We all know the fable about the ant and the grasshopper: the ant labored steadily, storing away provisions for the coming winter, while the grasshopper fiddled away the days and realized too late that he had nothing put back for lean times. While an entomologist or other expert would probably offer several corrections concerning actual insect behavior, the contrasting images communicate effectively the need to plan to maintain a desired lifestyle.
For those in their late fifties and sixties, it’s prime time to be looking closely at retirement financial planning: sources of income, tax strategies, healthcare expenses, budgeting, and other components of a comprehensive blueprint for a satisfying retirement lifestyle. Let’s take a look at a few key markers along the path to retirement and consider the moves most individuals should be making at that time to execute a successful retirement financial plan.
Pre-retirement, age 59 ½. When you reach 59 ½, you become eligible to withdraw funds from your IRA or other tax-qualified retirement plans without paying the 10% early withdrawal penalty. On the other hand, you are likely in your prime earning years, so it may be to your advantage to leave those IRA and other tax-advantaged balances alone, allowing them to continue compounding tax-free until you are ready to retire. By now, you should have also set up your free online account with the Social Security Administration (https://www.ssa.gov/myaccount/). Having your account set up makes it harder for identity thieves to falsely claim your benefits, and it also gives you access to free calculators and other tools you can use to learn more about your benefits. You can also view your Social Security earnings record, which is important to verify as you approach the time when you start claiming benefits.
This is also the time to get serious about eliminating your debt if you haven’t done it already. Ideally, you’ll want to retire with as little debt as possible, to make your retirement income stretch further.
Early retirement, age 62. At this age, you may be able to begin claiming Social Security benefits but remember: they’ll be at a reduced rate, and they’ll stay at that rate for the rest of your life. Still, depending on your situation, it may make more sense to begin claiming, thus collecting benefits over a longer period of years. Just remember that the longer you wait to start collecting Social Security, the larger your monthly check will be until it maxes out at age 70. This is also an area where a professional, fiduciary financial advisor can help by projecting various income scenarios to help you find the right time to start claiming your income benefits.
During this period, you’ll want to review your investment portfolio to ensure that you have the right mix of assets to provide both a steady income for your retirement and also adequate future growth potential that can perpetuate that income for years to come. People are living longer in retirement, and though many assume that retirees should keep most of their funds in very conservative investments, growth potential is going to be increasingly important, due to the longer lifespans retirees are enjoying. This is another area where a qualified, professional financial advisor can offer great assistance.
Medicare eligibility, age 65. When you turn 65, you become eligible for coverage under Medicare, the government-sponsored health plan for older Americans. Basic Medicare (Part A), which covers a portion of most hospitalization costs, is free for most persons age 65 and older. If you are still working or otherwise covered by an employer’s plan, you may not be required to enroll in Medicare, but if you aren’t, you should enroll during the annual enrollment period to avoid possible penalties later. This is also the time when you may need to start looking at Medicare supplement plans to decide on the best way to provide for medical expenses like prescription drugs, routine doctor visits, and other medical expenses that aren’t covered by basic Medicare.
At this stage, it’s important to create and review your projections of retirement income and expenses. Having the most accurate forecast possible is the only way you can learn if you need to make any adjustments in order to meet your retirement lifestyle goals. It’s a good idea to get in the habit of doing this review at least annually, to make sure you’re staying on track to your desired destination.
Full retirement age (FRA), age 67 (for persons born in 1960 or later). At this time, you’re eligible for full Social Security income benefits. But as mentioned before, you can also choose to defer receiving benefits for some time after reaching FRA, and your benefit will increase 8% each year you wait, up until age 70, when your maximum benefit is reached.
For many, this is the time to make the full transition out of the daily work routine and into “retirement mode.” You will want to develop a tax-efficient withdrawal strategy for generating income from your various tax-advantaged and regular investment accounts. Depending on your projections of income and tax liability, you may want to tap tax-free sources, like Roth accounts, and save taxable sources like traditional IRAs for later years, when your tax bracket may be lower. Your financial and tax advisors can help you make informed decisions.
At Milestone Money, our goal is to help retirees and those preparing for retirement put in place strategies that will allow them to thrive. To learn more about the key “landmarks” in your retirement map and how we can help, click here.
