5 Questions You Need to Answer 5 Years Before Retirement
By Trent Derrick, CMT®
Retirement is one of life’s most significant milestones, bringing a mix of excitement and concern for many Americans nearing this stage. In fact, a recent survey revealed that 66% of Baby Boomers (1) feel they’ve fallen behind on their retirement savings.
The best way to ease these worries is by planning in advance. As you get closer to retirement, be sure you can confidently answer these 5 essential questions.
1. How Will I Maintain a Consistent Cash Flow in Retirement?
On average, Social Security covers roughly 39% of one’s income in retirement. (2) So, where will the other 63% come from? It’s essential to have a proper cash flow plan for retirement so you can maintain a consistent income. There are a few potential sources of retirement income, including working part-time, retirement accounts, pensions, fixed annuities, savings, and other investments. Looking at all these income sources, you’ll want to determine if they’ll cover your needs.
If your projected expenses don’t match your income and savings, you’ll either need to reconsider your expenses or increase your retirement income. Consider working part-time, contributing more to your retirement accounts, and developing a strategy to generate more income from your retirement portfolio. This can be done by ensuring your asset allocation still meets your risk tolerance and time horizon, and investing in assets that will diversify your income stream.
2. How Will My Investments Hold Up in Various Market Conditions?
Market volatility can mean the difference between living comfortably in retirement or just scraping by. Facing a decline in the early years of retirement can be disastrous. Considering those who retire during or near a bear market are 31% more likely to run out of money, (3) it is crucial to understand how your investments may react during an economic downturn.
It’s important to regularly analyze your portfolio to ensure that it lines up with your risk level and that you haven’t become too reliant on any one asset category. It may be time to diversify your portfolio (if you haven’t already), rebalance, and utilize a Monte Carlo simulation to stress test your plan. This can help you see how your portfolio will react to various market conditions.
3. When Should I Take Social Security Benefits?
Social Security benefits can be claimed between the ages of 62 and 70; however, the timing of benefits will impact the total amount received.
Early Retirement
You can start receiving benefits as early as 62, but your monthly benefit will be lower than if you waited longer. Your basic benefit is reduced by a fraction of a percent for each month you begin receiving benefits prior to full retirement age. Retiring early can permanently reduce your benefit by up to 30%. (4)
Full Retirement Age
Your full retirement age (FRA) changes based on the year you were born. FRA is 66 for those born between 1943 and 1954 and increases by two months for every year after that you were born until it settles at age 67 for those born in 1960 or later. If you wait until you reach full retirement age to begin collecting your Social Security benefits, you will receive your full benefit amount.
Delayed Benefits
If you’re still working or don’t need the money immediately, you can delay receiving your benefits. Your benefit will increase by 8% for each year that you delay. (5) You cannot delay and increase your benefit indefinitely, though. Once you reach age 70, the amount of benefits you receive will not increase any further.
Be sure to reference your Social Security statement in the years leading up to retirement. This important document tells you a lot about your expected benefits, so it can help you in your decision-making process.
In general, the best time for you to claim your benefits depends on your personal situation and health. If you expect to live longer than average, your overall lifetime benefit will be greater if you delay claiming your benefits to increase your benefit amount. If the opposite is true and you see little chance of making it into your mid-80s, you would likely receive a greater lifetime benefit by taking it sooner, even though it would be a smaller monthly payment.
4. Am I Properly Utilizing Tax-Reduction Strategies?
As the saying goes: “It’s not how much you make, but how much you get to keep that matters.” This is especially true as you approach retirement. Once your income sources become fixed, managing and minimizing your taxes should be your top priority. If you haven’t already, consider working with a financial advisor to review your potential options, including:
- Charitable donations
- Qualified charitable distributions
- Roth conversions
- Health savings accounts
- Tax-loss harvesting
Your income plan during retirement will also play a major role in how long your money will last and how much will be lost to taxes.
Each retirement asset has different tax characteristics, whether it be a 401(k), a Roth IRA, an annuity, or some form of equity compensation, and understanding the timing of distributions from each source is a significant part of managing your overall tax bill in retirement.
5. How Much Can I Expect to Spend on Healthcare?
Choosing the appropriate insurance coverage is the first step to take when planning for unexpected healthcare costs in retirement. According to a Fidelity Retiree Health Care Cost Estimate, the amount needed at 65 to cover healthcare costs for a couple is roughly $330,000 (6) after tax. For those who had employer healthcare coverage, retirement may mean paying more for medical insurance (Medicare Parts B and D and Medicare Supplement policies). Even with insurance, some expenses will be paid out of pocket.
Planning for unexpected healthcare costs begins with choosing appropriate insurance. For those aged 65 and above who are eligible for Medicare, it means understanding options under Medicare and choosing insurance to supplement Medicare. Take a look at your eligibility and premium estimates (7) to get an idea of what to expect. Thorough research of your supplemental coverage options can help ensure your healthcare costs won’t eat into your retirement savings.
Get Started Today
If planning for retirement feels overwhelming, know that you don’t have to navigate this process alone. At Legacy Wealth Management, we provide the tools, experience, and skills to help you confidently transition into retirement. If you’d like to learn more about how I support my clients through this process, let’s connect. Contact me today for a no-obligation introductory meeting by emailing me at trent@legacywm.com.
About Trent
Trent Derrick is a financial advisor and Chief Market Technician at Legacy Wealth Management. He is passionate about the value small businesses bring to their communities and specializes in serving small business owners by providing seamless financial advisory services tailored to their financial needs, including tax planning strategies, cash flow management, and retirement planning. Trent obtained his bachelor’s degree from the College of Charleston, studied economics at the University of South Carolina, Columbia, and is a Chartered Market Technician® (CMT®) professional. Outside of the office, he serves as a guest lecturer for the College of Charleston’s MBA program and acts as chairman of the Market Technician Association’s Charleston chapter. To learn more about Trent, connect with him on LinkedIn.
The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.
Legacy Wealth Management and LPL Financial do not offer tax advice or services.
_________________
(1) https://www.bankrate.com/retirement/retirement-savings-survey/#feel-behind-on-savings
(2) https://www.cbpp.org/sites/default/files/atoms/files/8-8-16socsec.pdf
(6) https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs