If you are an American of a certain age, you find yourself beginning to imagine retirement. I find that for most people this happens around the 50th birthday. The good news is that for most of us, if we get serious about retirement around our 50th birthday, there is still a good chance we can make it work.
Here are 7 things you can do in the 10 years leading up to retirement to make sure that the transition from working for living to living in retirement is successful.
- Find the Right Time
Like most things in financial planning, finding the “right” time to retire depends on several factors. I always tell clients to think about retirement in three steps.
First step, is the day you stop working at the “Big Job.” This is the good-paying, high-stress career that has funded your savings.
Second step, is the day you stop working at any job. For many folks considering retirement today, there are a variety of “other” jobs that they take after the Big Job. Some are consulting gigs in their career field. Others are hobby jobs related to a passion. But, all of them bring in some money, and maybe some health insurance. These jobs can make a HUGE difference in the success of your long-term retirement.
Third step, is the day you decide to start spending some of your savings. Some of your retirement savings may have rules that dictate your options. For example, Social Security pays the maximum benefit at age 70, but you can take a reduced benefit as early as age 62. Many pensions pay at a different rate based on the date you begin. And, of course, your retirement savings in your IRAs will last longer, the later you begin to spend it.
For each family, they should consider each of these three steps and decide when the right time is for each. Sometimes, all three happen at the same time. Other times not. An experienced fiduciary financial planner can be a huge help in evaluating these options.
Historically, for most Americans, retirement comes between ages 61 and 65, according to the U.S. Census Bureau.
Your Probably Don’t Know
A recent Morningstar survey illustrated how hard it is to know exactly what your will retire. Morningstar asked a group of people 10–15 years from retirement to estimate when they’d retire, they found that those who thought they’d retire at age 55 were more likely to retire later at around age 58. And those targeting age 65 typically retired earlier at about age 63.2
Nearly Half of People Retire in Their Early 60s.
- Source: LIMRA Secure Retirement Institute analysis of US Census Bureau’s Current Population Survey, March 2017 Supplement.
When You are Married, You are Planning for Two
Statistically, men marry later than women, AND women live longer than men.
On average, women are likely to spend five years on their own in retirement, according to the U.S. Social Security Administration.
If a husband is five years older than a wife, he will be eligible for Medicare health insurance five years before her. If the couple decides to quit working before they both have Medicare, they need to plan for added health care expenses. As the couple ages, it’s likely that he will die before she does. At that point, she will be living on her own and may have a reduced retirement income since she will lose one Social Security check at a spouse's death.
Important Retirement Countdown Dates
Here are a few dates to keep in mind as you get closer to retirement:
Age 50 - Catch-Up Eligible – When you reach age 50, you are eligible for catch-up contributions to IRAs and employer-sponsored retirement plans.
Age 55 – Eligible for Early Distribution from Some Employer-Sponsored Retirement Plans – Some companies provide retirement accounts that allow you to take money out without penalty as early as age 55. You could spend this money, paying the income tax. Or, you could roll the money over to a self-directed IRA outside the company plan. This might permit more, different investment options.
Age 59.5 – Eligible for Retirement Distributions – At age 59.5 you can remove money from IRAs, annuities, and employer-sponsored retirement accounts without a PENALTY. You will NOT pay the 10% penalty for early withdrawal, but if the account was funded with pre-tax money, you will owe income tax on the distribution.
Age 60 – Widows Social Security Eligibility – A widow can receive a reduced Social Security survivor benefit as early as age 60.
Age 62 – Eligible for Reduced Social Security Benefit – You can start taking Social Security Income benefits, at a reduced rate, starting at age 62. The penalty is about 50% compared to waiting to receive the maximum benefit at age 70.
Age 64 and 9 months – Time to Enroll in Medicare – You need to enroll in a seven-month window. If you don’t you will pay higher premiums for life when you do enroll. If you or your spouse are covered by insurance at work, you can delay signup until you off the company plan, with no penalty.
Age 65 – Sign Up for Medigap Insurance – Medigap is private insurance that covers some of the out-of-pocket co-pays and deductibles under Medicare.
Age 70 – Maximum Social Security Benefit – Be sure to turn on Social Security by your 70th birthday. Your benefits grow up to your 70th birthday and then the growth stops.
Age 70.5 – Required Minimum Retirement Distributions Begin for those born in 1948 and before – You are required to remove a percentage of your traditional retirement savings and pay income tax each year. You can reinvest that money in a taxable brokerage account for continued growth. In 2021, the first-year required distribution was 3.65% of the prior year-end account balance.
Age 72 – Required Minimum Retirement Distributions Begin for those born in 1949 and later – Recent tax law changes moved the first date for a required retirement account distribution back to age 72. You are required to remove a percentage of your traditional retirement savings and pay income tax each year. You can reinvest that money in a taxable brokerage account for continued growth. In 2021, the required distribution for a person aged 72 was 3.9% of the prior year-end account balance.
Plan for the Long Run
Most people will be surprised by how long they live. The Social Security Administration estimates that the typical person aged 65 today can expect that :
- One in three will live longer than age 90.
- One in seven will live longer than age 95.
- Married couples have at least a 50/50 chance that one spouse will live past age 90.
- Determine How Much is Enough
One of the great retirement questions is, “How much retirement savings is enough?” And the answer is a common one in financial planning land, “It Depends.” This answer is unsatisfying but true. In order to get a handle on the number, you need to understand what retirement will look like for you. In general, here are three thumb rules to consider:
Save to generate 70-90% of your pre-retirement income. If you assume that most of your baseline costs will NOT change, you can reduce your monthly income requirement by subtracting two things:
- Retirement savings stops – If you stop saving for retirement, that’s money you don’t need to meet your expenses. This could be as much as 20%.
