Do you have more than 10 years to go until you retire? We've put together our top five things to consider prior to retirement so that your advanced planning can go a long way.
There's more to life than the balance sheet, and although retirement can appear to be daunting, it's important to also consider the wider opportunities that retirement can offer. By aligning your financial goals with your wider life goals you can purposefully dedicate to doing the things that you enjoy most. Once your financials are in order, perhaps with the help of your Mission Wealth financial advisor, or another acting fiduciary, you'll want to know what your next stage of life might look like in terms of the day to day.
Mission Wealth hosted a virtual Wisdom Share for private clients, family and friends as a part of our Inspired Living™ program. During the session our client advisors collaborated with small groups to crowd-source some of the most effective strategies, tools and tips for gaining enhanced fulfillment throughout retirement, and boosting abundance in each of the 11 Dimensions of Life™.
Watch the video in our article Reimagine Your Ideal Retirement.
Top Five Retirement Considerations
If you're approaching retirement age, or if it's way in the distance, it's great to be thinking about it now. Due to the level of uncertainty and change that retirement can present, planning for retirement can be a challenge. On the other hand, there are things you can do to make things easier.
If you're a decade or so away from retirement, you've probably spent at least some time thinking about this major life change. How will you manage the transition? Will you travel, take up a new sport or hobby, or spend more time with friends and family? Should you consider relocating? Will you continue to work in some capacity? Will changes in your income sources affect your standard of living?
When you begin to ponder all the issues surrounding the transition, the process can seem downright daunting. However, thinking about a few key points now, while you still have years ahead, can help you focus your efforts and minimize the anxiety that often accompanies the shift.
A strong retirement income plan allows you to enjoy your time in retirement, as well as providing sufficient cash flow that creates peace of mind. If you are unsure about your next steps or situation, contacting an experienced retirement advisor and/or financial advisor can be a way to gain clarity on what to expect. Note that only financial advisors who are fiduciaries like Mission Wealth are required to act in the best interests of their clients.
Consideration 1: Have you fully assessed your average living expenses?
A step you will probably take several times between now and retirement — and maybe several more times thereafter — is thinking about how your living expenses could or should change. For example, while commuting and other work-related costs may decrease, other budget items may rise. Health-care costs, in particular, may increase as you progress through retirement.
Try to estimate what your monthly expense budget will look like in the first few years after you stop working. And then continue to reassess this budget as your vision of retirement becomes reality.
According to a recent survey, 38% of retirees said they were "very confident" that they would be able to meet their basic expenses in retirement, while only 28% showed similar levels of confidence in meeting health-care costs.
Keeping a close eye on your spending in the years leading up to retirement can help you more accurately anticipate your budget during retirement.
Keeping a close eye on your spending in the years leading up to retirement can help you more accurately anticipate your budget during retirement.
Consideration 2: Have you definitely considered any and all income sources?
First, figure out how much you stand to receive from Social Security. The amount you receive will depend on your earnings history and other unique factors. You can elect to receive retirement benefits as early as age 62, however, doing so will result in a reduced benefit for life. If you wait until your full retirement age (66 or 67, depending on your birth date) or later (up to age 70), your benefit will be higher. The longer you wait, the larger it will be.
Note that if you work while receiving Social Security benefits and are under full retirement age, your benefits may be reduced until you reach full retirement age.
You can get an estimate of your retirement benefit at the Social Security Administration website, ssa.gov. You can also sign up for a my Social Security account to view your online Social Security statement, which contains a detailed record of your earnings and estimates for retirement, survivor, and disability benefits. Your retirement benefit estimates include amounts at age 62, full retirement age, and age 70. Check your statement carefully and address any errors as soon as possible.
Next, review the accounts you've earmarked for retirement income, including any employer benefits. Start with your employer-sponsored plan, and then consider any IRAs and traditional investment accounts you may own (read our article Investment Planning Throughout Retirement to get started there). Try to estimate how much they could provide on a monthly basis. If you are married, be sure to include your spouse's retirement accounts as well. If your employer provides a traditional pension plan, contact the plan administrator for an estimate of that monthly benefit amount.
Do you have rental income?
Be sure to include that in your calculations.
Might you continue to work?
Some retirees find that they are able to consult, turn a hobby into an income source, or work part-time. Such income can provide a valuable cushion that helps retirees postpone tapping their investment accounts, giving the assets more time to potentially grow.
Some other ways to generate extra cash during retirement include selling gently used goods (such as furniture or designer accessories), pet sitting, and participating in the sharing economy — e.g., using your car as a taxi service.
A financial professional, or financial advisor such as those at Mission Wealth can help you determine the best course based on your individual circumstances.
Consideration 3: Do your balance sheets show that you're really focused on paying off debt, so you can focus on your savings?
Once you have an idea of what your possible expenses and income look like, it's time to bring your attention back to the here and now. Draw up a plan to pay off debt and power up your retirement savings before you retire (read more on this topic in our article What Would Be a Sustainable Retirement Income? by Brad Stark).
Why pay off debt?
