’s a look at some of the ways workers are transitioning into their retirement years.

Bridge jobs.

“People are retiring in a process where they leave a full-time career job and then transition to a job that is less intensive, working less hours or fewer weeks per year,” says Michael Giandrea, a research economist at the Bureau of Labor Statistics. Among people who were employed in full-time jobs after age 50 and subsequently retired, 61 percent of men and 60 percent of women moved to another job before retiring completely. Slightly more than half of these “bridge jobs” were part-time positions. Young retirees and those with self-reported good health were the most likely to move into a bridge job before retiring. In many cases, people also switched careers at the same time. “People aren’t going to the same type of job, they are doing something different, often in a different occupation or industry,” says Giandrea. “The majority of people are taking pay cuts and making much less money for working typically fewer hours.”

For some people, these bridge jobs are a way to remain active or try something new. Other workers take them out of financial necessity or to get valuable employer benefits. “The use of bridge jobs is more likely at both ends of the socioeconomic scale,” says Joseph Quinn, a Boston College economics professor. “The people at the bottom end need the pay and the medical coverage. At the upper end, it’s a lifestyle choice. They like feeling productive and have friends at work.” Men and women earning less than $10 per hour or more than $50 per hour are considerably more likely to move into bridge jobs before retirement than middle-class workers earning between $10 and $50 per hour.

Back to work.

Many people return to the workforce after a period of full-time retirement. An analysis of people who held a full-time job in 1992, then retired for at least a two-year period by 2008, found that 16 percent of the men and 14 percent of the women later returned to work. Retirees were more likely to reenter the workforce if they were younger and in better health. Workers with only a 401(k) or no workplace retirement benefits were also more likely to return to work than those with a traditional pension.

Some factors influenced men’s and women’s retirement choices differently. Women with dependent children at the time they retired were significantly more likely to return to work than those without children under 18, but this was not true for men. Men who do not own a home were more likely to reenter the workforce after retirement than male homeowners, while there was no significant difference among women. However, both men and women with a working spouse were more likely to find a new job after a period of retirement than those without a spouse who was still employed.

Phased retirement.

A far less common way to transition into retirement is to reduce the number of hours you work for your current employer. “The opportunity for what people have called ‘partial retirement,’ cutting back hours at your existing employer, is relatively limited,” says Giandrea. Only a few employers have formal phased retirement programs that allow workers approaching retirement age to gradually work less hours or fewer days per week. A Society for Human Resource Management member survey of 600 human resources professionals found than only 5 percent of companies offered a phased retirement program in 2011, down from 12 percent in 2007.

Most other transitions to part-time work at the same employer are ad-hoc arrangements negotiated with individual supervisors and management. Phased retirement can complicate pension calculations, and workers need to make sure they continue to work enough hours to qualify for the health plan if they are under age 65. Employees also need to renegotiate which responsibilities they will keep, as well as fair pay for their continued work. Sometimes it’s easier to get a part-time job at a new company than to ask for less responsibility and fewer hours at your current job.

The 10 Most Difficult Retirement Decisions


Before making any major decision in one’s life, we usually look at all the possible things that might happen when we follow a certain course of action. Retirement planning is no different, every year, tens of millions of employees leave their employers hopefully to begin their retirement. Likewise, before actually retiring, there are aspects of retirement that most retirees want to clarify before taking the plunge. Getting answers to these areas or rather having a good idea of what you want to achieve, will clear problematic issues that my arise during your retirement. Emily Brandon explores in the following article, 10 of the most difficult retirement decisions faced by retirees.

The decision to retire can be sparked by a number of factors: reaching a specific age, hitting a savings goal, or being laid off in a tumultuous job market. To support yourself without income from a job, you’ll have to make a series of choices about Social Security, health coverage, and your investments. Here are 10 of the toughest decisions you will make before you retire.

When to retire.

For some people, it’s a financial calculation. You know you’re financially ready when the combination of your Social Security, traditional pension, and investment income produces enough cash flow to cover all of your anticipated expenses for the rest of your life. “Working two or three more years can make an incredible difference to your long-term plan if you continue to save in your 401(k) or 403(b) and continue to pay into Social Security,” says Mary Alpers, a certified financial planner and founder of Alpers and Associates in Colorado Springs, Colo. But retirement also often involves an identity shift from your former job title to a free agent. Sometimes this decision is made for you because of a layoff or buyout. Many people also like to coordinate their retirement with a spouse.

