A retirement is a life-altering event that comes with many changes. You will experience a change in your life, financial situation, and intellectual progress that can be truly amazing. If you are nearing retirement, this is the best time to review your arrangements and make any necessary adjustments so that the process is as smooth as possible. These resources can help you get started.
1. Notify Important Dates that You Do Not Want to Miss
You can maximize your retirement benefits and avoid being punished by securing important milestones in your retirement plan.
Social Security Application 4 Months In Advance
You must sign up for Social Security benefits at least four months before you want to begin receiving income. This is the earliest time you can apply for Social Security benefits and allows the Social Security Administration to process your request.
Social security retirement benefits can be taken by most people as soon as they turn 62. You will receive a larger monthly payment if your full retirement age is reached. Your full retirement age is between 65 and 67 depending on the year you were born. Your benefits will be permanently reduced if you claim them early. If your spouse dies, your benefits will be reduced by the amount that they receive.
Tip – To maximize your monthly Social Security Income, wait until you are 70 years old to claim. Benefits can increase up to 8% each year if you delay filing a claim after reaching full retirement age.
Register for Medicare 3 Months Prior to Age 65
Medicare is a right of passage for most people. You can sign up for Medicare up to three months before your 65th birthday.
If you are filling in for Medicare as you get closer to 65, and your employer (or your mate) provides medical services, you can ask your benefits division or protection suppliers how they deal with Medicare. These guidelines can be confusing. It is possible to be eligible for Medicare, regardless of your bunch wellbeing inclusion status. Missing the cutoff time at which you enlist can cause huge problems, such as a hole in inclusion or a late enlistment penalty.
You will need to sign up for Medicare if your employer offers retiree health insurance. Retirement programs often complement Medicare benefits, such as prescription drug coverage. It’s a smart idea to compare the benefits of your employer’s retirement plans with alternatives such as Medigap or Medicare Advantage plans.
Set up RMDs if you’re over 72
The Internal Revenue Service will require you to take minimum distributions from pre-tax retirement accounts every year after you turn 72. Examples include:
401(k), including Roth 401 (k), 403 (b) and 457(b), plans
SIMPLE and SEP plans available for small businesses
Other retirement accounts that have pre-tax money
You don’t have to receive RMDs if you were born after June 30, 1949. To take your first RMD, technically you can wait until April 1, the year after you turn 72. This might be a good option if you are able to delay, but it doesn’t mean you have to wait so long. You will need to take two RMDs if you wait to take the RMD after you turn 72.
WARNING – The penalty for not submitting an RMD is half of the amount that you were supposed to withdraw. If you are required to withdraw $10,000 but fail to do so the excise taxes would be $5,000.
If your money is part of a workplace retirement plan, such as a 401(k), then you may not have to take RMDs until you retire. This applies unless you own more than 5% of the plan sponsoring employer. RMDs will not be applied to retirement plans that aren’t associated with your current job at 72 years old or older.
2. Plan for your Health Care Expenses
Fidelity Investments estimates that a couple of 65 years old should budget to spend $300,000. This doesn’t include long-term care costs.
IMPORTANT Traditional Medicare doesn’t cover long-term care, hearing aids, and routine dental and vision services. To help cover these expenses, you can buy additional insurance through private carriers.
You need to find a way to keep your coverage until Medicare kicks in if you are 65 or older. There are many options:
Continuation in benefits: This allows you to continue your employer’s insurance for up to 18 months.8 You can also use COBRA (or state continuation programs if you are a small business) to save money. You are responsible for paying 100% of the premiums.
Spouse’s plan. If your spouse has employer-provided insurance, you may be able to switch to this plan. If the employer pays a substantial portion of the monthly premiums, this may be an affordable option.
Individual policy: An insurance company can sell you health insurance directly. Check your state’s health care marketplace for more details. You might be in for some sticker shock when you find out that health insurance for seniors is not cheap.
Employer health coverage for retirees: Some companies offer post-retirement healthcare coverage. Compare the retiree package with other options if you are able to afford it. While it is easier for some employers to provide a subsidy, you might still be better off having an individual plan or spouse’s coverage.
