As a retirement writer who is working past his normal retirement age, I’ve witnessed a lot of people transition from work to retirement. And I’ve noticed that a source of stress for many is determining which things have to happen at retirement versus which decisions can wait. While every retirement is unique, these are my observations about what issues should be prioritized and what can be delayed.
For most people, retirement is a huge life-event. It’s as big or bigger than graduations and weddings. And for many, retirement is also a stressful event. One way to remove some of this stress is to plan ahead. The challenge is what things can be planned for in advance, and what things can wait. Everyone will vary on this, but if you find yourself preparing for retirement, some generalizations can be made about priorities. Consider these three must-dos, and three it-can-waits.
1. Medicare
For most Americans, the two crucial foundations of their retirement plans are Medicare and Social Security. The good news is that filing for Social Security can wait, but Medicare can’t. Even if you’re going to continue working past age 65, you should determine in advance your plans for Medicare.
Age 65 is usually the magic age to make Medicare happen. You can file as early as three months before you turn age 65 to assure that your coverage kicks in on the first day of your special birthday. To file for Medicare it takes more than just signing up for government health benefits. If you are part of the over one-half of Americans who choose Original Medicare, you’ll need to sign up for Parts A and B, choose a carrier for a Part D drug plan, and decide who to use for Medigap supplemental coverage. If you’re with the sizeable minority who choose Medicare Advantage, you need to choose your provider and determine if a separate Part D plan is needed.
Age 65 may be the magic age for Medicare, but what if you’re planning to retire either earlier or later than 65? If you’re planning an early retirement, you’ll need to secure health coverage to take you to age 65. This may come from your employer’s retiree health plan (these are becoming more and more rare), from electing COBRA, from enrolling in one of the Affordable Care Act exchange programs, or through insurance provided by your spouse’s employer. If, instead, you plan to continue working past age 65, you need to determine whether your employer’s health plan qualifies you to delay filing for Medicare, and determine if you should at least file for Medicare Part A (it’s free) or continue with your HSA plan. Bottom line: At least six months before turning age 65 (or before if retiring early), you should research your health insurance options.
2. Build A Social Security Income Bridge
There’s a difference between checking your Social Security account and actually filing for benefits. If you expect to receive this important retirement benefit, you should go to www.ssa.gov and sign up for and check your account. The online Social Security tools are a great way to make sure your earnings are correctly recorded and to get an estimate of what you’ll receive in benefits once you do file. If you don’t get the answers you need, there are both specialists and software tools that can help. That said, actually filing for Social Security is a retirement move that is almost always better to delay (see below). So how do you create an income to live on between the time you retire and when you file for Social Security? How do you fill the gap?
You make up the difference by building an income bridge. This strategy can save you tens of thousands of dollars over the lifetime of your retirement, and help you avoid being underfunded in your later years.
A Social Security income bridge can be created by accessing taxable or non-taxable income – or both. It may take some research to determine the best approach for your particular situation, but here are two tax-advantaged strategies.
- If you have significant home equity but not a lot of locked-in retirement income, a reverse mortgage can create a tax-free income bridge to cover your needs between retiring and filing for Social Security.
- If you have substantial cash values in a life insurance policy, you can create a bridge by drawing down some of these values through withdrawals and loans.
Consider these three approaches using after-tax retirement savings.
- Invest in a single premium annuity that pays a monthly income from age 62 until when you file for Social Security (ideally at age 70). You’ll pay some tax on the annuity’s growth, but the tax is prorated over the income payout period.
- Create bond ladders. Have a series of bonds that mature annually during the early years of retirement. For example, you can create a ladder of zero-coupon bonds that mature at ages 62, 63, etc., until age 70 when you file for Social Security.
- A newer concept is to create a ladder using MYGAs (multi-year guarantee annuities). Before you retire, you purchase a series of MYGAs designed to complete their interest rate guarantees in consecutive years between retirement and filing for Social Security. This can work with CDs as well, but the MYGA approach has the advantage of tax-deferral until they are withdrawn.
There are fully taxable Social Security income bridge strategies as well.
- Start drawing down your IRAs and 401(k) accounts when you retire. While these benefits are subject to ordinary income tax, they buy you time for your Social Security monthly income to continue to build. For many middle-class retirees, this approach also avoids an insidious tax often referred to as the Social Security tax torpedo. In essence, you change your Social Security from being taxable to non-taxable.
- While you’re probably planning to retire to get away from work, consider working part-time. Not only will the income from this part-time work help as a Social Security income bridge; it may also help you with the third “must-do” in retirement planning – figuring out what to do with your time.
3. Have A Plan For Your Time
People commonly think of retirement as an event – they’ll stop working, file for benefits, and start a long-delayed trip. In reality retirement is a process, a life stage. And for it to succeed, you need a plan for how this process will work. Financial issues such as Medicare and Social Security are important, but so is the emotional angle of retirement. Specifically, you should have a plan for how to spend your time. Failure to plan for your time in retirement can have negative consequences such as overspending due to boredom, loss of a social network, marital strife, and depression. While we all know that things will change in retirement, the error some make is to say “I’ll see how it goes once I retire.” Staying flexible is one thing; but putting off making a plan is a mistake.
