For most people, retiring means the end of a paycheck but not the end of an active life. The typical retiree spends 20 to 30 years in retirement and running out of money is their biggest fear. When you retire, how will your lifestyle be affected? Here are some of the things to take into consideration.
Modern retirees face lots of choices that their parents did not have. There is no longer a mandatory retirement age, so the question—when should I retire?—gets more complicated. It’s not unusual to find people with satisfying careers who enjoy doing what they’re doing and interacting with other people at work who want to continue working long past the customary retirement age of 65. Others can’t wait to reach the point in their lives where they have the luxury of deciding how they’re going to spend the day, free of the routine of work. (For more, see: Why It's So Important to Update Your Estate Plan.)
The age at which you apply for Social Security benefits has a big effect on your retirement income. Apply early and you reduce your monthly benefits by 25% to 30%, depending on your age. Wait until you’re 70 and you increase your monthly benefit by up to 32% (8% per year), depending on your age. If you are married, the decisions get even more complicated.
If you are entitled to a pension, the amounts you receive usually depend on your length of service and income during the last few years of your working life. The formula used to calculate the pension benefit can get quite complicated. Those who work for employers whose finances are questionable may want to consider whether they will get the benefits they are promised. Even public employees have to be concerned with the fragile financial state that many municipalities find themselves in. Puerto Rico’s financial problems are largely the result of public employee benefits.
If you are married, you will be asked to decide how much of your pension will go to your spouse if you die first. Once you make a decision about survivor benefits, it’s irrevocable so make sure this is done with great care. (For more, see: How Advisors Can Help Surviving Spouses.)
More and more people go back to work after retirement. Many don’t want to stop working but want to do something different. Others use their skills to become consultants, or turn a hobby into a business. A second career makes a big difference in your retirement lifestyle and income.
As we age, the amount of medical care we receive goes up. The cost of this care has to be taken into consideration. If retiring means that your employer-paid medical insurance coverage ends, the cost of insurance coverage can become a big budget item, especially if you are not eligible for Medicare. Some people with a younger spouse continue to work until both are eligible for Medicare. The Affordable Care Act ensures that people with pre-existing conditions cannot be denied insurance. However, individual policies can easily exceed $1,000 per month and premiums have been rising rapidly.
These are the funds you have saved for retirement: IRAs, 401(k)s, 403(b)s, 457s and individual accounts. These funds are under your control. Most retirees use them to supplement Social Security and pension income. They are the key to determining how well people live in retirement. As they grow in importance, you have to decide if you have the expertise to make appropriate investment decisions. A growing number of retirees have decided that they want to hire a professional to make the day-to-day investment decisions for them and report back on their progress and performance.
Combine these issues with the effects of inflation, market volatility, uncertain investment returns, low interest rates and longevity and it becomes apparent that retirees need to plan. If your retirement is years away, a plan allows you to make mid-course corrections. If you’re already retired a plan can bring peace of mind, allowing you to sleep more soundly and knowing that a lot of the uncertainty has been removed. (For more, see: Why Saving 10% Won't Get You Through Retirement.)