7 Essential Retirement Rules for Anyone Over 50February 3, 2017 Judith Ward, CFP®, Senior Financial Planner
- It’s estimated that 10,000 baby boomers are expected to retire each day until 2030. For those who planning to retire by the end of this year, there are plenty of things to consider before doing so.
- Track your spending carefully and figure out which expenses you won’t have when you stop working. It’s also important to consider which expenses may increase (i.e. healthcare) once you are retired.
- Be aware of dates surrounding filing for Medicare and Social Security benefits.
- It’s also critical to know how you are going to draw down your investments. Consider the tax consequences of accessing your taxable and tax deferred retirement accounts.
While some baby boomers have already retired, for many of us, retirement is still around the corner. We tend to spend a lot of time thinking about when to make that decision.
The Pew Research Center estimates that 10,000 baby boomers are expected to retire each day until 2030. If you’ve resolved that this is the year you are retiring, congrats. Those years of planning—and saving—have given you the confidence to move forward with an exciting time in your life.
Whether retirement is close or a bit further out on the horizon, consider these seven tip to ensure you are ready for retirement.
1. Buckle down on a budget. A general spending guideline is fine when you’re years away from retirement, but now the rubber meets the road. It’s time to get serious about what your budget will be when you’re retired. Track your spending carefully and figure out which expenses you won’t have when you stop working and which expenses may increase throughout retirement. Look at your basic living expenses first and then your discretionary items. This will help you match your income sources to your spending needs and show where you may have room for adjustments down the road.
2. Get cozy with your 401(k). For years, you’ve thought of your 401(k) as money you couldn’t touch, but now this will likely become a valuable source of funding for your retirement. If possible, have a talk with your company’s benefits team to see how you can access your money after you leave the company. You may be able to leave the money in the plan and make periodic withdrawals, or you might have to take all the money out at one time, which means you will probably be using a Rollover IRA. You’ll need to decide if you’re going to keep your retirement accounts as is or consolidate them to make things easier to manage.
3. Location, location, location. Are you staying put in retirement or mulling a move? Do you and your partner feel the same way about it? I want to spend retirement on a sunny beach in Florida, but my husband wants to move to Canada and fish. Clearly, we’ve got some things to talk about! By now, you and your partner should have a shared vision for retirement. Don’t assume you have the same plan in mind if you haven’t discussed it. Whether you want to age in place, downsize, or relocate, consider how your home equity may be part of your retirement plan.
4. Be aware of age-related deadlines. Keep these milestone birthdays in mind
- Age 50 (or older): You can make “catch-up” contributions to your 401(k) and IRA.
- Age 55 (or older): You can access money from your 401(k) penalty-free if you are age 55 or older and no longer working.
- Age 59½: You are eligible to make penalty-free withdrawals from your IRA.
- Age 65: Be sure to apply for Medicare, or you may be penalized.
- Age 70: If you haven’t claimed Social Security, it’s time to start, since your benefit isn’t going to increase from this point on.
- Age 70½: Begin taking withdrawals known as required minimum distributions (RMDs) from most retirement accounts.
5. Determine your Social Security claiming strategy. The average monthly Social Security payment in 2016 was $1,341 for an individual ($2,212 for a couple with both receiving benefits). Just because you can take benefits as early as age 62 doesn’t mean you should. Consider this income as part of your holistic retirement plan. The longer you wait, the higher your lifetime benefit may be. This is especially important if planning with a spouse. Coordinate your claiming strategy, and consider what happens should one of you pass away. To maximize the benefit for a surviving spouse, the higher earner should wait as long as possible (up to age 70) before claiming benefits.
6. Map out a strategy for withdrawals. Once you stop working and the paychecks stop coming in, how are you going to pay for things? In addition to regular income, such as Social Security and pension income, you may have to spend from your savings. Isn’t that the whole reason you’ve been saving in the first place? Think about which accounts you are going to tap first and consider any tax consequences. Conventional wisdom suggests using regular, taxable accounts first to benefit from lower capital gains rates. Then, access tax-deferred accounts (i.e., 401(k) or IRA) where distributions are taxed at ordinary income rates. Finally, tap your tax-free accounts (i.e., Roth IRAs) last.
But, depending on your situation, this order may or may not hold true. If you hold low-basis stock, for example, you may want to hold on to that and let it pass to your heirs. If most of your nest egg is in tax-deferred accounts, you may want to spend from them first to lessen the amount of distributions that will be required when you reach age 70½. And there may be times where tax-free income would be beneficial. Seeking a tax advisor may be a good idea if your situation is complicated.
7. Make Medicare your friend. Medicare is the primary health program for retirees. You become Medicare-eligible at age 65. Understand the deadlines and your options and evaluate, carefully, the plans that are best suited to your situation. You can get an idea of the premium costs on Medicare.gov and see what you may need to cover out of pocket. For example, the standard Part B premium amount in 2017 is $134 per person per month, but high-income earners could pay more than $400 monthly (this amount doesn’t factor in any prescription coverage through Part D). These estimated costs should help you with that budget exercise.
If you plan to retire earlier than age 65, you will have to explore health care options. This is an often-overlooked, but extremely important, consideration for early retirees. If it’s a short period of time, perhaps your former employer may offer access to health care via a retirement arrangement or the company may be able to extend COBRA benefits. More likely, you may need to purchase coverage through your state’s health care exchange.
If this seems like a lot of work just so you can stop working, it is! But retirement is a serious decision. You’ve worked and saved for this your whole life. Resolve to make it great.
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