By Allyn Hughes, CFP®, ChFC®, CLU®, CAP®
By the time you reach age 60’s, you have already made many important financial decisions and, like most of your peers, understand your basic financial situation as you finalize your retirement plans. You still must prepare to take the assets that you have—or sometimes what you hope or plan to have—and figure out how to use them to fund retirement expenses.
Transitioning into retirement
The first important decision is figuring out if, when or how to leave your current employer. Weighing a variety of factors ̶ your job situation, your financial preparedness, your health, your family situation, your goals — could influence your decision about if and when to retire. You will need to understand each of these factors (and many others) to determine if you are prepared financially, emotionally and socially to stop working. For many in their early 60’s, their initial answer is “no” as they realize they either have to or want to continue working.
Others might be financially ready to retire, but they aren’t sure what they will do with their lives once their retirement begins. At this later stage in life, taking time to consider and plan your retirement lifestyle and goals could be your most important financial planning step.
Starting Social Security
The next big decision is deciding when to start taking Social Security. In 2013, according to the Social Security Administration, 48% of women and 42% of men chose to start receiving Social Security at the earliest age possible ̶ 62. These percentages have been declining lately as more recent retirees better understand both their potential longevity and the value of postponing Social Security to increase monthly benefits. (Read Delaying Social Security can boost retirement income.) For those who choose to start Social Security at age 62, they often do so because they: 1) are in relatively poor health 2) have a lower than average life expectancy, or 3) need the money.
There are a variety of good Social Security planning software tools that are available to financial advisors. If you have questions about the effects of different Social Security decisions might have on the total value of your Social Security benefits, we suggest that you work with someone who can help you analyze all of your options within the context of your other income sources and investments.
Whether you start receiving Social Security at 62, 66 or 70, you will still have to make Medicare decisions in the six months around turning age 65 if you are not still working and participating in a different health insurance. You will need to evaluate your need for, and the price of, several different parts of Medicare and Medicare supplement insurance policies.
How to live in retirement
“Given my personal situation – including my health, status of important relationships and my finances – how and where do I want to live in retirement?” is another important question that people in their 60’s should ask. Working with your spouse or other loved ones to answer such questions can be rewarding as it can build the framework for all of your lives over the next few decades.
We occasionally work with couples in their 60’s who have either never talked about how they want to live in retirement or have very different ideas about their retirement lifestyle. Often, it takes some coaxing to get pre-retirees to have a discussion about this topic, because the prospect of hurt feelings or disagreement is real, and many feel that conflict avoidance is better than working through their issues to come to a resolution. We have found that going through this effort is usually worth it as it can begin an important dialog about how to live together in the future.
Understand your income sources in retirement
A final consideration is understanding where your money will come from in retirement. Most retirees will qualify for Social Security or a defined benefit pension plan. Others have money in taxable brokerage accounts, tax-deferred retirement plans (e.g., IRA, 401k, SEP), tax-free investments (e.g., Roth IRA) and other retirement income sources, such as annuities. Depending on which accounts you have, you may want to think about how these assets should be spent down so that you may reduce your taxes in retirement. How you plan for and execute a long-term retirement income strategy could make a difference of potentially hundreds of thousands of dollars over a long retirement. (Read Retirement income withdrawal strategies.)
To best take advantages of these opportunities, you should see your CPA or a financial advisor who has the tools to help you with distribution planning.
- Financial Plan: What is it? Who needs it?
- How to choose a good financial advisor
- Good advisors ask questions
- Do you need a financial adviser or counselor
- Financial planning for new middle-aged orphans
- Make the most of employer-sponsored retirement plans
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