Entering retirement debt-free — including paying off your mortgage — will put you in a position to modify your monthly expenses in retirement if the need arises. On the other hand, entering retirement with a mortgage, loan, and credit-card balances will put you at the mercy of those monthly payments. You'll have less of an opportunity to scale back your spending if necessary.
Why power up your savings?
In these final few years before retirement, you're likely to be earning the highest salary of your career.
Why not save and invest as much as you can in your employer-sponsored retirement savings plan and/or IRAs?
Aim for maximum allowable contributions. And remember, if you're 50 or older, you can take advantage of catch-up contributions, which enable you to contribute an additional $6,500 to your 401(k) plan and an extra $1,000 to your IRA in 2022.
Draw up a plan to pay off debt and power up your retirement savings before you retire.
Consideration 4: Check you're managing your taxes according to your goals.
As you think about when to tap your various resources for retirement income, remember to consider the tax impact of your strategy. For example, you may want to withdraw money from your taxable accounts first to allow your employer-sponsored plans and IRAs more time to potentially benefit from tax-deferred growth. Keep in mind, however, that generally you are required to begin taking minimum distributions from tax-deferred accounts once you reach age 72, whether or not you actually need the money, but note that Roth IRAs are an exception to this rule.
If you decide to work in retirement while receiving Social Security, understand that income you earn may result in taxable benefits. IRS Publication 915 offers a worksheet to help you determine whether any portion of your Social Security benefit is taxable.
If leaving a financial legacy is a goal, you'll also want to consider how estate taxes and income taxes for your heirs figure into your overall decisions.
Managing retirement income to result in the best possible tax scenario can be extremely complicated. Qualified tax and financial professionals can provide valuable insight and guidance.
Note that working with a tax or financial professional cannot guarantee financial success.
If leaving a financial legacy is a goal, you'll also want to consider how estate taxes and income taxes for your heirs figure into your overall decisions.
Consideration 5: Ensure you consider and account for health care costs.
The Employee Benefit Research Institute (EBRI) reported that the average 65-year-old married couple retiring in 2020, with average prescription drug expenses, would need about $270,000 in savings to have a 90% chance of meeting their insurance premiums and out-of-pocket health-care costs in retirement. This illustrates why health care should get special attention as you plan the transition to retirement.
As you age, the portion of your budget consumed by health-related costs (including both medical and dental) will likely increase. Although Original Medicare (Parts A and B) will cover a portion of your costs, you'll still have deductibles, copayments, and coinsurance. Unless you're prepared to pay for these costs out of pocket, you may want to purchase a supplemental Medigap insurance policy. Medigap policies are sold by private health insurers and are standardized and regulated by both state and federal law. These plans offer different levels of coverage and may pay many of your out-of-pocket costs.
Another option is Medicare Advantage (also known as Medicare Part C), which is a bundled plan that includes Parts A and B, and usually Part D prescription coverage, and may offer additional benefits Original Medicare doesn't cover. If you enroll in Medicare Advantage, you cannot also purchase a Medigap policy. For more information, visit medicare.gov.
Also think about what would happen if you or your spouse needed home care, nursing home care, or other forms of long-term assistance, which Medicare and Medigap will not cover. Long-term care costs vary substantially depending on where you live and can be extremely expensive. For this reason, people often consider buying long-term care insurance. Policy premiums may be tax deductible, based on a number of different factors. If you have a family history of debilitating illness such as Alzheimer's, have substantial assets you'd like to protect, or want to leave assets to heirs, a long-term care policy may be worth considering.
A complete statement of coverage, including exclusions, exceptions, and limitations, is found only in the LTC policy. It should be noted that carriers have the discretion to raise their rates and remove their products from the marketplace.
These are just some of the factors to consider as you prepare to transition into retirement. Breaking the bigger picture into smaller categories and using the years ahead to plan accordingly may help make the process a little easier.
How Mission Wealth Can Help
This may be your first time retiring, but it's not ours! Retirement is our area of expertise. Since 2000, we have helped hundreds of families retire with confidence. Careful coordination is required to ensure your retirement income strategy is tax-efficient and sustainable. You will face many decisions when retiring. Let us guide you through your options and come up with a plan.
An advisor can guide you through the different retirement events you may be facing, such as downshifting in work life, phasing into retirement, full retirement, changing residence, receiving social security income, eligibility for Medicare, and receiving retirement plan distributions. Gain peace of mind that you are prepared and supported, so you can focus on what's important to you during retirement. At Mission Wealth, our fiduciary advisors offer insight and prioritization of your personal goals and aspirations. Explore the Mission Wealth Retirement Guide here.
MISSION WEALTH IS A REGISTERED INVESTMENT ADVISER. THIS DOCUMENT IS SOLELY FOR INFORMATIONAL PURPOSES, NO INVESTMENTS ARE RECOMMENDED. ADVISORY SERVICES ARE ONLY OFFERED TO CLIENTS OR PROSPECTIVE CLIENTS WHERE MISSION WEALTH AND ITS REPRESENTATIVES ARE PROPERLY LICENSED OR EXEMPT FROM LICENSURE. NO ADVICE MAY BE RENDERED BY MISSION WEALTH UNLESS A CLIENT SERVICE AGREEMENT IS IN PLACE.
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