After a stressful 2020, you’re thinking more and more about retirement. While the bulk of your retirement prep work and heavy lifting has been completed by the time you are a couple of years away from retirement, there are still a few boxes you will want to check off before finally saying adios to the workforce. Let’s go through them.
1. Social Security Decision
You will need to decide when to collect Social Security benefits. The earliest age is 62. Unless you are retiring early and need the benefits to help cover expenses like health insurance, it’s advantageous to wait. At 62, your benefits would be reduced by 25% or more. You won’t collect 100% of your benefits until you’re 66 or 67, depending on what year you were born. When you wait to collect, keep in mind that benefits increase by 8 percent per year up until you are age 70.
2. Get Your Finances Simplified
Do you have multiple brokerage accounts, savings accounts, checking accounts, 401(k)s, IRAs, and other retirement savings accounts? Perhaps, you have lost track of an account?
First, simplifying and consolidating your various small financial accounts into a larger one will make it easier for your heirs to step into control if you had a medical emergency, needed long-term care, or passed away.
Second, you can reduce paperwork, possibly save some cash, and better keep track of your income to expenses ratio by having everything neatly confined. For example, aggregation with a single provider can offer some economies of scale like cheaper expense ratios.
Lastly, if you have lost track of an account, then you are missing a piece of your financial pie that could make a big change in how retirement unfolds. Look at: missingmoney.org and unclaimed.org as good places to start tracking lost and unclaimed funds.
3. Give Your Portfolio A Health Checkup
Ideally, your portfolio at this point should be moderate-risk. It should be about half stocks and half bonds. If the stock market is causing you any worry, then consider a move to more steady stock funds like VEIPX or TWEIX, who have both held up well in previous downturns.
A bucket system may help protect you against your biggest retiree risk: forced sells during plunges. During plunges, the bucket system allows you to have enough cash and bonds that you won’t be forced into selling stocks to pay your debts. You will divide your nest egg into three buckets:
• Bucket one – cash for living expenses not otherwise covered in the next few years.
• Bucket two – short and intermediate term bonds to cover money you will need in the first ten years of retirement.
• Bucket three – diversified stocks for money needed in the distant future.
4. Make A Plan With HR
Schedule a time to speak with your company’s human resources department about your retirement. Topics you will want to ask about include:
• Are unused vacation days paid upon retirement?
• Is receiving profit-sharing payouts, bonuses, 401(k) match, or any other income aspect impacted by your planned retirement date?
• If retiring before Medicare-age, what retiree health benefits are offered?
• If a 401(k) is left as-is versus rolling it over into an IRA, can distributions still be taken? How? Is there a fee?
• If a pension is available, what are the options for payout?
One note on lump-sum pensions to keep in mind is that extending your retirement may not increase your pension. Lump-sum pensions are calculated based on interest rates. The higher the interest rate, the lower the pension. Extending your retirement when interest rates are rising can actually result in your pension going down, not up.
5. Study Medicare Closely
Medicare is a difficult beast to navigate, and the sales pitches you get from supplement insurers only add to the confusion. So, you will want to start studying now, understanding how Medicare works, what coverage gaps exist for you, and what you need versus don’t need in supplements. Here are some highlights you will want to consider:
• Upon turning 65, Social Security beneficiaries are automatically enrolled in Medicare parts A (hospital care) & B (doctor and outpatient visits.) If you are delaying your SS payment, then it’s up to you to enroll on your own.
• If delaying your SS claim and you are still covered by your employer’s health plan, then you will likely find it beneficial to go ahead and sign up for part A at age 65 since there is usually not a premium.
• To ensure you are not left without coverage, plan to sign up for part B around six weeks prior to retirement. You have eight months after leaving your job to sign up for part B without penalty.
• Decide if you want Medicare Advantage. This is basically a combination of parts B & D with a supplemental medigap plan to cover the copayments, deductibles, and other traditional healthcare costs that Medicare doesn’t include. These plans provide private insurer medical and drug coverage within a network, meaning you will need to carefully research your plan options and determine if your preferred health care providers are in the offered network of a plan.
6. Should An Annuity Be On The Agenda?
Without a traditional pension, an immediate annuity might be a good option for you. A common strategy is to calculate fixed monthly expenses – car note, mortgage, insurances, utilities – and buy an annuity that gives a congruent payment. Basically, you give an insurer a lump sum of money in exchange for them paying you a monthly amount each month for either the remainder of your life or a specified amount of years. If you choose a joint-and-survivor annuity, that payment continues through your spouse’s life should he/she outlive you.
Another strategy is a deferred income annuity. Ideally, these are bought at least 10 to 15 years out from retirement since they take 10 years to mature. However, if you are taking an early retirement or expect your expenses to be greater in the next decade, a deferred annuity may be a good option. They are much less costly than an immediate annuity, but they also have a major risk versus reward. Your heirs get nothing if you pass away before payments begin. The fix is to opt for return-of-premium benefits, but this reduces your payout quite a bit.
In closing, the finish line is just around the corner, but now isn’t the time to slack off just yet. You will want to make sure these important boxes are checked so that you can retire with the peace and confidence you have worked all these years to afford.
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