If you are transitioning into retirement or planning to within the next few years, there are many important considerations to take into account.
1. Workplace Retirement Plan. Your last opportunities to contribute to it are coming up, and you must decide when you want to roll it over. If you are retiring in your fifties - whether from a civil service or private sector job – you may benefit from leaving the money in the plan a few more years, as early withdrawal penalties could cut into a plan distribution.
2. Social Security. An important part of income planning for your golden years is when to begin taking Social Security. If you begin benefits at age 62, you will be receiving a reduced benefit, as well as lower future cost-of-living (COLA) adjustments. While it is generally advantageous to delay taking Social Security until a later age, for many this may not be the best option if income is an immediate need or if life expectancy is shorter to the reap the benefits of delaying.
3. Required Minimum Distributions (RMDs). For those approaching your seventies, you must plan for taking Required Minimum Distributions (RMDs) for your non-Roth retirement accounts. These annual distributions begin for the year that you turn 70 ½ and are calculated by dividing the December 31st retirement account value by a life expectancy factor published by the IRS. (1)
4. Health Care. Will your health coverage end when you leave work? If you end your career after age 65, you need to enroll in Medicare within eight months of retiring (or the end of your group health coverage). If you fail to do so, you will have to pay markedly higher Part B premiums than other retirees for the rest of your life. If you aren’t yet eligible for Medicare when you retire, you will need to search for private health insurance until that time arrives.
5. Thinking of Snowbirding? Retirees who want to live in warmer climates for part of the year need to consider some monetary factors before starting out. Property upkeep, for one – Sun Belt homes have lawns and landscaping that grow year-round. Taxes, for another – what do you have to do to qualify for residency in a state with a more favorable tax code?
You should assess expenses pertaining to your northern residence and southern retreat (or RV). The cost of utilities, association fees, and travel may make snowbirding less attractive. It can be fun, but you may want to “rent” the experience before you “buy” it. (2)
6. Stay Invested to Keep Ahead of Inflation. One of the leading threats to the quality of your retirement is also one of the subtlest. You may have heard that inflation is all but absent, but that is not the case – the core Consumer Price Index (minus energy prices) has risen 1.9% in the past year. At some point, the supply glut in oil will disappear and oil prices will rise, driving costs of everything from food to airfares higher.
Even if we have only 2% inflation for the next few years (which may be highly unlikely), inflation erodes the purchasing power of households, most notably those headed by retirees. Due to inflation, the lifestyle that $60,000 bought in 2000 cost $85,000 in 2013.
This underscores the importance of investing for soon-to-be and recently retired Baby Boomers. Allocating a portion of your assets into equities allows for the potential to outgrow inflation, as the possible long term equity returns have historically exceeded annual increases in consumer prices. (3,4)
7. Enjoying Your Retirement. Lastly, a well-planned retirement allows you to take time to relax. After all, you deserve it after working for so many years, and you may want to take time to reflect on what you really want to do next. For some, this may mean traveling. For others, it is enjoying the simple things in life. Either way, it is important to maintain a healthy and engaged lifestyle to make the most out of this chapter in your life.
1 - irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Required-Minimum-Distributions
2 - troweprice.com/ric/ricweb/public/ric.do [2/10/16]
3 - thestreet.com/story/13328137/1/inflation-is-higher-than-you-think-so-fed-should-raise-rates-now.html [10/19/15]
4 - marketwatch.com/story/every-retirees-single-worst-enemy-2015-11-02 [11/2/15]
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Financial Roadmap, Inc. is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.