Ok, you are a few months to starting retirement and you’ve determined that you made the necessary financial arrangement to cater for your living expenses. Living in retirement has so many things you’ll need to consider once you retire, for example, whether or not, and when to start withdrawing for your retirement fund, working while retired, your social security contributions etc. For you to have a fulfilling retirement, you need to look at all aspects of retirement that are bound to affect you life, and the following article by editors of the Money Magazine, look into the different areas that normally affect retirement.
On my next blog, I will dwell into one area that really does some serious financial damage to your retirement funds, Healthcare.
Can I afford to retire?
To step off the corporate treadmill in your 50s or early 60s and maintain anything close to your standard of living, you need a seriously big retirement kitty.
How serious? You’ll likely need assets worth 10 to 16 times your salary by the time you leave your job. A 45-year-old making $120,000 who hopes to retire at age 60, say, should already have nearly $700,000 set aside. (See the Retire Early calculator.)
You can get by with less if you’ll have other sources of income. If that same 45-year-old has a typical old-fashioned check-a-month pension, for example, he might need only $432,000 in savings to be on track. If you expect to hold down a scaled-back job for your first decade of retirement, you can also get by with less.
If the combination of Social Security, pensions and prudent draws from your savings is enough to cover the expenses on your retirement budget, then you’re pretty much home free. Let your retirement adventures begin!
I’m retired. Now what?
Congratulations! Hopefully you’ve done enough planning in your working years, and by this point you’ve got it all figured out. But if not, you’ve got quite a few decisions to make.
Start by figuring out what type of lifestyle you want in retirement, and how much money you think it might cost you. Create a retirement budget that includes everything from essentials like food, utilities and housing costs to the nonessentials that make life more enjoyable, such as travel and entertainment. And don’t forget that you’ll undoubtedly run into unexpected expenses – medical bills that aren’t covered by Medicare, a roof that needs fixing or a car that’s got to be replaced – and that your living costs are likely to rise along with inflation over the years.
From here, you’ll need to figure out how much money you should be withdrawing, and which accounts to tap first. You’ll also want to look into collecting social security payments. You’ve also got some decisions to make about your home. Do you plan to relocate? Downsize to a smaller home?
If you don’t think you’ll have enough to sustain the lifestyle you want, you may have to consider other options like scaling back your retirement plans, taping your home equity for income, working in retirement, or even delaying your retirement
When can I start withdrawing my money?
Now that you’re not working, you’ll probably want to start tapping your retirement money. But you can make the most of your nest egg by withdrawing from taxable accounts first, and leaving any money you have in tax-sheltered retirement accounts for last. For more see When should I start withdrawing from retirement accounts? and Working in retirement
When can I start collecting Social Security?
Assuming you qualify for Social Security, you can begin collecting “early retirement” payments at age 62. (Widows, widowers and disabled persons can sometimes collect sooner.)
But you will receive a much larger benefit if you can afford to delay until you reach “full retirement age” (somewhere between 65 and 67, depending on when you were born) or later – and working in retirement might allow you to do just that. For more, see What’s the best age to start getting Social Security payouts?
Where do I get my health insurance?
Once you turn 65 you are automatically eligible for Medicare coverage. That provides a base level of health insurance that will take care of a lot of your medical expenses, but probably not all. You will be required to pay a premium for some of your Medicare coverage, and you will probably want to purchase a private Medigap policy to cover all the costs that Medicare doesn’t.
Should I delay my retirement?
Maybe. Lots of people should seriously consider it. Hanging on at work for even one more year can be a great boost to your long-term security, especially if you are about to retire when the markets are inconveniently in a swoon.
Say you have $1 million in a tax-deferred account, split evenly between stocks and bonds, when you retire at age 65. If you withdraw 4% plus an inflation adjustment every year, in 30 years you will likely still have $636,200 left after taxes. But if the market happens to tank early in that withdrawal period, the outlook gets riskier – there’s a one-in-four chance that you’ll run out of money before year 30.
If you work just one year longer, though, the projections are far better. And by working three years longer you’d typically end up with $1.2 million after 30 years – and have just a 1-in-20 chance of running out of money.
Every year that you are able to earn enough money to live on allows you to leave your retirement egg untouched for another year – leaving you more money when you finally do stop working.
When can I start withdrawing from retirement accounts?
Well, clearly you need to start tapping those accounts when you need the money to live on. But let’s say you have some of your retirement stash in tax-sheltered accounts like 401(k)s and IRAs, and some of it in regular investment accounts.
Your best strategy in that case is to tap the regular investment accounts first. That way, your money in the tax-sheltered accounts will keep right on growing without Uncle Sam taking his cut. If you spent the money in your IRA or 401(k) first, you’d keep getting taxed on the amount in your regular investment account, eroding its value.
How much should I withdraw from retirement accounts?
