by William Sabin - Retirement Strategy
We review the best time to take Social Security Benefits.
Discussion of budgeting your income and expenses are explained.
We touch on long-term care and related costs.
Finally, its key to have your post-employment portfolio reviewed.
Ah...the countdown, the day dreaming, the planning. What will you do – travel the world, fish, volunteer, more time with the grand kids? I have always found retirement a bit frighting. Why? Because I don’t want to retire too soon and outlive the nest egg.
Below are a number of items to at least think about before retiring from that full-time job. If you are married, make sure that you both are on the same page before announcing your retirement....
1. Reaching Full Retirement Age
From the US Government standpoint via Social Security, see the below chart for 'full retirement' age. Although you can start claiming Social Security benefits as early as 62, your benefits will be much higher if you wait until full retirement age. If you start your retirement benefits at 62, your monthly payment is greatly reduced – see below. The longer you delay receiving a payment — up until age 70 — the larger the monthly check you will receive.
If you claim Social Security benefits at 62, think through the decision carefully ensuring you understand how Social Security benefits work, so you can make the right choice for you and your family.
To be fair, there is a break even analysis that one should review on when to take benefits - the point at which the amount you receive if you claim later equals the amount you would have received if you had started receiving payments early. Social Security is designed with "actuarial neutrality" built in. Meaning, regardless if you start receiving your benefits earlier or later, you should receive about the same total money over your lifetime. However, since delaying your benefits provides a larger monthly check, most experts advise to delay receiving a payment as long as possible.
Below is a chart showing the breakeven at a number of typical monthly social security income levels along with if you started to take a check at 62 vs 66 and 70. The breakeven ages are shown in the last column – if you take benefits early, it will generally take you to age 77 to 83 to breakeven – where the extra early payments equal the increased payments for waiting.
Its important to note that you are guaranteed these additional monthly benefits by waiting. While you potentially could get payments starting at 62 and invest in instruments yielding more than you would have by waiting to receive a bigger check later, there is no guarantee of this.
Some people take social security benefits early (earlier than full retirement age) for a number of reasons – they don’t think that the system will be around (e.g. it’s going broke) or because of injury or illness that makes it impossible to work. While the Social Security trust fund is estimated to run out money by 2034; I believe that the problems will be fixed before then. There is no reason to short change your day-to-day life over what could be or might be under a huge government program.
If you can't work because of a physical disability, you might consider not rushing to claim Social Security retirement benefits at 62. Doing so will cause you to permanently reduce the benefits you receive for the rest of your life. Rather, consider applying for Social Security Disability Insurance (SSDI). This is different than Supplemental Security Income (SSI). SSI disability benefits are available to low-income individuals who have either never worked or who haven't earned enough work credits.
If you get SSDI, you won’t could hopefully delay receiving your social benefits. You can also become eligible for a "disability freeze." Social Security calculates benefits based on your average wages. If you're disabled and making very little, a disability freeze prevents these low-earning years from being counted when determining your monthly benefit. In addition, SSDI will automatically switch to regular social security benefits when you reach full retirement age.
2. Who You Financially Support is Reduced
If you kids are grown, out of the house, or maybe have their own income, you should have lower expenses. If so, that makes it a lot easier to retire as you have fewer expenses. However, if they are still in college, and you don’t have a state pre-paid plan or have fully funded their college costs, you might consider postponing your retirement plans.
At the same time, if you are caring for elderly parents, this might take a bite out of your retirement dreams. I’ll discuss long-term care (LTC) and related insurance in a future article, however, it pays to shop around for this type of insurance to cover costs of nursing home, assisted living and in-home care. According to AARP, only approximately 7.2 million Americans have LTC insurance for expenses that are not typically covered by Medicare.
3. Being Debt-Free
If you are debt free – I mean all debt – cars, house, credit cards, boat, etc. , you might be able to retire more easily. You definitely don’t want to be on a fixed income and have to feed the debt monster each month. If you have your debt paid off, you will have more income to allocate to other things that come up such as emergencies and vacations. To help reduce your debt by reducing your expenses, see my historical article. The key is to be goal-driven – to be debt free. Don’t look at debt as a tool – leverage works both ways. In good times, you can get more stuff (bigger house, nicer car, etc.). However, when the lean times come, and they will, be ready to be nimble.
4. Create a Retirement Budget
Aghh...I spent my whole life living on a budget? Are you saying I need one in retirement as well? Yes. Unfortunately, it is needed. Its one of the most effective tools for knowing what you are spending. If you find over time that you are spending too much relative to your savings and retirement income, you will need to figure out how to make more money (higher yielding bonds which carry more risk, getting a part-time job) or reduce your spending.
A budget is important to determine if you can live comfortably on your post-retirement income. For a sample budget, please click here. Add all your income up - your Social Security payments, pension, retirement account distributions, and any other sources of income. Determine your costs such as mortgage, rent, groceries, utilities, insurances (house, car, medical, etc.), gas, entertainment, medical, shopping, etc.
5. Review Your Portfolio
Ensure that you consult your financial advisor to work through tax, investment mix, and goals that very well could change in retirement. Your portfolio will be working hard for you in retirement and you will rely on it to provide you with income and to cover expenses.
One area that you might consider is to review the size of your portfolio, how much growth you expect and consider your estimated spending from your budget. It’s important to build your portfolio in a more conservative manner in retirement primarily as you do not have as many years to recover from market swings.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is intended to provide educational information to readers and in no way constitutes investment advice. Investing in public securities is speculative and involves risk, including possible loss of principal. The reader of this article must determine whether any investments mentioned in this article are suitable for their portfolio, risk tolerance and accept responsibility for their decisions. Neither information nor any opinion expressed in this article constitutes a solicitation, an offer or a recommendation to buy, sell, or dispose of any investment or to provide any investment advice or service. An opinion in this article can change at any time without notice.