Most people only retire once, so they have no past experiences to draw on. They don’t know what their schedules will look like because they’ve spent their adult life working. A way to deal with this unknown is to envision the retirement you hope to experience. Ask yourself what you’ll do on day one of your retirement, consider how you’ll pass your time for the next few months, and at least think about a long-term activity plan. Another step in the process is to both acknowledge and address your fears about retirement before you actually retire. Are you worried about losing your work friends, do you fear driving your spouse crazy with your constant presence, or perhaps you’re apprehensive about losing your personal identity without your job? These are normal concerns, and by admitting to them, you can start to build a structure that addresses these issues. With this awareness, when the day to retire comes, you can look forward to your new life stage rather than worry about “what’s next?”
Medicare; a Social Security bridge; a plan for my time — this is a lot to deal with before you retire. What decisions can wait? Do you have to address every issue about retirement, or can you shelve some choices for awhile? For many, these are three decisions that can wait.
1. Filing For Social Security
You’ve paid a lot into the Social Security system, and you want to get your fair share back. If you die shortly after retirement, your family doesn’t get a refund for what you’ve paid in over the years in employment tax. And who says the government is going to be able to pay these benefits in the future? Bottom line, why not file for Social Security as soon as possible?
There’s a blunt answer to this common question: For the great majority of retirees, filing early for Social Security will harm their retirement prospects. This is a fact; not an opinion, and it has been borne out by research. There are exceptions in individual situations, but the baseline assumption should be to try to defer collecting Social Security for as long as possible. Granted, if you need the benefits to live, you can file as early as age 62, but otherwise you should consider delayed filing until you reach your full retirement age (age 67 if you were born 1960 or after) or even wait to file until as late as age 70. Despite all the worries about the long-term funding of the Social Security system, this benefit is a cornerstone to locking in an inflation adjusted income for life, and like wine, it gets better with age. Think of your Social Security benefit as longevity insurance. If you live too long, Social Security can help you avoid a financial mess in your old age. And the longer you wait to file, the larger the benefit you’ll have to help you in your later years.
There’s no need to time the filing for Social Security to coincide with the date of your retirement. The annual cost-of-living increases will be baked into your future benefits. However, if you delay filing, be sure to know your monthly cash flow needs in the retirement years preceding filing for Social Security. For example, you’ll have to pay out-of-pocket for your monthly Medicare costs. Only after you file for Social Security will your Medicare premium be subtracted from your Social Security retirement benefit.
2. Moving
Some prospective retirees will be happy to slow down and stay put in retirement. But many envision making big changes in lifestyle. Some want to move South and golf every day while others picture buying an RV and seeing the country. Unshackled by work, this is the chance to relive one’s youth and have a second childhood.
There’s no rule that says these changes need to happen immediately upon retirement, and in many cases it makes sense to give it some time. Specifically, tying a change in residence to coincide with retirement may not be the best idea.
Leaving a job means a disruption in schedule, and this requires some time to adjust. Moving, whether in town or out of state, is an additional hassle that can compound the stress of adjusting. And there are practical reasons to delay a move — at least for a short period of time. At the financial level, there are modifications that need to be made in cash flow and taxes. This may involve quarterly tax filings and moving accounts around to pay for changed monthly expenses. Better to smooth out finances before making a major move in housing.
Add to this the emotional adjustments that can arise. Married couples will find their routines disrupted, and sometimes familiarity can breed contempt. Others discover their social network is lost because they no longer see friends at work. All these challenges can be exacerbated by a change in residence. Family may be farther away and trusted service providers such as doctors, beauticians and clerics will be lost. After you first retire it may be worth taking a beat to get used to the new normal. If a move is part of the plan, at least consider giving yourself a little time to get used to the idea of being retired.
3. Spending
A common phenomenon is for the recently retired to ramp up their spending. Whether because of boredom, an increased amount of free time, taking on a new hobby, or a desire to catch up for lost time, money flies out of the retiree’s pockets. And this can have a financial effect that is way more destructive than a mere dent in cash flow. Once retired, many individuals are decumulating their retirement portfolio, whether it’s a 401(k), brokerage account or savings. And if this portfolio experiences substantial reductions early in retirement, for example because of a market downturn, it becomes difficult to maintain the portfolio’s value. This can be a self-fulfilling prophecy if early in retirement you further harm your savings by overspending. It’s hard to maintain returns on a decumulating retirement portfolio when the portfolio is further decreased by excess spending.
This is why waiting to make major purchases after retirement can be effective. Delayed gratification is better than an inadequate retirement account, especially if you’re not sure how much you really have to work with. First test out retirement life, assess your spending habits, and then decide where and how you want to spend your hard-earned savings. Maybe buying that boat isn’t as important as you thought it was. The good news is that you may also find you spend less in retirement than expected, and you can afford to spend more on travel, the grandkids, and hobbies. Waiting a few months to get a feel for your retirement expenses can give you that insight and provide peace of mind in your purchasing decisions.
Prospective retirees — take a lesson from the you that you’ve been during your working years. You’ve probably spent a decent amount of time planning and prioritizing; but you also learned to put off some things for later. Finding the right mix was the challenge. Try this same approach in your retirement planning. Do what needs to be done now, and let the rest wait until later.
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