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Stan Corey | February 23, 2022
I have been dealing with the topic of the transition to retirement for the past 25 years. During this time, I’ve worked with clients considering retirement at many different times in their lives. Some have retired at the “normal” retirement age of 65 while others have retired by age 50 or deferred to age 75 and even 80.
I have come to the conclusion that retirement is not about an age or an amount of money; it is about when work – earning an income – becomes optional!
Many other factors may contribute to the decision to retire, like health, parents needing care, wanting to live near the grandchildren, receiving an inheritance, or turning over a new leaf after a life event such as loss of a spouse or surviving a divorce.
Regardless of the circumstances, the one common core item I have found running throughout the transition is the emotional shift from living on earned income to living on all that we have saved up for retirement. We have spent our whole lives saving and investing, contributing to retirement plans, getting kids through college. We have scraped and saved for this moment in our lives.
However, we quickly realize that retirement is not the goal line; it is only the 50-yard line or half-time in our financial lives. Now we will need to start spending the money we have saved, and it can be very scary as we fear running out of money before reaching the end of the game of life.
So, what are some things you can do to reduce the fear and anxiety over retiring?
Think About Your Paycheck
Replace your paycheck by having an amount of money deposited into your bank account from your investments the same time as when you received your paycheck deposit when you were earning a living. If you are receiving a pension or Social Security, they are typically deposited at the beginning of the month so maybe have your deposit from the investment portfolio fall in the middle of the month.
Social Security and the Transition to Retirement
Unless you need it sooner or have poor health, consider waiting until age 70 to start drawing on Social Security. This will give you an increase in the amount of the payment equal to about 8% per year delayed. If your “Full Retirement Age” (FRA) is age 66 and you defer for 4 years, you will increase the monthly amount by 32%. This is not an investment increase; it is an actuarial increase on the retirement benefit.
In fact, if your family history is that no one lives past age 80 then you may want to start at FRA. The break-even point is at about age 82. Therefore, if you or your spouse is in good health (no chronic illness or disease) at age 65, your life expectancy is 21.5 years.
Consider Your Pensions
If you are lucky enough to have a pension, then it will usually start upon retirement. If you do not, then you may want to consider having your own pension. This can be done with either after-tax monies or retirement monies by buying a single premium immediate annuity that guarantees income to you for as long as you live. It may also include a survivor benefit to your spouse for as long as they live.
I would not suggest placing all your available resources in such an account as there is no residual value and no liquidity. It should only be considered as part of the overall structure of retirement distribution.
If you had started an annuity as a deferred annuity and now want to make withdrawals, you can do that and still retain residual value for heirs. There are many different types of annuities. I favor the fixed annuities over the variable annuities due to the high cost of variable annuities and the guarantees of fixed annuities.
Prepare Your Retirement Accounts
Retirement accounts such as a traditional IRA or old 401(k): this type of investment is usually accumulated with pre-tax monies. As such, the IRS wants to collect taxes so they require you to begin withdrawals by age 70 ½, referred to as the Required Minimum Distribution, or RMD.
There are many different types of IRAs so it is important to get professional help if you do not understand the differences as these can make a big difference in your income taxes.
For instance, a Roth IRA has no RMD and is a great asset to pass down to the next generation. If a traditional IRA is transferred down, then the beneficiary will pay the income tax on the distribution. In many cases this could be to someone who is still working and would have a higher tax bracket. A Roth IRA can also be a great resource for lump sum amounts as there is no income tax on the distribution.
Plan for the Possibility of Outliving Your Spouse
Women generally outlive their spouses and about 70% of people in assisted care facilities are women. It is imperative for women to have a better understanding of their financial life early in their marriage and in retirement and not just because of losing their husband through death or divorce.
Do you know what your financial statement shows and where all the financial accounts are located? Do you have a list of the accounts and any associated passwords? If you have not been the one paying the bills, maybe it is time you started!
Don’t Forget Estate Planning
When was the last time your estate documents were reviewed? If it has been more than five years, you should look and make sure they are still what you want to have happen in the event of your incapacity or demise. Estate planning is one of the most important aspects of planning the transition to retirement.
Manage Your Expectations
It is important to have a good understanding of what you believe retirement will be and the understanding of your spouse. Otherwise this can be a significant point of contention. Be sure to have this conversation early in the retirement transition period, or before making the retirement decision.
Long Term Care Insurance
The cost of care is increasing rapidly. I just helped a client’s family place a loved one into a memory care facility at a cost of about $12,000 per month. If you are not married and do not plan to leave an inheritance, then having long term care (LTC) insurance may not be necessary.
However, if you have a spouse and want to try and preserve assets, buying a LTC policy can be very beneficial. It may not cover all the costs but it can greatly reduce the amount of withdrawals from your accumulated resources if care is needed.