Are you planning to retire in 2019? If so, you probably have most of your ducks in a row – things like money, health care, Social Security (SS) and pension benefits, and how you plan on spending your time.
But, if you’re like many about-to-be retirees, some elements of your post-career life could use a bit more attention.
Every day roughly 10,000 Baby Boomers turn 65, the age most often associated with retirement. In 2019, about one million folks are expected to call it a career and segue into either full or partial retirement. Some of these people are, no doubt, more prepared than others — financially and/or emotionally.
No matter where you fall on the retirement-ready spectrum, everyone can benefit from running through a few key planning concepts before they clock out for the last time.
1. Get a good idea of your monthly expenses.
What will your spending look like during retirement? Some people are surprised at how much their monthly expenditures change when they step away from work.
Sure, you won’t have the expense of your daily commute or updated office attire, but you will likely spend more on things like travel and entertainment. Exactly how much money you’ll need to meet your goals is an individual calculation. It pays to develop a good sense of your expenses to avoid possible overspending.
You don’t need to track every little daily expense. That would be maddening! Instead, develop a “ballpark budget” – one that shows your average monthly spending. In creating this type of budget, you’ll want to hone in on your three biggest expenses. The first two are likely the same for every retiree: housing and health care. The third one, on the other hand, is individual and could, depending on how your retirement looks, be travel, food, and dining out, or something else entirely.
Once you know your spending, consider your income streams. Add up the money you’ll get each month from Social Security, pension benefits, rental income, investment income, or part-time job. Now you have parameters to shape your spending. Maybe this means taking one less vacation a year or taking an extra one. But, at least you know what you have and what you need financially.
2. Develop a strategy for taking your Social Security benefits.
Be sure to make a well-informed decision about when to start drawing your monthly SS checks. Remember, you can start taking SS benefits as early as age 62. But, the longer you wait, the larger your monthly checks will be; benefits increase 6% to 8% yearly until you reach age 70.
Most people, however, don’t wait quite that long. Your sweet spot is unique to you. Consider working with a financial professional to create an SS strategy, or run the numbers yourself and choose the option that makes the best sense for you.
If you plan on continuing to work while you receive your SS, keep in mind that, if you’re taking the benefit before your government-determined “full retirement age,” there is a limit on how much money you can earn. After a point, your benefits are reduced. In 2019, the earned income cap will be $17,640. If you earn more than this amount, your benefits will be reduced by $1 for every $2 you earn over the threshold. Once you reach full retirement age, you can earn as much as you like and your benefits will not be affected.
3. Factor the cost of health care into your retirement financial plans.
“But there’s Medicare!” you say. True. Once you reach age 65, you’re eligible for Medicare. Much to many people’s surprise, this rich benefit doesn’t cover everything. Things like dental, vision and long-term care aren’t included, plus you still have co-pays and prescription drug costs.
And, if you’re planning on retiring before age 65, you’ll have to find coverage on your own. For that gap in coverage, there are a couple of options of which to be aware. The first is COBRA, a federal law that requires businesses with at least 20 workers to allow ex-employees to stay on the employer-sponsored health plan. Now, under this choice, you have to pay the full amount of the premium, which could be a hefty cost.
The second option is to find a plan on the Affordable Care Act (or, Obamacare) exchange. With this choice, you could pay less than with COBRA, depending on your income. For instance, Obamacare will partially subsidize the cost of your policy if you make less than a certain amount.
No matter what you do, bear in mind that health-care expenses generally increase as you age. It pays to have a plan in place to help cover some of these costs.
4. Give yourself some breathing room while gauging your risk tolerance.
If you have a 401(k) or IRA, be sure its current investment mix still works well for your retirement income plan. The percentage of your portfolio dedicated to stocks (which we know are generally riskier investments that could potentially offer more reward) will depend on how much income you need to generate during retirement, and how much risk you’re able to tolerate emotionally.
Financial advisors typically recommend that retirees keep several years’ worth of income in lower risk investment vehicles, like money market accounts or plain ol’ cash. But how you choose to have your investments allocated will always depend on your individual tolerance for risk.
Make sure you take your risk tolerance “temperature” for retirement (as it could be different from your working years) and adjust your asset allocation accordingly.
5. Create and evaluate your personalized tax and income strategies.
Remember that during retirement, you may have a variety of income streams – things like SS and pension benefits, retirement savings (like a 401(k) or individual retirement account), taxable savings and investment accounts, and/or health savings accounts. Be smart about when to dip into each.
Not all income is taxed equally, so plan strategically. For instance, your withdrawals from a traditional IRA or a 401(k) plan will be taxed as ordinary income, while Roth IRAs or Roth 401(k) plans come with tax-free withdrawals. Also, for taxable investment accounts, you may need to pay capital gains taxes.
And then there’s the issue of required minimum distributions (RMDs) — the amounts you must withdraw annually, at age 70 ½ from 401(k)s and traditional IRAs. (Roth IRAs, on the other hand, do not have RMDs.) Depending on how much income these RMDs put into your pocket, you could jump to a higher tax bracket.
6. Know your core pursuits and, well… pursue them.
Most folks spend a lot of time planning for the financial aspect of their retirement. But what about the personal side of things?
In the research for my book, You Can Retire Sooner Than You Think, I found that the happiest retirees are those that engage in “core pursuits,” or hobbies and passions that bring them joy. Do you know what yours may be?
It matters much less what they are (other than more social core pursuits bring more happiness than solitary one) than that you do them. Technically speaking, the happiest retirees have an average of 3.6 core pursuits, while the unhappy camp has only 1.9.
So, spend some time also planning and envisioning the retirement that you’d like to have on a day-by-day, year-by-year basis. There’s nothing better to creating truly Golden Years than having activities that you love to do and do often.