Should You Retire in 2018?
Are you considering retirement for 2018? There are several factors you should review and questions you need to answer before you “clock out” for good.
Do you have enough savings to support you?
Before you consider retiring, do the math on how long your savings will last! The majority of pre-retirees in America are underfunded and don’t have nearly enough savings. To decide whether you have enough savings to fund your retirement years, there are a few methods you can use.
Shopping for Annuities: While some annuities come with high fees, they can also provide guaranteed income during retirement. If you want to make sure you don’t run out of cash, see how much an annuity purchased with your current savings (from a reliable insurer) would provide you with retirement income. The type of annuity best suited to retirement planners is typically a deferred fixed annuity, which, starting on some future date that you’ve chosen, will start paying you a fixed amount of money at regular intervals.
Another common method of finding your retirement savings target is using the 4% rule. This rule says you won’t run out of money is you withdraw 4% of your savings in the first year of retirement and increase withdrawals for inflation in subsequent years. Unfortunately, this rule doesn’t hold up in a low-rate market, and a 2013 study found there’s a 57% chance the 4% rule will leave you broke. To make sure this doesn’t happen, start at a 2.5% rate. If that withdrawal rate appears to cover your expenses and keep you from going broke, your nest egg will likely keep you supported.
You can also use the IRS Required Minimum Distribution (RMD) tables. RMD tables specific the amount of money you must withdraw from tax-advantaged retirement accounts each year, starting at age 70 1/2. The IRS withdrawal calculations are based on average life expectancies, and they rise with age. While the IRS tables start at age 70, the Center for Retirement Research used the IRS tables to calculate the appropriate withdrawal rate starting at 65. The CRR recommends this method over the 4% rule because it’s more responsive to market fluctuations.
At the end of the day, it’s better to review your budget and make your plans for retirement by running it through each method and choosing a conservative withdrawal rate. Your budget should account for all expenditures, including housing, healthcare, travel, utilities, food, gifts, and other costs. Use your current spending to get an idea of how much you’ll spend on a fixed income in retirement and make adjustments based on how you plan to change your lifestyle.
How much will you receive through Social Security?
Retiring doesn’t necessarily mean claiming Social Security benefits right away. If you’ll need Social Security benefits, determine how claiming in 2018 will affect the benefits you receive. The key questions if where you’ve reached your full retirement age. Full retirement age varies based on your birth year; it’s 66 if you were born between 1943 and 1954 and gradually moves up to 67 if you were born in 1960 or later. If you retire before FRA, your Social Security benefits will reduce by 5/9 of 1% per month up to 36 months early, and by an additional 5/12 of 1% per month beyond 36 months early. You can claim retirement benefits as early as 62, but your income will be considerably lower than it would be if you waited until full retirement age.
For example, if your full retirement age is 66 and you file at age 62, then you’ll be 48 months ahead of schedule, and thus your monthly checks will be cut by 25%.
(36 months x 5/9 x 1%) + 12 months x 5/12 x 1%) = 25%
Benefits keep going up until age 70 if you delay claiming after full retirement age, and recent research suggests you should wait until 70 to max out your benefits, as Social Security is the optimum source of retirement income: it’s guaranteed for life, and you get a substantial return for delaying benefits. You can use the Social Security Benefits calculator to review your options.
What budget should you set for your healthcare?
If you’re retiring at 65 or later, you’ll be eligible for Medicare. Unfortunately, if you’re counting on Medicare to cover all of your healthcare costs – you’re in the right place. Medicare Pathways can help guide you down the pathway to healthcare that meets your medical and financial needs. Original Medicare Part A and Part B covers most services, but there are many things it does not cover.
It’s important to review all of your options for healthcare. For example, many Medicare eligibles choose to add a Medicare Supplement Insurance plan with their Original Medicare coverage to fill in the gaps left behind. Others choose to enroll in a Medicare Advantage (Medicare Part C) plan that is required to cover everything Original Medicare covers, and some additional care like prescription drugs. For more information on budgeting your healthcare options, give us a call at 866-466-9118 to learn more about the types of plans that may be right for you!
What will you tax situation look like?
Just because you’re no longer a member of the “workforce” doesn’t mean that you’re done with taxes! If you take money out of your retirement accounts, your withdrawals can be taxed as ordinary income, unless your money’s in a Roth 401(k) or Roth IRA. It’s important to calculate what your taxes on your retirement income will likely be and how your budget will be affected by your tax liability. This is especially true as tax reform passed at the end of 2017, and likely changed both your tax rate and the deductions you’re entitled to claim.
You’ll also need to see if your income is high enough that you’ll be taxed on your Social Security benefits. You could be taxed on anywhere from 50% to 85% of your benefits by the federal government, and your state may charge taxes as well. If your tax bill reduces your income substantially, will you still be able to live comfortably on the amount you’ll earn from retirement accounts and Social Security? If not, 2018 may not be your best year to retire.
What will you actually do during your retirement?
Now that you’ve answered the questions regarding your financial and medical options, it’s time to plan for how you’ll spend your retirement! Retiring can be detrimental to your health if it causes you to lose your social connections, so be sure you have a plan to stay connected with friends, family, and your community!
Medicare Pathways provides guidance on health plans that can help cover your community health activities, like discounts on gym memberships and much more. Give us a call today and learn more at 866-466-9118. Calling the number will connect you with one of our licensed sales agents.