- Social Security and Medicare Taxes Stop. If you no longer receive payroll, you will not pay payroll taxes, so that reduces the monthly expense by 7.65% if you get paid on a W-2 and if you are self-employed, the number is 15%.
Save to reach a multiple of your earnings. To be sure you will have enough, save a multiple of your salary times your age. The illustration below shows that if you make $100,000 in salary and are age 55 then you need between $600,000 and $800,000 in savings.
Save to generate a 4% distribution rate. Research shows that if you take no more than 4% of the savings balance each year, it will last at least 25 years with no investment growth. If you can grow faster than 4% each year, the savings will last longer. With a historical bond return rate of 6% and a historical return on stocks of 8%, a diversified portfolio should average more than 4% growth rate each year. When your savings grow faster than your distribution rate, you can increase your annual distribution in dollars each year and still keep it at 4% of the savings total.
For example, if you need $100,000 to spend each year of retirement, a 4% distribution rate suggests you should have a savings fund of $2.5M.
- Make the Most of Your Savings
As you get closer to retirement, you may have the option to save more each year. For example:
- Employer-sponsored retirement plans can help a couple of ways:
- Often have employer matching funds available. This is free money from your employer on top of what you save. Be sure you are saving enough to get all the free money.
- Many employer-sponsored retirement savings plans have catch-up options for those better than 50 years old. Many plans allow up to $6,500 catch-up savings per participant each year.
- Individual retirement plans can help:
- Typically, you can save to an IRA even if you are participating in an employer-sponsored savings program.
- The maximum contribution is $6,000 per person per year.
- People better than 50 years of age can add $1,000 of additional savings each year.
- Consider the Roth Option. Both employer-sponsored plans and IRAs allow after-tax contributions. The
- Roth contributions do NOT get a tax deduction when you save into the account.
- Roth accounts do NOT create an income tax bill when you take a distribution, not even on the growth.
- Evaluate Your Progress
Review your goals, your timeline, and your current status. Most people change jobs more than 10 times over their career, so it’s very likely that you will have retirement savings in more than one place, and that you might have lost track of some of it. So it’s a good idea to conduct a kind of audit:
- What is the TOTAL of retirement savings for your household, from all accounts?
- How long do you have until your target retirement year?
- What is your current retirement savings rate?
- How are your assets allocated? Stocks, bonds, cash, or annuities.
- What has been your historical investment performance?
- What adjustments should be made to reach your goals?
You will likely find the help of an experienced fiduciary financial planner super useful as you make this evaluation. They can bring experience and perspective to your assessment.
- Make a Social Security Plan
You may not be expecting Social Security to make much difference in your retirement. I would suggest you reconsider. Social Security has some fabulous retirement characteristics:
- It is guaranteed by the U.S. Government, still rated AAA.
- It pays for life. No matter how long you live.
- It includes a cost-of-living adjustment.
And, Social Security may not cover all your retirement expenses, but it does help. The maximum Social Security benefit is 2021 for someone who starts taking benefits at age 70 is $3,895 per month. For life. With a cost-of-living increase.
For married couples, the strategy around who claims Social Security at what time can be an important part of your retirement income strategy. An experienced fiduciary financial planner can help you make projections to evaluate your options. I help clients with Social Security projections all the time. Follow this LINK if you would like to find a time to talk about your Social Security situation.
- Create Retirement Income
One of the basic adjustments as you begin to spend your retirement savings is the shift from adding to your accounts to distributions out of your accounts. If you are planning to spend 4% of your savings each year in retirement, you need to manage your accounts to have that money available each month to pay the bills. As you look at your retirement savings think about the various buckets of money you have:
- Cash reserve bucket in a savings account at the bank. Earns nothing. Completely liquid. Can cover monthly expenses. You need to maintain this account in order to cover unexpected expenses that come up from time to time.
- Taxable brokerage accounts. May receive dividends and interest over the course of the year. The funds can be used to pay expenses. Shares can also be sold. Any growth in the investment will be reported as a taxable capital gain. The current maximum cap gains tax rate of 20%.
- Roth IRA and 401k funds. These accounts can provide distributions that are free from all tax.
- Tax-deferred, traditional IRA and 401k accounts. These accounts can provide distributions, but all funds are taxed as regular income. The maximum Federal income tax rate is 37% and in the great state of Minnesota, where I live, the maximum State income tax rate is 9.85%.
You will want to be strategic about where you take your monthly distributions and how you manage the investments in each account to create maximum income while also growing fast enough to cover rising expenses in the future. Again, a great area where the experience and training of a fiduciary financial planner will be a big help.
- Think About More Than the Money
It’s a funny thing, but data shows that people get happier the longer they are retired. The data is pretty convincing. Studies have shown that the most important factors that determine happiness in retirement are health, friendships, and family. The trend is consistent across gender, income level, education, culture, and geography. So, you have lots to look forward to.
You might find that all of this leads you to seek advice and help. The great thing about working with an experienced fiduciary financial planner, like me, is that I have retired lots of times. So, I’ve been through the process before and I know what to expect.
I am a CERTIFIED FINANCIAL PLANNER™ professional. I have been doing this for 20 years. I’m a fiduciary for my clients. I act as their advocate at all times. I provide financial planning services for a fee.
If you would like to talk with me about your situation, I would be honored to be of service. I love retirement planning. Follow this LINK if you would like to find a time for us to talk.
If this article has you thinking about your own circumstances, contact my office at firstname.lastname@example.org. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.