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Things You Must Know Before Leaving the Workforce

Planning for retirement can be both exciting and stressful.

Finally, you can finally sleep on Mondays. You can enjoy your hobbies, travel, and spend more time with your family.

It can be difficult to create a retirement plan. There are many factors to consider, including Social Security and Medicare as well as taxes and investments.

Although it can seem overwhelming, it is worth making a plan for retirement as soon as possible.

Here’s a list of things you should know before retiring in the next year.

Six Essential Things You Need to Include in Your Retirement Checklist

Retirement is calling you — but can your budget handle this?

These are some tips to help you avoid financial stress and worry in your golden years.

  • Calculate how much money you actually need.
  • Find out your total Social Security retirement age
  • Find out how to maximize your Social Security benefits
  • Do you plan to work in retirement? Learn the Social Security Earning Limits
  • Make sure you are familiar with your health care options
  • Learn how your Social Security benefits are taxed

1. Calculate how much you need and how much you have

It is important to know how much money you will need for retirement before you leave the stage.

There are many well-known formulas that can help you determine how much you should retire.

These are two of the most popular:

  • 25x Rule Take your annual expenses and multiply by 25.
  • 70%-80% Rule Experts estimate that you will need to save 70% to 80% each year to fund your retirement.

It’s good to have these numbers on hand, but creating your own retirement budget will give you the best estimate of your retirement income.

To track where your money is going, you can pull out some bank statements and credit card statements from the past few months if you don’t have one.

It is a good idea to also review the information in all of your retirement accounts.

It is important to think about how your financial situation will change and what expenses you will have in retirement. While you won’t have to commute as far as work, your healthcare costs will rise as you get older.

You should also consider other financial obligations, such as supporting parents and children.

Last but not least, eliminate as much debt as possible to ensure that your retirement savings don’t get eroded.

2. Find out your full retirement age for Social Security

Social security retirement benefits can be started as soon as you turn 62. However, your monthly benefits may be significantly reduced if you sign up early.

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You won’t be eligible for full Social Security benefits unless you reach full retirement age.

The full retirement age was 65 in the past, but this has changed for some time.

Social Security Administration bases your retirement age on the year that you were born.

  • Your full retirement age if you were born between 1943-1954 is 66
  • Your full retirement age will increase gradually if you were born between 1955-60.
  • Anybody born after 1961 is eligible for full retirement at age 67.

Working beyond your full retirement age can result in a greater monthly benefit.

The benefit amount you receive increases each month that you refuse to accept Social Security benefits. However, this additional benefit reaches its maximum at age 70.

These numbers can help you choose the best retirement date for your budget.

Pro TipA monthly benefit can be 77% higher if you wait until you turn 70 than if you claim it at 62.

3. Find out how to maximize your Social Security benefits

As we have already mentioned, working beyond your full retirement age can help you increase your Social Security benefits.

There are many ways to increase your monthly benefit. Unfortunately, these are not quick fixes.

Nearly all strategies that can increase your Social Security check come down to this: Work harder, make more money, and delay your retirement date as much as possible.

Minimum 35 years of work

Social Security calculates your benefit based on your 35 highest-earning years. It’s a good idea to remain in the workforce for at least six years.

It can pay off to work for more than 35 years, especially if your earning potential is higher than it was in your early years.

All Earnings Should Be Reportable

Throughout your career, report any earnings from tips, freelance work or self-employment. These earnings can reduce your Social Security benefits.

There is a difference between marriage and divorce

Your marital status also affects how much Social Security will pay you.

If you are divorcing and have not remarried, your ex may be eligible for benefits based on your work record. This is subject to the condition that your marriage lasted at most 10 years. This will not affect their benefits.

If you meet certain criteria, you may be eligible for 100% of your ex-spouse’s benefit in the event that they die.

4. Do you plan to work in retirement? Learn the Social Security Earning Limits

Yes, you can work while also collecting Social Security.

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However, if your annual income is greater than $19,560 in 2022, Social Security benefits will decrease.

