If retirement is looming in your future, you may wonder about how exactly this next phase of your life will play out. From when to start collecting benefits to how exactly money will end up in your bank account each month, the process of starting retirement can seem like a mystery. To help you understand the key
milestones of retirement and allocate funds strategically, you should assess your own financial situation and consider the best ways to maximize benefits.
Read on for answers to common questions and tips for a comfortable and fulfilling retirement.
How Do I Retire?
Leaving the workplace may be as simple as filling out paperwork with your human resources office, but replacing a paycheck can be more difficult. Kyle Ryan, executive vice president of advisory services for hybrid digital wealth manager Personal Capital, says the No. 1 question he hears from workers is: “Logistically, how am I going to make that happen?” They want to know about how to move from the steady income of the workplace to living off their retirement savings. The answer is usually found by sitting down with a finance professional and determining how much to pull out of retirement accounts and on what schedule.
When Can I Retire?
The short answer: You can retire when you want to leave the workforce and can afford to do so. However, in reality, people may have many constraints on when they can leave the workforce. For instance, some employees may have to work 20 or 30 years to be eligible to receive a company pension. Those who need Social Security to retire can’t begin collecting benefits until age 62 at the earliest. And Medicare doesn’t begin until age 65, meaning workers who receive health insurance through an employer may wait until then to retire.
How Much Money Do I Need to Retire?
It all depends on what you plan to spend in retirement. Gage Kemsley, vice president of financial firm Oxford Wealth Advisors in Rio Rancho, New Mexico, finds it frustrating to hear some financial advisors say a specific amount is needed to retire. Rather than providing a blanket figure such as $1 million or $2 million, Kemsley says people should work with an advisor to determine how much is needed to meet their specific retirement goals.
How Much Will I Spend in Retirement?
To determine how much you need to retire, you need to understand how much you’ll spend. Fortunately, that’s not as hard to calculate as it might seem. “It’s not a guessing game at all,” says Tim Speiss, partner-in-charge of the personal wealth advisors practice with the accounting firm EisnerAmper LLP in New York City. Financial advisors can use a person’s spending habits, expected inflation and life expectancy to determine how much they will reasonably need in retirement.
Should I Retire Early?
No one can answer that but you. However, financial advisors can run through a number of what-if scenarios to help a worker determine the best time to retire from a financial perspective, Ryan says. These scenarios can consider whether retiring early could lead to a shortfall of money later.
[ See: 11 Ways to Avoid the IRA Early Withdrawal Penalty.]
When Should I Take Social Security?
Workers can take Social Security as early as age 62, but they will permanently reduce their monthly benefits by 25%. The full retirement age for those born from 1943-1954 is 66, and seniors can get up to an 8% bump in benefits for each year they delay their claim up to age 70.
Those who plan to continue working full-time until their full retirement age should think twice about taking early Social Security benefits. There is a benefits penalty of $1 for every $2 you earn above $17,640 in 2019 if you are younger than the full retirement age. And some may worry about Social Security running out of money and take their benefits early for that reason. However, Kemsley is optimistic that the program isn’t going bankrupt, and these concerns shouldn’t drive the decision of when someone begins benefits.
How Do I Apply for Social Security Benefits?
There are three ways to apply for Social Security benefits. Retirees can complete an online application through the Social Security Administration website or call 1-800-772-1213 to submit an application over the phone. The final option is to visit a local Social Security Administration office and apply in person.
How Much Will I Pay in Taxes in Retirement?
A tax professional can likely estimate your effective tax rate in retirement. Some retirement savings, such as traditional 401(k) or IRA accounts, are taxable, while money from Roth accounts is exempt. Depending on how much income you have in retirement, a portion of your Social Security benefits may be taxable, too. In addition to calculating expected federal taxes, Kemsley advises workers not to overlook state taxes.
Should I Take My Pension as an Annuity or a Lump Sum?
This is a decision best made with the help of a finance and tax professional. Taking a lump sum payout may sound appealing, but Speiss cautions, “You’re going to have a significant tax bite out of that.” Annuitized payments may lessen and spread out the tax burden.
How Will I Afford Medical Expenses in Retirement?
While most retirees are eligible for Medicare at age 65, early retirees may need to bridge the gap between when they lose their workplace benefits and begin their government coverage. That may mean buying an individual policy through the health insurance marketplace. Insurance plans purchased through the marketplace may be eligible for government subsidies that lower out-of-pocket costs for retirees.
A bigger concern is long-term care coverage. “What if you could not live in your own home?” Speiss asks. Medicare doesn’t cover ongoing custodial care such as that provided in assisted living or nursing home facilities. To pay for this, retirees could use long-term care insurance, a reverse mortgage or personal savings. Once someone’s assets have been depleted, Medicaid may provide this coverage to those meeting income requirements.
(Getty Images/iStockphoto/Nattakorn Maneerat)
(Getty Images/iStockphoto/Nattakorn Maneerat)
Should I Pay Off My Mortgage Before Retirement?
For those who itemize deductions, a mortgage interest may reduce taxes. If the interest rate is low enough, it may also make more financial sense to invest money rather than pay off the debt. However, it comes down to personal preference. “It’s important to balance the hard math with what allows you to sleep at night,” Ryan says.
What’s more, retirees need to consider how paying off a mortgage could impact their ability to live comfortably in retirement. “I think it’s a good thing to go into retirement without debt,” Kemsley says,” but I don’t think it makes sense to rob a retirement account of $100,000 to (pay off) a house.”
[ Read: How to Open a Roth IRA.]
How Should My Money Be Invested Once I Retire?
Since retirees may be living largely off their savings, that money needs to be protected in case of a recession or market downturn. “We should be more conservative in your retirement,” Kemsley says. However, retirement savings also need to earn enough gains to keep up with inflation. A financial advisor should be able to recommend the right mix of bonds, equities and other investments to keep some money safe while allowing a portion of the portfolio to grow.
What Will I Do in Retirement?
This is the question many workers fail to ask themselves even though it’s essential to a happy retirement. Kemsley has seen many clients spend six months to a year getting acclimated to retirement, only to then find it boring after that. In some cases, they go back to work because they aren’t sure what else to do. Kemsley advises workers approaching retirement to give thought to how they would like to spend these years. He says, “We need to have very specific goals for the time we have.”
See: 10 Ways to Increase Your Social Security Payments.]
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13 Most Frequently Asked Retirement Questions originally appeared on usnews.com