Retirement is a milestone many of us look forward to, and the more prepared we are going in, the more rewarding it’s likely to be.
You should also know how to manage your IRA, 401(k), or whatever retirement savings plan you have. Here we’ll review nine key retirement questions you must answer if you think 2019 is the year you’ll leave the workforce for good.
1. Should I start collecting Social Security?
One of the most important sources of income retirees have access to is Social Security.
Your benefits are calculated based on your 35 highest years of earnings, but the age at which you first file for them can cause that amount to go up, go down, or stay the same.
The earliest you can begin collecting Social Security is age 62, which means you can file for benefits in 2019 if you were born in 1957 or earlier. But if you claim benefits prior to reaching full retirement age, or FRA, they’ll be reduced by a certain percentage for each month you file early.
Here’s what your full retirement age looks like, depending on your year of birth:
If you were born in 1953, you’ll reach your full retirement age of 66 at some point in 2019, at which point you’ll get the full monthly benefit your earnings history entitles you to. You can also delay benefits past FRA, and in doing so, boost them by 8% a year up until you turn 70, at which point the incentive to wait runs out.
If you’re intent on retiring in 2019 but aren’t sure whether to file for benefits right away, think about your age and its impact on your monthly payments. Also, ask yourself whether you actually need the money immediately, or whether you’re able to hold off and increase your benefits.
To help you make that decision, take a look at your most recent Social Security statement, which you can access by creating an account on the Social Security Administration’s website if you don’t have a physical copy available. That statement will tell you what your benefits will look like depending on the age you file at.
2. Should I start withdrawing from my IRA or 401(k)?
If you’re housing your retirement savings in a tax-advantaged plan like an IRA or 401(k), you’ll be eligible to take penalty-free withdrawals beginning at age 59 1/2. If you access your money sooner, you’ll generally be hit with a 10% early withdrawal penalty. Therefore, if you’re retiring on the early side, keep in mind that you might need to hold off on taking distributions until you reach 59 1/2.
On the other hand, if you’re retiring on the later side, know that once you turn 70 1/2, you’ll need to start taking required minimum distributions, or RMDs, from your traditional IRA. Both traditional and Roth 401(k) plans also impose RMDs. Because these plans offer tax-deferred or tax-free growth on the money they contain, the IRS doesn’t want you to reap that benefit indefinitely, or leave your retirement savings to your heirs. So you’ll be required to remove a certain portion of your account value each year, the exact amount of which will depend on your plan balance and life expectancy at the time.
Your first RMD is due by April 1 of the year after the year you turn 70 1/2. If you turned 70 1/2 last year, you’ll need to take that withdrawal by April 1, 2019, or face a 50% penalty on whatever amount you fail to remove from your account.
The only exception is if you have a 401(k) and are still working for the company sponsoring that plan as of April 1 of this year. If that’s the case, and you’re planning to retire later in the year, you don’t have to take that RMD right away. Once you take your first RMD, know that all subsequent ones are due by Dec. 31 annually.
3. Can I sign up for Medicare?
Many retirees rely on Medicare to cover their healthcare needs. Medicare eligibility begins at age 65, but your initial Medicare enrollment period begins three months before the month in which you turn 65 and ends three months after the month in which you turn 65. It pays to sign up for Medicare on time, because if you don’t, your coverage could end up costing you more money in retirement.
Traditional Medicare has three distinct parts:
- Part A, which covers hospital visits and is generally free for enrollees.
- Part B, which covers doctor visits and diagnostics, and charges a monthly premium.
- Part D, which covers prescription drugs and also charges a premium.
For 2019, the standard monthly Part B premium is $135.50, though it could be higher or lower depending on your yearly income and whether or not you collect Social Security. Your Part D premium, meanwhile, will depend on the drug plan you choose. If you don’t sign up for Part B on time, know that you’ll face a 10% increase in your premiums for every 12-month period you were eligible for coverage but failed to enroll.
There’s also Medicare Advantage, which is an alternative to original (traditional) Medicare. Unlike traditional Medicare, Medicare Advantage is a single program that offers comprehensive coverage. In other words, your Advantage plan premium will cover your diagnostic care, prescriptions, and hospital visits. Many Advantage plans cover a host of services that original Medicare doesn’t, so it pays to compare your premium costs under your various options and see what makes the most sense.
Of course, this assumes that you’ll be eligible for Medicare. If you’re retiring in 2019 but aren’t yet 65, you’ll need to secure health coverage elsewhere. You can either purchase your own plan on the open marketplace, or obtain coverage through COBRA.
COBRA allows previously employed adults who had health coverage through work to continue that coverage for a limited period of time — generally 18 months. The downside of COBRA is that it can get expensive, since you’re responsible for paying your full premium costs for as long as you maintain that coverage. But if you’re retiring this year and are turning 65 in, say, eight months’ time, you might choose to pay for COBRA so that you get continued coverage until Medicare kicks in.
4. What will my expenses be in retirement?
Plenty of seniors expect their expenses to magically go down in retirement, but many find that their living costs ultimately stay the same or even go up. As a general rule, you should expect to need about 80% of your previous income to live comfortably in retirement.
If you’re planning to adopt a far more frugal lifestyle than the one you maintained during your working years, then you can probably get away with a lower target, like 65% to 70% of your former earnings. And if you’re aiming to travel extensively, you might need 90% to 100% of your previous paycheck. But that 80% benchmark is a good place to start.
That said, it’s crucial that you map out a retirement budget to get a good sense of what your monthly bills will actually look like. That way, you’ll be able to properly assess your savings (we’ll show you how to do that in a bit) to see how well they’re likely to hold up. When creating that budget, think about the expenses you’ll face on an ongoing basis, including:
- Housing
- Transportation
- Utilities
- Communications (cable, phone, and internet)
- Food
- Clothing
- Leisure
- Taxes (we’ll discuss this in more detail later)
- Healthcare
That last one is an important one, because it could end up costing more than you expected. In fact, recent projections tell us that the average 65-year-old man today will spend an estimated $189,687 on healthcare in retirement, while the average 65-year-old woman will spend $214,565. Those figures, however, don’t include long-term care, which is an additional expense.
5. Are my savings enough for retirement?
Ideally, by the time you retire, you’ll have amassed a pretty sizable sum in your IRA or 401(k). But what does that number really mean? Will it be enough to buy you the lifestyle you’re hoping for? A good way to evaluate your savings is to figure out what percentage of your nest egg you plan to withdraw each year.
For years, financial experts have been touting the 4% rule as the best rule of thumb. The rule states that if you begin by withdrawing 4% of your savings balance during your first year of retirement, and then adjust subsequent withdrawals to account for inflation, there’s a good chance your savings will last for 30 years. Though the 4% rule has its flaws, it’s a good starting point to work with.
Let’s say you’ve set up your retirement budget, like we talked about earlier, and determined that you’ll need $6,000 a month, or $72,000 a year, to cover your expenses. Let’s also assume that $2,000 a month, or $24,000 a year, will come from Social Security, and that you have no other known sources of income to work with. This means that your savings will need to provide you with $48,000 of income each year. If we multiply $48,000 by 25 as per the 4% rule, we arrive at a target balance of $1.2 million.
If your IRA or 401(k) has that much money or more, you’re in good shape. If not, you’ll need to consider whether 2019 is really the right year to retire. Postponing retirement for a couple of years could bring your savings up to the level you want them to be at. Otherwise, if you’re really intent on retiring this year, but are perhaps $100,000 or so short, you might revisit your budget and see if there are ways to trim your expenses.
Keep in mind that you don’t necessarily have to apply the 4% rule to your savings. If you’re retiring in 2019 but are only in your early 50s, for example, you might need to go with a more conservative withdrawal rate — say, 2% or 3% — because you might need your savings to last 40 years (whereas the 4% rule targets a 30-year retirement).
On the flip side, if you’re 70 years old right now and are looking to retire this year, you might get away with a higher annual withdrawal rate, since only 10% of 65-year-olds today are projected to live past 95, according to the Social Security Administration.
6. How should I invest in retirement?
You’re probably familiar with the concept of investing for retirement, but if you want your savings to continue earning income, you’ll need to keep that money invested during retirement. Of course, you’ll want to invest your nest egg wisely so that it’s growing, but not exposed to undue risk. That’s where asset allocation comes into play.
