The age of 65 used to be the common number at which people retired, but times have changed and even the Social Security Administration (SSA) has decided to increase the age at which full retirement benefits are available. With the shift from defined-benefit plans to defined-contribution plans and many savings programs not producing projected returns. This could mean many individuals may not only need to postpone the date at which they start to receive Social Security and other retirement benefits, but they may also have to live a retirement that is quite different from the one they envisioned. Even for those who are financially secure, reaching age 65 does not always mean time to retire, as many 65-year-olds love their jobs and want to continue working.
Determine Your Readiness
If your employer's policy is to offer retirement at age 65, consider whether you are really ready to retire from a psychological and financial perspective. If not, consider whether you want to ask your employer to allow you to work a few more years, or if you prefer to be hired as a consultant. You want to do this at least a year before you reach age 65, as some employers start the retirement process early. Many employers are now focusing on hiring and retaining employees who are experienced and 'know the business' to strengthen their intellectual banks.
Staying on as a salaried employee not only means that you continue to receive a steady income, but also that if your employer has a health plan, you will continue to receive health coverage and other privileges offered by the employer. On the other hand, providing consulting services offers you more flexibility and could allow you to have more of a working-retirement, thereby enjoying both options at the same time.
Most retirees who have saved up for many years feel that reaching retirement age means it's time to enjoy the fruits of their labor. While that is a fair concept, many go overboard and spend it all in a few years on a lifestyle that is relatively lavish compared to their pre-retirement lifestyles. To make sure you do not fall into this category, it is wise to budget your expenses. While budgeting, be sure to include non-traditional expenses that you plan to incur. This will help you to make a realistic determination of whether you can afford to incur future expenses. If you are no longer working, a budget is even more important, as your income will likely come from your savings, Social Security and any pension balance you may have.
Determine the Best Time to Take Social Security
Social security is usually included in an individual's financial projections for retirement. One key decision when factoring Social Security into your equation is to determine whether you will receive full or reduced benefits. If you were born before 1938, you are eligible to receive full retirement benefits from the SSA at age 65. If you were born in 1938 or afterward, your full retirement is determined by how long after 1937 you were born. Please see the following table for details.
|Age To Receive Full Social Security Benefits|
|Year of birth||Full retirement age|
|1937 or earlier||65|
|1938||65 and 2 months|
|1939||65 and 4 months|
|1940||65 and 6 months|
|1941||65 and 8 months|
|1942||65 and 10 months|
|1955||66 and 2 months|
|1956||66 and 4 months|
|1957||66 and 6 months|
|1958||66 and 8 months|
|1959||66 and 10 months|
|1960 and later||67|
|NOTE: People who were born on January 1 of any year should refer to the previous year.|
If you take Social Security benefits before you reach your full retirement age, your annual benefits will be lower than if you waited until you reached full retirement age. Furthermore, if you do not need the payments when you reach full retirement age, it may be wise to wait until you do. The longer you wait, the higher your Social Security payments are projected to be.
To get a complete understanding of your Social Security benefits, including determining how much you are projected to receive, visit the SSA website.
Sign up for Medicare
Medicare can be used to cover certain medical-related expenses instead of using your savings to cover those amounts. Medicare provides hospital insurance, for in-patient care and certain follow-up care, and medical insurance coverage for physician services that are not covered under the hospital insurance. Medicare is available to individuals who are age 65 and older. (The age can be younger for individuals who are disabled or have permanent kidney failure.) The medical portion of the insurance is available at a premium and is optional. Therefore, if you are covered under a health plan at work, you may not need the medical portion; or you can compare the cost and features of both and choose the one that is most suitable. The hospital insurance is available at no additional costs to you, as you have already paid for it as part of your Social Security taxes while you were working.
Even if you will not retire at age 65, you may still want to consider signing up for Medicare, as it may cost you more if you sign up later.
Use Your Home for Income
If you own a large home, it may be time to consider whether you should move to a smaller home that is less costly to maintain and/or to an area where the cost of living is lower. Selling your house could provide some additional funds to add to your retirement nest egg. If you are not willing to move or sell your home, but need additional income, consider whether a reverse mortgage is a suitable option for you. Under a reverse mortgage program, the lender will use the equity in your home to provide you with tax-free income. Before applying for a reverse mortgage, be sure to ask as many questions as possible, including how much fees will be incurred, the terms of the mortgage and your receipt-of-payment options.
Managing Your Income
If you need to take income from your savings to finance your retirement, take steps to ensure that you minimize taxes and maximize what you get to keep. Your unique financial profile will determine the most opportune time to use certain types of income, but from a general perspective, withdrawals from tax-deferred accounts such as Traditional IRAs and employer-sponsored (tax-deferred) plans should occur during the years when your income tax rate is lower. This will help to minimize the amount of income tax you owe on those amounts. Of course, if you are of required minimum distribution (RMD) age, you must satisfy your RMD amounts from those accounts regardless of your tax rate.
The Bottom Line
You will likely read much about what to do about retirement and how to manage your income. One of the best rules is to remember that there is no one-size-fits-all solution. As such, it is very important to work with a financial planner and/or retirement counselor in order to design a solution that is ideal for you. It always important that you start planning for retirement as early as possible and that you rebalance your investment portfolio as often as is determine necessary by your financial planner.