How it works

  • After reaching full retirement age, you can stop working and receive Social Security benefits regardless of how much you earn.
  • You can earn up to $19 560 per year if you are not yet fully retired but still receive Social Security benefits. For context, this is $1,630 per month or $376 per week.
  • Your benefits will be reduced by $1 per $2 earned over $19,560.

Here’s an example.

Let’s suppose you start receiving Social Security benefits at the age of 62. You receive $1,200 per month.

You return to work a few years later and make $30,000 per calendar year.

This is $10,440 more than the limit. Your yearly Social Security benefits will be reduced by $5520 or $460 per month.

This means that if you make $30,000 in a year between 62-65 and your full retirement age, your $1,200 monthly check will drop to $740.

However, and this is very important, money doesn’t disappear forever.

Social security will calculate your monthly benefit amount once you reach full retirement age and credit you for the months that they have reduced your payment.

5. Make yourself familiar with your health care options

Your biggest expense in retirement will be health care.

Even if your health is good, it’s important that you plan ahead and know what your options are for health care.

  1. You will likely lose your health insurance if you are 65 or older and have to pay for your own healthcare.
  2. At 65, you’re eligible for Medicare.

It is possible for early retirees to find themselves in difficult health care situations.

If you are married to someone who has workplace health coverage, you might be eligible for coverage through your spouse’s plan. They can’t add your name to their Medicare plan if they are on Medicare.

You can also extend your employer’s COBRA insurance benefits for 18 months. It’s expensive, however, at an average cost between $400 and $700 per person per month.

Optional Health Insurance for Early Retirees

  • Search for a job that provides health coverage. Be aware of the Social Security earnings limits.
  • The Health Insurance Marketplace allows you to find an insurance plan. You can apply for the Marketplace’s 60-day special enrollment period if you lose your health coverage at work. This is the federal government’s health care shopping and enrollment program for uninsured Americans.
  • Check to see if your state offers Medicaid. Particularly if your retirement income is low.
  • You can create your own private health insurance plan. This can be costly and complicated, especially for those with poor health or limited incomes.
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What you need to know about Medicare

Although we would love to tell you that things are easier once you reach 65 and become a Medicare beneficiary, it is not always true.

Contrary to popular belief this federal insurance program doesn’t come with free or all the costs of your healthcare.

There is a lot more to Medicare than we can possibly cover here.

Here are some important guidelines for Medicare:

  • If you are already receiving Social Security benefits at 65, you will automatically be enrolled. There is no need to do anything.
  • You must enroll. If you have coverage through a market plan, COBRA through an employer in the past, or TRICARE for retired service members, you will need to enroll in Medicare once you turn 65.
  • You might still be covered: If you are still working and enrolled under your employer’s group insurance plan, or if your spouse still works and is covered by their plan, you may not have to sign up immediately for Medicare. However, you should always check with your employer.
  • You are eligible for Medicare at 65. Also, you have seven months to sign up. Late enrollment will result in stiff penalties.

Medicare eligibility is only available to those who have been disabled from Social Security for 24 months or more. Individuals with end-stage renal disease (ALS) are also eligible.

6. Learn how your Social Security benefits are taxed

Social security benefits are considered income. Do you owe Social Security taxes?

Sometimes, yes.

There’s a chance that at least a portion of your Social Security income will be taxed if you earn additional income from investments or work.

If:

  • Half their annual Social Security benefits + income = more than $25,000 for single filers and $32,000 for married couples filing jointly.

Even if your income exceeds these thresholds, the IRS will not tax your entire Social Security Income. Instead:

50% of your Social Security Benefits are taxable if you:

  • Half of your benefits + income = $25,000-34,000 for individuals and$32,000-44,000 for married couples filing jointly.

If:

  • Half of your benefits + income = $34,000 for individuals and $44,000 for married couples filing jointly

Remember that 50% to 85% of your Social Security benefits are taxable. However, they will be subject to tax at your normal income rate.

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