After you have estimated the cost of health insurance coverage, make sure to add it to your income calculation.
3. Know your Income Needs
A key part of any successful plan is knowing how much money you will need each year. A target will help you determine if your plan is on track and if there are any adjustments you should make. Consider how much money you will be spending each month and any additional expenses that might arise each year. There are two possible ways to estimate your retirement spending.
Income Replacement Ratio
It is possible to assume that your retirement spending will be similar, but with a slight decrease in spending. You no longer have to save money or pay payroll taxes. Additionally, expenses associated with work such as commuting or clothing may be reduced.
An income replacement ratio is a way to estimate how much income you’ll need to replace your current income. The U.S. Government Accountability Office states that target income replacement rates range from 70% to 85% of preretirement income.9 Fidelity believes rates are slightly lower at 55% to 80%.10 If you earn $100,000 annually, an 80% replacement ratio would mean your target is $80,000 to replace your annual income.
IMPORTANT It is possible to use your current income as a basis, but it can become problematic if you have expenses that change. If you are responsible for your health care premiums after you retire, and your employer has paid insurance premiums for your benefit, and income replacement method may not be able to account for that additional expense.
You can also make a detailed list of all your expenses. This is similar to a monthly budget. This allows you to have the most control over your spending and gives you an excellent overview of it. Temporary expenses can be eliminated (if your mortgage is paid off after eight years), and you can budget for regular items such as a large vacation every three years.
Start by keeping track of your spending for several months to create a detailed budget. Add irregular costs (quarterly, annual, or property taxes) to the above-calculated health care costs. Don’t forget about any other expenses you may incur during retirement.
No matter which method you use, set a spending goal. You can avoid any unpleasant surprises and increase your chances of having the resources that you need.
NOTE – While you can’t predict the future, it is possible to get a start point. Use the information that you have now to your advantage.
4. Take stock of your income and assets
These two types of income are known as “guaranteed” and include social security benefits and pensions from employers. They are guaranteed and will last your entire life, regardless of how your investments perform.
The ultimate goal of retirement is to be able to retire comfortably using this income base and supplemental retirement savings.
NOTE: Retirement savings can be defined as all money that you have earmarked for retirement. This includes any money in a bank, taxable brokerage accounts, or official retirement accounts like an IRA.
Social security benefits are available to nine out of ten people over 65. The average monthly payment for retirement was $1,555 in 2021.11 Your earnings history and when benefits were claimed can affect how much you receive. To see how much you can receive at different ages, review your Social Security Statement.
The calculations used to calculate your monthly Social Security payments are becoming less generous, particularly after 2021. While the penalty for filing early (before full retirement age), is not new, your monthly Social Security payment will be less generous as the full retirement age increases, from 66 to 67 depending on when you were born.
IMPORTANT The full retirement age for those born after 1955 increases faster than it did in previous years. Early claims can lead to severe benefits cuts. Delaying claiming can result in a less generous calculation. Your benefit amount ceases to grow once you turn 70. This means you will have fewer years for delayed retirement credits.
You can include pension income received from your employer in your “guaranteed base”. However, it is important to determine if your pension will affect Social Security retirement benefits. Some people have worked in both government and private organizations that contribute to Social Security. If this is the case, your Social Security benefits might be reduced or eliminated entirely.
Savings and Retirement Accounts
You might not be able to rely on guaranteed income sources to meet your spending requirements. To supplement your income, you might need to take out money from your account.
Most likely, your retirement assets are in an employer-provided plan such as a 401k, 403(b), and 457. You might also have savings in IRAs or annuities, high-yield savings accounts, taxable accounts, and/or high-yield savings. You should take stock of all your money and where it is being invested. You will need to plan how you are going to manage and draw on your assets as you get closer to retirement.
5. Reexamine Your Investment Risk
Investments are most important in the first years of retirement. These years are crucial for your investments. Market losses can have a surprising impact on your success and increase your risk of running out of cash.
If you completely eliminate risk (keeping all your money in cash), you are vulnerable to inflation. It might be difficult to keep up with the rising costs and pay for the things that you need over many decades. Too much risk can lead to financial disaster. It is difficult to find the right level of risk because you have to make assumptions about the future, weigh the pros and cons and compare different portfolios.