When to claim Social Security.

You can sign up for Social Security beginning at age 62, but payouts increase for each year you delay claiming until age 70. “Wait as long as you possibly can, because the additional percentages that are added on are enormous,” says Jane Nowak, a certified financial planner for Kring Financial Management in Smyrna, Ga. “Since we are living longer, you certainly want your paycheck from Social Security to be as fat as possible.”

Health coverage.

It’s essential to find affordable health insurance if you want to retire before age 65. “If you are not entitled to retiree medical benefits or if they are deferred to a later date, make absolutely certain you have access to and can qualify for individual coverage,” says Robert Henderson, president of Lansdowne Wealth Management in Mystic, Conn. “Also verify the costs. Health insurance can be prohibitively expensive in some cases.” Even after you qualify for Medicare, the decisions don’t end. You have to choose whether to purchase a supplemental policy and shop around for the Medicare Part D plan that best meets your prescription drug needs each year in retirement.

How much you can safely spend each year.

If your nest egg isn’t sizeable enough to finance your retirement completely, you’ll need to calculate how much you can safely spend each year without depleting your savings too quickly. “Three to 4 percent is my comfort zone, and I hope less,” says Alpers. An annual draw-down rate of 4 percent on an investment portfolio with 35 percent in U.S. stocks and 65 percent in corporate bonds has an 89 percent likelihood of lasting 35 years or more, according to Congressional Research Service estimates.

How much investment risk.

Retirees need to balance their investment needs for safety and continued growth. “Hold as little equities and higher-risk assets as possible, while still enough to meet your long-term goals,” says Henderson. “Most retirees need no more than 50 to 60 percent in equity and equity-like investments.” You’ll also need an emergency fund and several years’ worth of living expenses set aside in a safe place. “Always make sure that you have your first three to five years of withdrawals invested in very conservative investments. Good choices are CDs, money market accounts, short-term treasuries or mutual funds that invest in them, and fixed-immediate annuities,” says Henderson. “This way, regardless of what the stock market is doing today, you don’t have to worry about withdrawing assets that have dropped in value.”

When to pay taxes.

After decades of deferring taxes on your retirement savings using 401(k)s and IRAs, the tax bill becomes due upon withdrawal in retirement. The timing of these withdrawals could affect how much you pay in taxes. “Try to balance out your withdrawals from taxable and nontaxable accounts each year so you are not kicking yourself into a higher tax bracket at some point,” says Henderson. Taking a large IRA withdrawal in a single year could result in an oversized tax bill. Withdrawals from traditional retirement accounts become required after age 70½.

Where to live.

Once you are no longer tethered to a job, you can live anywhere that suits your tastes and budget. Moving to a place that costs less than where you live now can boost your standard of living and help stretch your nest egg. You could also test out a place with better weather, more opportunities for recreation, or move closer to family.

Whether your home should help finance retirement.

A paid-off mortgage can help finance your retirement because it eliminates one of your biggest monthly expenses. In some cases, downsizing to a smaller home or moving to a place where the cost of living is significantly lower can even give a significant boost to your nest egg. “Especially if you live on the East or West coast, where housing can be extremely expensive, you may have an opportunity to downsize and realize quite a bit of the appreciation you had in your real estate,” says Henderson.

Whether to keep working.

A part-time job is increasingly becoming common in the retirement years. Many people downshift to a job with shorter hours and less responsibility before retiring completely, while other people return to work after a break. The income, and sometimes benefits, a part-time job provides allows you to withdraw less of your retirement savings each year. Some people also find jobs they enjoy that allow them to interact with former colleagues, consult on the occasional project, or learn a new skill.

What you will do.

Retirement isn’t only about quitting your job. It’s an opportunity to have complete control over how you spend your time. Make sure you have a few ideas about how you will fill the eight or more hours per day you previously spent working and commuting. Some people miss the sense of purpose and friends that their job provided for them, while others finally have the time for hobbies and projects they have been waiting years to tackle.

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