IMPORTANT CONSIDERATIONS FOR THOSE APPROACHING RETIREMENT AGE
While there are many financial and emotional decisions that should be made before retirement, I have jotted down a few ideas here to help clients as they begin to think about this.
- Some key ages as you approach retirement
- Simplifying the numbers for retirement income
- At what age should you take social security?
- How about guaranteed income during retirement?
- Health Insurance
- Phasing into retirement
- Physical fitness is as important as Fiscal fitness!
- What now?
1. There are several key ages as you approach retirement:
Age 50; you are eligible for catchup provisions to retirement plans ($1,000 for IRA’s, $7,500 for 401(k)’s and 403(b)’s.)
Age 55; if you leave a job after 55 but before age 59 ½ you can take distributions from your 401(k) with no 10% penalty.
Age 59 ½ ; You can take money from any retirement plan with no 10% penalty. You can transfer money tax-free from an IRA or 403(b) that allows it into an IRA which is called an “in service withdrawal”. You are now exempt from the usual rule that requires money converted from a Traditional IRA to a Roth to stay in place 5 years or be subject to a penalty.
Age 65; you can take withdrawals from your HSA for non-medical expenses without the usual 20% penalty.
Age 73; be sure to start taking the mandatory Required Minimum Distributions (RMD’s) from IRA’s and possibly other retirement plans to avoid a 25% penalty.
2. Simplifying the numbers for retirement income:
First, there is no magic percentage of income you need in retirement. The absolute best way to estimate your need is to have a budget of all the fixed, variable and discretionary expenses you’ll have at retirement.
Short of that, you’ll no longer have to pay 7.65% into social security and will no longer be making pre-tax retirement plan contributions so let’s say 15% for those. Right there, that makes it so you only need 77% of your pre-retirement income to have the same standard of living. Plus you will have no more work-related expenses like commuting, parking, dues, clothes, lunches out, etc.
The next step is to estimate your social security at ages 62, 66 (or full retirement age) and 70 and subtract that from your income needed and see if your assets provide the short fall at the various ages; assuming a 5% withdrawal rate.
This will tell you if you need to keep working or not to make up the short fall or how much you need to save and invest between now and then to not have to work. It is never too early to start but age 50-55 is the latest I recommend starting to figure this all out. This is a service I offer for free to my clients so please contact me to have a Retirement Income Analysis done if you haven’t done so already.
3. At what age should you take social security?
Please go to this link to read the full article I wrote https://www.forgefinancialadvisors.com/p/when-to-take-social-security
4. How about guaranteed income during retirement?
It used to be that employees had 2 sources of guaranteed income when they retired; social security and their defined benefit pension plans.
Sometime around 1981, the 401(k) became popular as a way to get employees to help fund their own retirement. The problem is that over the years many companies dropped or terminated the defined benefit pension plans; which guaranteed employees a lifetime of income in favor of a defined contribution type 401(k) where they simply provided pre-tax employee contributory retirement plans. The employer may or may not match up to a certain percentage.
Given what has happened, according to The National Institute on Retirement Security Analysis of 2013 Survey of Consumer Finances, only 54.7% of all households owned a retirement account and the median balance was $50,000. Of the age 55-64 group, 59.3% had a retirement account and the median balance was $104,000. Clearly these amounts are not adequate to provide enough income to supplement social security.
Fortunately, if one starts early enough, there are programs available that enable employees to estimate and fund their own guaranteed retirement income. The mechanics of such a program are beyond the scope of this article but if a person has 15-20 years until retirement, it’s worth taking a look at to get some guaranteed income built up for down the road.
5. Health Insurance
Common belief: “Health insurance is going to cost an arm and a leg if you retire before age 65!”
Not really! In the Rochester area, if you retire before age 65 and need health care, there are quality high deductible plans available for roughly $300 a month give or take depending on your situation. Many people already have such plans and coupled with an HSA (Health Savings Account) they are a cost-effective way to deal with health insurance. You no longer need an employer to get affordable health care. You can go directly to any of the provider sites such as Excellus BCBS or MVP and get a plan for yourself.
After age 65, a Medicare supplement plan is roughly $100 per month.
6. Phasing into retirement
In today’s world, a growing number of retirees either don’t want to or cannot afford to stop working cold turkey at some pre-set age like 62, 66 or 70.
Many would prefer to “phase in” to retirement; either at their current job if they like it and are still competent or in a whole new field.
Factors to consider financially include health insurance benefits before age 65, how working will affect your social security benefits and what it will do to any of your retirement plans including pensions if you have one.
Regardless of any financial benefits to continuing to work and be productive, there are also benefits to keeping active, being productive and feeling useful in your Golden years.
7. Physical Fitness is as important as Fiscal Fitness!
Finally; even if your fiscal health is on track, you want to make sure you can enjoy it by having good physical health.
According to the Center for Disease Control and Prevention and the National Center for Health Statistics, only 42% of Americans age 65 to 74 and 28% of those age 75 and older meet the government recommendation for aerobic activity. Worse yet, only 14% of the age 65 to 74 group and 8% of the over age 75 group get the recommended amount of weight training.
A recent editorial in the Annuals of Internal Medicine stated; “People who engage in physical activity have a lower risk for cardiovascular disease, diabetes, some types of cancer, depression, cognitive impairment and functional decline.”
A good guideline is to spend at least 20 minutes a day (150 minutes a week) on moderate-intense aerobic activity and 2-3 sessions of strength training per week.
From personal experience, I helped my mother with a remarkable physical transformation from her age 75 (in 2003) until her death at age 87 (in 2015) from brain cancer. In 2003 she weighed 170 lbs., smoked 50 cigarettes per day, had been clinically depressed for 10 years and hadn’t driven a car in 5 years.
Over a fairly short period after starting to use a Concept II Rower daily, she lost 40lbs, made strides in strength, balance and agility, was driving again and her mental function improved dramatically. She quit smoking at age 84 but by then had cut way back from how much she used to smoke and was walking a mile or two daily. Her last 12 years were better than the 2 decades prior.
8. What now?
It’s never too early to take a look at all of these factors and the earlier you start, the more time you will have to make up for any shortfalls discovered; or at least reduce the impact they have. I can help you explore all of these vital areas.