Talking to a financial advisor can also be a good idea in this situation. They can help you to allocate risk among the investments in your portfolio according to your income requirements and risk tolerance level.
6. Create a withdrawal plan
It is best to calculate the cash flow from your savings each year to plan for your retirement. If you are looking for a more detailed strategy, there are two options that can help you to understand how to withdraw your retirement funds.
You should be able to withdraw enough money to cover the difference between your guaranteed income and what you spend. You should be able to withdraw only what you require without reducing your assets. These strategies might help you achieve that goal.
You may have to make changes if you are facing a financial crisis and don’t have the assets to cover it. There are two options, but they are unlikely to be accepted: delay retirement or spend less each year.
The HTML4 Rule
Many retirees wonder how much money they can withdraw from their retirement accounts. It depends on many factors and it is impossible to predict how much you will earn or lose on these accounts. Initial estimates might be helped by the 4% rule.
According to the 4% rule, you can.
Withdraw 4% from your retirement account each calendar year
Inflation increases withdrawals
The funds should (hopefully!) last for at least 30 years
Important: The 4% rule does not guarantee your money will last 30 years. Your results will depend on how you invest and the market. Despite this, the rule was created to withstand some of the worst financial times in history.
Each year, withdraw 4% from your retirement account
Inflation increases withdrawals
The 4% rule assumes you have 50% of your money invested in stocks and 50% in bonds. To maintain the 50/50 target allocation, you will likely sell some of your stocks and some of your bonds when taking income. This is a guideline, so there may be variations.
You can use a bucketing strategy to plan your withdrawals in different time segments or “buckets”. For example, you could imagine how many withdrawals you will need and then divide them into three buckets.
The next four years (your first couple of years of retirement, 2021-2025)
The six subsequent years (2026-2031)
Your remaining years of retirement (2032 and beyond).
For your first bucket, use safe investments, such as cash in the government-guaranteed bank and credit union accounts. There is no need to be concerned about the financial markets. Your money is safe and you can use it as per your plan for the first few years. You might choose to invest in the second bucket in low-risk investments such as mutual funds that have 30% stocks and 70% fixed income. You can replenish the first bucket with this portfolio over time.
The third bucket is where you keep funds that you won’t touch in at least 10 years. It could be used to invest in higher-risk securities. You might have a portfolio that includes mutual funds and at least 70% in a broad-based stock portfolio. While the goal of that bucket is long-term growth and diversification, it doesn’t necessarily mean that you should take unnecessary risks. You can fill the second bucket over time with money from your third bucket.
NOTE The bucketing strategy may not be the best retirement income strategy. It is an intuitive strategy that can be used by risk-averse retirees to provide some security and peace of mind.
7. Do not forget about taxes
You will have less money to spend each year due to taxes, so it is important that you include them in your income planning. These are the most important issues for retirees.
You pay income tax on funds you withdraw from pretax accounts like 401(k), 403(b), and 10% for early withdrawals. There are typically withdrawals that are made before age 59 1/2.
Pension income is generally taxable so you won’t be able to spend every penny.
Your Social Security benefits may be subject to partial taxation if your income exceeds $25,000 (including distributions from pretax retirement funds). Single filers are subject to taxation when they earn $25,000 in income. The lowest threshold for married couples filing jointly is $32,000 in annual income.
High retirement income can lead to higher Medicare premiums.
Consider how taxes will impact your income, Medicare premiums, and the tax rate on your Social Security benefits before you retire. Remember to include taxation on RMDs. You may be able to lower future taxes by paying only a portion of your taxes during your early retirement years.
Partial Roth conversions are a way to reduce your taxable income, and pay taxes at the current rate. This might be a good option if you have a low income for several years (before RMDs kick in) or if your investments are losing value.
8. Enjoy Your Retirement
These steps will help you address the most important financial aspects of a successful retirement transition. Planning can help you increase your chances of getting the income that you want for the rest of your life. It also helps you avoid some of the most common retirement pitfalls.
These means will enable you to strategically focus on the important things, such as your connections and how you spend your retirement years.