About to retire? Congrats! But wait, not so fast, there are a few things you need to know before you say goodbye to your career, and hello to your favorite golf course. Before entering your golden years, take time to consider these best practices to set yourself up for retirement success.
Overestimate your retirement years
Many pre-retirees assume they will only be in retirement for a couple of decades. However, many Americans are living longer, which means they are in retirement longer. Your retirement may last 30 years or more, which is a long time for many, and usually more than what pre-retirees estimate.
That’s why it’s essential to be strategic about your retirement income planning. Partnering with a financial planner can help determine how to maximize your savings and plan for the decades to come.
Understand your tax burden
During your working years, you may have simply paid taxes on your paycheck. But when you retire, you may have a variety of income sources that require different taxation. For example, if you are taking distributions from a taxable account, you may have to pay capital gains tax rates. For most people, long-term capital gains taxes are no more than 15% . Short term capitals gains will be taxed at your ordinary income tax rate.
Income from your retirement savings account is a bit different. If you take withdrawals from your traditional IRA or 401(k) accounts, you’ll face ordinary income tax rates. If you take withdraws from Roth IRA accounts, your distributions will be tax-free since you already paid taxes on your contribution amounts.
It’s important to note that even your Social Security benefits can be taxed. For example, if you make over $34,000 a year, your benefits will be taxed up to 85%.
Take advantage of tax breaks for seniors
Speaking of taxes, there are special tax breaks available for seniors. For example, if you do not itemize your deductions, you can get a higher standard deduction if you and/or your spouse are 65 years or older. You might be able to get even more if you or your spouse are blind. Additionally, you can reduce your property tax if you’re age 65 or older.
To identify all of the tax breaks available, consult with your financial planner and tax advisor. They can help you determine what you may qualify for post-retirement.
Strategically select when you begin taking Social Security
It seems as though every financial professional has a different opinion of when the best time is to apply for your Social Security benefits. While some think it’s wise to collect as early as age 62, others recommend waiting. If you start taking benefits at 62, your check will be smaller, but you will receive benefits longer. Conversely, if you wait, your checks will be bigger, but you will receive them for a shorter amount of time.
Even though both scenarios have advantages and disadvantages, everyone has different financial needs that require a different recommendation for when you should start taking Social Security. Therefore, consult with your financial planner to see what the best scenario is for you. For example, if you’re not in great health and can’t continue to work past age 62, it might be wise to start taking benefits earlier.
Be open to downsizing your lifestyle
If you’re in a situation where you think you don’t have enough to retire, you may want to consider downsizing your lifestyle. While it may seem impossible to live without your golf membership or forgoing your monthly shopping spree at Saks Fifth Avenue, you may be surprised at how much you can live without.
Another way to downsize your life is to seek senior discounts. From discounted movie tickets to discounts on auto services, seniors have a vast array of access to special deals. In addition to reducing your expenses and looking for senior discounts, you may want to find alternative income streams as well. For example, if you dedicated your life to teaching, you may want to take up part-time tutoring.
Account for high retirement healthcare costs
According to a Fidelity Retiree Health Care Cost Estimate, an average retired couple, age 65 in 2019, needed approximately $285,000 saved (after tax) to cover health care expenses in retirement. While this is simply an estimate, your healthcare costs will depend on when you retire, where you live, and how you maintain your health. Even though some will spend a lot less, others will spend a lot more.
Therefore, always focus on your health by exercising and eating nutritious foods. And, if you’re about to retire, review the status of your health so you can make appropriate adjustments as you head into your golden years.
Make a date to apply for Medicare
Even if you’re not ready to start receiving benefits, it’s important to sign up for Medicare Part A and Part B three months before or after your 65th birthday. Since you must pay a premium for Medicare Part B, which is your medical insurance, you can decide to forgo the coverage. But, if you decide you need it later, you may end up paying an enrollment fee. In fact, your premium payments go up 10% every 12 months if you don’t enroll. Therefore, if you think you will need Medicare Part B at some point, make sure to mark your calendar for your 65th birthday.
You may also want to consider a Medicare Advantage plan. Private insurers offer these plans to provide coverage beyond what you may receive with Medicare Part A, Medicare Part B, Medicare Part D, and Medigap supplemental coverage. While the federal government requires each plan to offer at least as much as original Medicare, they can offer more, such as vision, dental, and prescription coverage. They may also cost less for out of pocket costs than an original Medicare plan.
Fill your retirement days with structured activities
Although many pre-retirees count down the months, days, and even seconds until they retire, some retirees may not enjoy their golden years as they expected. Even if you’re tired of working and ready to fire your boss, a routine may keep you sane once you retire. It’s important to maintain a social life, engage in activities you enjoy, and keep your brain sharp.
So, if you’re about to retire, decide beforehand how you will spend your days and who will you spend them with. Take the time to map out your time so that when you leave your job behind, you have a plan of action to keep you occupied and happy every day.
The bottom line
If you’re about to retire, consider all aspects of your years in retirement, from health care to how you spend your days to additional taxation, account for everything. As you decide how to adjust your lifestyle as you approach retirement, you may want to have a conversation with your financial planner. You can consult with them about the best ways to prepare for retirement and create an action plan that works for you.
And, if you’re looking for a financial planning partner who can help you realize your financial goals, we have financial planning offices in Redmond, Seattle, Mill Creek, the Tri-cities region, and Denver. Our firm focuses on helping retirees and those preparing for retirement achieve financial freedom by creating a plan that shows them how they can have the income they need and want until they turn 100.
If you’re ready to take the first step in achieving your retirement goals, our team is ready to assist you. We’ve helped hundreds of couples and individuals smoothly transition with confidence, and we’d like to do the same for you.