Retirement is ideally the most stress-free time of life. You’re now free to relax, play, socialize, travel, and explore everything you never had time for in your working years. However, if not planned and funded appropriately, retirement can turn into quiet the opposite and a real financial nightmare. David Giertz, a 30-year veteran in the progressive financial services industry, shares some important considerations for future retirees. Let’s look to see if you’re ready to retire in 2018.
Do The Math
All other caveats aside, if the math doesn’t add up to your savings being sufficient to support you, then you have a major problem and need to re-evaluate your retirement plan. Sadly, most Americans approaching retirement age are quite shocked to find that the math on their savings simply isn’t sufficient to carry them through the golden years.
One contributor to this problem is that the life expectancy has significantly improved for both males and females over the last decade. People are living longer, and they’re living those years more actively and productively.
Do you have enough money to retire? A good estimate is to figure how much income your various savings options will yield verses a livable withdraw rate.
When we talk about creating retirement income, there are several financial tools available for investment. One of the most common is an annuity. Annuities provide guaranteed income, albeit at a potentially high fee. Contact a creditable insurer or retirement planer to discuss how much income an annuity would produce if you purchased one with some of your retirement savings.
There are various types of annuities available, but certified business coach David Giertz concurs with what most financial planners recommend – a deferred fixed annuity. This type of annuity begins paying you a fixed amount, usually monthly, at a future date specified in the annuity agreement.
There are also several options to figure out if your nest egg will stand the test of time and math. Here are the two most common methods:
1) Four Percent Rule
The percentage-based rule can be used to figure out your retirement savings target. The premise: you will withdraw 4% in the first year of retirement from savings. The next year you’ll increase the withdrawals to meet inflation. The problem is that low-rate markets can skew this rule and leave you blowing through your funds to counter inflation.
Most financial studies suggest this problem can be circumvented by starting out at withdrawing no more than 3% in the first year. Do the math using the 3% rule to determine if your nest egg will hold out for the amount of expectant withdrawals.
2) IRS Required Minimum Distribution (RMD) Tables
This is the preferred method since it’s more responsive to fluctuations in the market. From age 70.5, RMD tables dictate the yearly dollar amounts you must withdraw from tax-advantaged retirement accounts. Calculations rise with age and are based upon average life expectancy.
Use both methods with several withdrawal rate options that are likely to withstand the test of time. Make a retirement budget to see which income projections will allow you to live within your expected lifestyle.
Make A Retirement Budget
Lifestyle changes may be necessary, but it’s important to stay reasonable. Don’t set yourself up for failure by choosing a withdrawal rate that’s not feasible to live within. Don’t forgo including budget points that you know you must have, such as unreasonably figuring that you’ll never buy another gift or will eat a third the cost of your current food expenses. Make sure it’s realistic. Account for all expenses you routinely incur, including housing, utilities, food, vehicle maintenance, travel, healthcare, and so forth.
Research shows that about half of all seniors expecting to spend less during the first two years of retirement actually end up spending more. Six years later, and around 1/3 of seniors are still spending more post-retirement.
David Giertz recommends that working seniors give their retirement income a test run periodically by trying to live completely on the expected monthly retirement income for two to three months every few years leading up to retirement.
Trying to decide if now is the time to retire? If you’ve determined that your investment withdrawals, pension, savings, and/or Social Security check sufficiently covers your cost of living, then 2018 may be your retirement year.
Factor In Your Retirement Plans
How you spend your time in retirement can significantly impact your retirement plan and budget. Are you, for example, going to explore your hobbies at home or are you planning on becoming a jet-setting world traveler? The cost difference in funding the two are quite different.
Maybe you need to extend your working years for extra money, or you could need to re-evaluate your retirement lifestyle to fit your retirement income. Whatever the case, David Giertz recommends to remain realistic about your funds and expectations to ensure retirement success.
Socialization is also a consideration. Even if the math is right to retire, you should consider how retiring would affect your mental and emotional health. Would losing your work environment leave you without necessary social connections? Do you have a strong foundation of friends and family outside of work?
Know Social Security Ins and Outs
While not always the case for people with significant pensions, savings, and/or liquid assets, most retirees heavily rely upon Social Security as a significant portion of their immediate retirement income. If you’re in a position to delay filing, then it’s beneficial to wait until you’re 70-years-old. Waiting past 70 isn’t financially beneficial.
Otherwise, the most important part is that you’re at least full retirement age (FRA.) The criteria for FRA is your year of birth.Those born in 1960 or after must be at least 67 for FRA. It’s 66 if you were born in 1953-1943. You must be at least 62 to collect any SS benefits, even at a reduced rate.
Retiring without meeting your FRA reduces your benefits. You’ll lose 5/9 of 1% of your monthly benefits if you file 36 months or less ahead of FRA. That increases another 5/12 of 1% if FRA is more than 36 months away. This is a considerable reduction over the long run. Someone filing at age 62 who’s FRA is 66, for example, would lose 25% of what their monthly check would be just four years later.
As you can see, when you file for SS retirement benefits can greatly impact your retirement planning and budget.
Realize That Taxes Continue, Even In Retirement
Sadly the end of your career doesn’t signal the IRS to stop calling. Unless in a Roth IRA or 401k, any monies you withdraw from retirement accounts will be taxed as income. Even portions of high-dollar SS retirement checks can be taxed by both the state and federal income tax agencies. Always consider your tax liability and how it can reduce your monthly retirement income
Don’t Forget To Secure Healthcare
Most retirees over 65-years-old are eligible for Medicare. That said, please understand that Medicare part A is hospital coverage, part B is medical coverage, part C is Medicare advantage for hospital and medical, and part D is prescription drug coverage. Typically, part A is the only “premium-free” part. Other parts require you to pay a premium and coinsurance for coverage. In other words, do not mistakenly rely upon “free” insurance coverage through Medicare.
Those under 65-years-old retiring are faced with costly COBRA options from employee insurance or Obamacare subsidy coverage that’s in an it’y state with the repeal of the mandate.
Another option is a HSA, or health savings account, in which funds are dedicated to a savings account specifically for healthcare purposes. This, however, takes years of planning ahead to accumulate funds and can only be utilized for medical purposes.
— David Giertz (@david_giertz) April 10, 2018
Healthcare costs can be significant. Married senior couples with Medigap and Medicare could still need almost $400,000 to have surety that they’ll cover their healthcare costs through retirement, this according to the Employee Benefit Research Institute. If you haven’t figured out a way to fund your healthcare costs, then you’re likely not ready to retire.
Keep Making Smart Moves
Whether 2018 is your year to retire or not, keep making smart moves to protect your retirement funds and income. Most Americans are at least a few years behind in retirement savings, leaving them to work longer or save wiser. If this is your case, don’t panic. Financial planners and advisors can help you come up with practical solutions and income and investment streams.
David has 30 years of experience in the financial world as president of Nationwide Financial’s sales and distribution organization, a certified business coach, the Financial Institutions Bank channel, and various roles within Citigroup. Throughout his roles, he’s consistently leveraged strategy, processes, and innovation to build profitable growth. He holds an MBA from the University of Miami and a BS from Millikin University.