Most people also have to dip into savings to bridge the gap between what Social Security and pensions, if any, provide and what’s needed to cover retirement expenses. At that point, the issue comes down to how much you can reasonably draw from your nest egg each year to close that gap. Generally, to avoid going through your savings too soon you’ll want to limit your initial draw to about 4% of your savings and then increase that dollar amount for inflation each year (although, this 4% rule is a guideline, not a carved-in-stone commandment).
How long can I leave money in my retirement accounts?
It depends on what kind of account you have.
If you have a traditional IRA, when you turn 70 ½ years old you must begin making a required minimum withdrawal from it each year. The amount of the distribution depends on how much you have saved in the account and your life expectancy, according to tables published by the IRS.
With a Roth IRA, you can leave the money in for as long as you want, letting it grow and grow as you get older and older.
The rules are similar for traditional 401(k)s and Roth 401(k)s. After you turn 70 ½, you must make required minimum withdrawals from a traditional 401(k). Not so with Roths.
Should I work in retirement?
If you’re worried about making your money last your lifetime, then continuing to bring in some cash through a job, even if it is part-time, can be a huge help. Let’s say you take on some work that gives you enough income so you’re able to reduce your IRA withdrawals by $15,000 a year for 10 years. (As we mentioned, if you are over 70 ½ years old you must make a required minimum withdrawal each year. But we’re talking about reducing your non-required withdrawals that exceed that minimum.)
Okay, so you delay making that $15,000 IRA withdrawal for 10 years and thus keep the money growing tax deferred at an 8% annualized rate. At the end of that 10-year stretch, your IRA will have nearly $220,000 more in it than it would if you had been withdrawing $15,000 a year instead.
Will working affect my Social Security payments?
It depends on when you retire. The Social Security Administration determines your so-called “full retirement age,” which is somewhere between 65 and 67 depending on when you were born. (Your Social Security annual statement includes your lucky date. Visit the ssa.gov Web site for more details.)
If you take early Social Security benefits (anytime between age 62 and your full retirement age), each dollar of income you earn above $13,560 each year will reduce your Social Security payout by 50 cents.
The rules are more lenient starting in the year in which you reach full retirement age. For example, if you already are drawing Social Security benefits and you hit full retirement age in 2008, you could pocket $36,120 in earnings without any reduction in your Social Security benefit. If you happen to earn more than $36,120 in your big transition year, your benefit will be reduced by $1 for every $3 in earnings above the $36,120 threshold.
Now the good news: Once you have passed full retirement age you can earn as much as you want with no impact on your Social Security payout
What’s the best age to start collecting Social Security?
You will receive a much larger benefit if you can afford to delay until you reach “full retirement age” or later – and working in retirement might allow you to do just that. For example, if you take an early benefit at 62 the payment will be 25% less than if you waited until your full retirement age. Hold off until you are age 70 and your benefit will be 25% to 30% more than the payout you would have received at full retirement age. So the difference between taking early retirement and waiting until you are 70 can be a benefit that is more than 50% higher.
Of course, the tradeoff is that when you take the earlier benefit you have that many more years of receiving a payout. Still, with much longer life expectancies today, delaying the payout as long as possible typically pays, assuming you make it to at least age 77. And according to the official actuary tables, if you are alive at 65 there’s a high probability you will indeed still be around at age 77.
If my spouse dies, do I still get his/her Social Security?
Yes; you will be covered under the Social Security Survivor’s Insurance program. And this being Social Security, there are the usual array of odd rules that determine how big a benefit you will receive.
If you have already reached full retirement age (somewhere between 65 and 67 based on your date of birth; if you aren’t sure, check your latest Social Security annual statement), you’re entitled to 100% of your deceased spouse’s benefit.
If you’re at least 60 but not yet at Social Security’s definition of “full retirement age,” your payout will be somewhere in the range of 71% to 99% of your deceased spouse’s full benefit. Note that a widow or widower of any age with a child under age 16 is entitled to a 75% payout.
If my spouse dies, will I still get his/her pension?
Maybe. It depends on whether your spouse chose a monthly payout based solely on his/her life expectancy, or a monthly payout that continues through your life – that is, the “joint and survivor” benefit option. If you aren’t sure what your spouse chose, get in touch with the company providing the pension.
As you might expect, with the “joint and survivor” option, the size of the monthly payout is smaller because the chances that one of you will live a long time are greater. Additionally, many plans offer different payout options: you may choose a setup that pays 100% to the surviving spouse, 75%, 50%, etc. The higher the promised payout to the surviving spouse, the lower the monthly payment will be.
Once the payout decision is made, it typically can’t be changed. So if your spouse hasn’t retired yet, your best bet is usually to make sure he or she chooses “joint and survivor” – or you may be in serious financial jeopardy if your spouse dies before you do. Alternatively, choose the bigger payment pegged to the retiree’s lifespan, and invest the difference to build a bigger nest egg for you. If your spouse dies shortly after retiring, however, you’re out of luck.