Steps you can take to prepare for retirement
For most people this is a major transition in life and there are a number of things to consider. Ask yourself some questions such as; what plans do you have, travel, a new hobby, relocate or even continue to work in some capacity such as consulting? Planning ahead will minimize the anxiety you may endure otherwise.
Take an assessment of your living expenses. This will not be a one-time deal. Between now and retirement you should be looking at your spending often. While some expenses may decrease — for example, commuting costs — others may increase such as health care. According to a survey by the Retiree Benefit Research Institute, 38 percent of retirees said their expenses were higher than expected. Next consider all of your possible income sources. The starting place here is with Social Security (unless you are in a CalPERs or CalSTRS plan). You can begin taking Social Security income at age 62 but this will be at a permanently reduced rate. You may delay until age 70 increasing the amount you receive but this really needs to be assessed on a case by case basis.
Check with ssa.gov to get an estimate of your benefits. You may have other pensions to draw income from. Check with the administrator of those plans to determine what your options may be. Perhaps you have some rental income you can add to the equation. You may want to work part time, perhaps in a hobby or consulting position which may add income. Also look at your retirement savings programs through your employer and any IRAs or ROTH or other plans you have in place. Be thorough in this research so you know what income you will have.
I mentioned expenses earlier but now you also need to focus on paying down any debt. The debt you have in retirement reduces the money you will be able to spend on what really matters to you. Put a plan in place to reduce as much as possible, even the mortgage if you can. The other side of that is to max out all the savings which you are able. In these last few years before retirement you are likely earning the highest salary of your career. Build up your emergency savings fund and if you are 50 or older, take advantage of catch-up contributions to your group plans ($6,000) and IRAs ($1,000).
Taxes, taxes and more taxes. They don’t go away with retirement so plan for taxes. As you plan for income, and what accounts to draw from in retirement, you must always consider the impact that taxes will have on your strategy. For example, you may want to draw from taxable accounts first to allow your tax-deferred accounts to grow more before you tap into those sources. The year in which you turn 701⁄2 you will be taking RMDs (required minimum distributions) from your taxdeferred accounts. ROTHs are an exception to this. Speaking of taxes, if you continue to work in retirement and begin taking Social Security income you need to understand that some of your benefits may be subject to taxes. IRS publication 915 has a worksheet that can help you determine this number for you.
And finally consider health care costs. I have written previously about Medicare plans, supplement or gap plans, Part D drug and Advantage plans. It may be complicated but it is a critical part of your retirement planning so do your homework. The Employee Benefit Research Institute in 2015, stated that the average 65-year-old married couple would need $213,000 in savings to have a 75 percent chance of meeting their out-of-pocket health care costs throughout their retirement years. If this doesn’t scare you into action nothing will.
Related to health care is longterm care. Let me be clear, Medicare is not a long-term care provider or plan and does not offer such benefits. The Center for Medicare Medicaid Services handbook “Medicare & You 2015,” determined that people 65 years and older have a 7 percent chance of having a long-term care event and yet only 23 percent of caregivers had actually made plans for such an event. According to longtermcare.gov, home health care in California starts at a cost of over $50,000 annually and a semi-private room in a nursing home starts at a cost of over $91,000 annually.
These are the kind of numbers that can quickly derail your retirement so make sure you take longterm care into consideration. The very wealthy may be able to self-insure but before you decide to go that route make sure you understand the consequences and have looked at options available to you.
Pre-planning and forethought can go a long ways toward peace of mind and as always, my advice is to work a quality team of professionals. Until we talk again, be well!