You work long and hard during your life and those retirement days are finally approaching. Unfortunately, some are prepared for those days and some are not, according to CNBC in “Nearing retirement? This checklist can help you make sure you’re financially prepared.”
How much do you spend? When income is steady, we tend not to think about what we spend. However, when we transition into retirement, a budget is our best friend. If you don’t know what you spend monthly or annually, pre-retirement is the time to start tracking your cost of living. Remember that you may be spending less on work-related items, but more on leisure. If you can get rid of debt before retiring, you’ll also be in a better situation. Not everyone can go into retirement debt-free but try to minimize as much debt as you can.
The big unknown: health care costs. This is the biggest unknown of retirement. If you are 65, it’s time to sign up for Medicare, which pays for much, but not all, of your health care costs. You’ll need to pay for dental, vision and long-term care costs. If you haven’t already purchased a long-term-care insurance policy, take care of that soon. Medicare does not cover the cost of care for daily living costs, like bathing or dressing.
How much you pay for Medicare depends on your recent income, if you signed up on time, and what additional coverage you select. If you didn’t sign up when you were first eligible, or if you don’t meet an exclusion, or if you have a high income, you’ll pay more.
You can’t get Medicare coverage until you turn 65, so if you retire younger than age 65, you’ll need to secure your own health insurance.
What happens if you retire before you turn 65? A federal law, COBRA, requires employers with at least 20 workers to allow ex-employees, including those who have retired, to remain in the employer-sponsored plan. The catch? The former employees must pay the full cost of the premiums. That can be expensive.
Are there other options? You might be able to sign up for a health insurance exchange program (the Affordable Care Act plan) if they are available. There are short-term plans that cover the gap between employment and retirement, if you can qualify. They are mostly available for healthy people with no pre-existing conditions.
Do you have a Social Security strategy? The longer you can delay taking Social Security benefits, the larger your checks will be. Even knowing this, many people start taking benefits as soon as they become eligible because they need the income. However, if you can wait, your benefits will increase by 6-8% yearly until you reach 70. These days, more people celebrate their 65th birthday and keep right on working. At least 55% of people ages 60-64 are working part time, as reported by the Bureau of Labor Statistics. People age 65 to 69 are also working—nearly 31%.
What does your retirement income look like? Retirement income comes from a variety of sources and everyone has their own mix. You might have a Roth IRA, or a traditional IRA. If you have a traditional IRA, you’ll have to consider that your withdrawals are going to be taxed as regular income. An IRA of $1 million may leave you with $700,000 in after-tax income, depending upon your tax bracket.
If your investment accounts are healthy and you’ve been investing for decades, you will probably have to pay capital gains taxes on some of the withdrawals.
Lucky enough to have a pension? Fewer and fewer Americans can count on a pension from their employer. However, if you have a pension in place, chances are you must take either a lump-sum payment or receive income over your lifetime. Pull out your paperwork and read it carefully. What will the benefits be for a surviving spouse? Do you have the option to leave the pension to a beneficiary?
An estate planning attorney can help you prepare for your retirement income in advance to avoid some of the problems that retirees can face.
Reference: CNBC (July 5, 2019) “Nearing retirement? This checklist can help you make sure you’re financially prepared”
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