Ideally, your savings should be spread out across a mix of stocks, bonds, and cash. Stocks are the most volatile of the bunch, while cash is pretty much secure. Bonds fall somewhere in the middle, but if you invest in those that are highly rated, your chances of losing money are relatively low. Stocks, however, will generally produce a lot more growth than bonds, while cash is limited to interest.
So how much of your retirement portfolio should you leave in stocks? One good (though not perfect) rule of thumb is to take your age and subtract it from 110 to figure out what percentage of your assets should be stock-based. For example, if you’re 65 years old, you should have no more than 45% of your portfolio in stocks. If you’re the risk-averse type, however, you might limit, say, 30% of your holdings to stocks, even if that means limiting your portfolio’s growth at the same time.
7. How should I pay off my debt?
Once you retire and move over to a fixed income, reducing your monthly expenses is important. If you’re planning to retire in 2019, take a look at how your debt situation currently reads, because ideally, you should aim to enter retirement with no debt in your name. This includes credit card debt, student debt, and mortgage debt, all of which can eat up an unhealthy chunk of your limited monthly or yearly income.
That said, if you can’t manage to kick off retirement totally debt-free, you should at least focus on eliminating the least healthy kind before calling it quits on the work front. That means paying off your credit card debt, followed by your student debt. Mortgage debt is generally considered the “best” type of debt to have, especially since it can produce some tax breaks. Still, you’re better off retiring without owing money to anyone.
8. What taxes will I pay in retirement?
Many retirees are surprised to learn that they don’t get out of paying taxes. There are a number of ways in which your income might get taxed in retirement.
First, unless you’re housing your retirement savings in a Roth IRA or 401(k), your retirement plan withdrawals, including your RMDs, will be subject to taxes. In fact, they’ll be taxed as ordinary income — meaning, your highest possible rate.
Next, you might pay taxes on your Social Security benefits if your income exceeds a certain (modest) threshold. To see if you’ll be hit with taxes here, you’ll need to calculate your provisional income, which is basically your non-Social Security income plus half of your yearly benefits. You can refer to the following table to see whether taxes will apply to your benefits:
Keep in mind that there are 13 states that tax Social Security benefits to varying degrees. That said, almost all of these states offer some sort of exemption that eases or eliminates that burden for low- to middle-earners.
Taxes will also come into play if you have a pension from your former employer (though certain types of military or disability pensions might provide tax-free income), investment gains or income (such as dividend income) from assets held in a traditional brokerage account and not a tax-advantaged retirement account, or interest income from a bank account.
Be sure to plan for taxes in retirement so that they don’t throw your budget off course. A good bet is to include taxes as a line item in your budget so that you remember to account for them from the start.
9. How do I spend my time in retirement?
Retirement can be a rewarding period of life, but it can also throw you for a loop if you aren’t careful. After all, it’s not easy to go from working a full-time, 40-hour-a-week schedule to suddenly having loads of free time on your hands. In fact, retirees are said to be 40% more likely to suffer from clinical depression than working adults, and much of that boils down to the fact that not having a job could lead to periods of intense boredom and self-doubt.
The solution? Go into retirement equipped with a plan for how you’ll spend your days. Maybe you’ll have enough money to travel several times a year. Maybe you’ll spend your mornings tending to a garden and your afternoons looking after your school-aged grandkids while your own adult children work. Or maybe you’ll start a business, which is a great way to not only earn extra money, but occupy your time without spending money you may or may not have.
It doesn’t really matter what you intend to do with your time as long as you have a plan. But make sure that plan is realistic. Spending two days a week on the golf course is a great idea in theory, but only if your budget can truly support it. Similarly, lunching with friends is a nice treat to look forward to twice a week in retirement, but make sure those folks are accessible and available before you count on them for entertainment.
Of course, your retirement plan can, and probably will, change as you evolve in retirement. The key is to go in with a mapped-out strategy so that the shock of not having to go to work doesn’t negatively impact you mentally.
Think things through before you retire
Clearly, there are many factors that go into retirement, from Social Security to savings to healthcare to logistics. The takeaway, therefore, is to think things through before rushing into retirement.
You might have previously assumed that you’d retire once you hit a certain age, but if that age has arrived this year and you aren’t ready financially or emotionally, you’re better off postponing that milestone until the time is right.
On the other hand, if you’ve thoroughly considered the above points and have reconciled each one, then 2019 might be the ideal time for you to retire after all.
— Maurie Backman
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