Prepare for Retirement

Retirement planning is not something most people look forward to, but it is a necessary fact of life. If you don't want to work during your retirement years, you need to ensure that you have enough retirement savings to last, and that takes careful planning. By determining how you will need to save for retirement, you'll be able to set your goals and not worry about the future.

Steps

Determining How Much Money You Need to Save

1. Figure out how much you need to spend. Many financial advisers use a rule of thumb for needed retirement income of 60 to 66 percent of current pretax income. However, this estimate is just a rule of thumb for an average case. To estimate your retirement expenses yourself, begin with a baseline, and then make adjustments. For your beginning baseline, start with your current monthly income. This will give you an idea of how much you currently spend each month. Then deduct expenses that you currently have that will disappear after retirement.
   • For example, suppose your current monthly income is $5,000 after taxes. Assume that your monthly expenses equal your monthly income, so begin with this number.
   • Deduct your savings. After retirement, you won’t be saving anymore. Suppose you save $500 each month. Deduct that from your total. <math>$5,000 - $500 = $4,500</math>.
   • Deduct how much you’ll save in living expenses if your home is paid off by the time you retire. For example, if you're paying $1,000 per month towards your home and it is paid off, you no longer have to pay that amount in retirement.<math>$4,500 - $1,000 = $3,500</math>.
2. Consider changes in your lifestyle. If you are going to travel, then some expenses might increase. However, you might also decide you need to spend less on commuting, clothing, and groceries. Suppose you can reduce your monthly transportation, grocery and clothing budget by $300 per month. But, you plan to take one large trip each year for $5,000, so you plan to save $450 per month for this trip. The net change means adding $150 per month to your budget. <math>$3,500 + $150 = $3,650</math>.
3. Calculate your annual income gap. Determine how much income you will receive from your current retirement savings, including Social Security, your pension and any retirement accounts you already have. Compare that monthly income with your estimated monthly expenses. Multiply that number by 12 to get your yearly income gap.
   • Using the above example, you estimated that you will spend $3,650 each month in retirement.
   • Suppose you know you will receive $1,100 from Social Security and $1,250 per month from your pension. Your monthly income will be <math>$1,100 + $1,250 = $2,350</math>.
   • Your income gap is <math>$3,650 - $2,350 = $1,300 *12 = $15,600</math>.
4. Calculate how much you will need to save. Assume you will want to withdraw 4 percent from your retirement savings per year. Multiply your annual income gap by 25 to estimate 25 years of living past retirement. This will tell you how much more you need to save between now and retirement in order to have enough.
   • In the above example, your annual income gap is $15,600.
   • Multiply this by 25. <math>$15,600 * 25 = $390,000</math>.
   • You need to save an additional $390,000 using retirement accounts such as a 401(k) or IRA.
   • These numbers are rough estimates and presume no draw down of principal after retirement.
   • You may have to adjust your calculations to include more years of retirement if your spouse is much younger than you are.
   • Another option is to purchase a lifetime annuity. These annuities can be purchased for a variety of amounts that provide different payouts as income each month or year for life.
   • For example, an annuity to fill your $15,600 gap over your 25-year retirement would likely cost you about $160,000.

Collecting Social Security

1. Decide when to apply for Social Security benefits. The age at which you begin to collect Social Security benefits affects the percentage of benefits you will actually receive. Choosing the optimum age at which you should apply for benefits depends on many factors. Consider your life expectancy and financial picture to decide how long to wait.
   • Waiting until full retirement age allows you to collect 100 percent of your Social Security benefits. If you were born before 1938, full retirement age is 65 years old. For those born in 1938 and after, full retirement age can be up to 67 years of age.
   • To determine your full retirement age, refer to the Social Security Administration’s retirement chart at https://www.ssa.gov/planners/retire/agereduction.html.
   • If you can wait until age 70 to collect Social Security, you can collect an even higher monthly check.
     • For example, persons born after 1943 earn an increased benefit of 8 percent per year of deferral.
   • You can begin collecting Social Security as young as age 62. However, you will receive a permanently reduced amount. If your full retirement age is 67 and you begin collecting at age 62, your benefit amount will be reduced by 30 percent.
   • If you have other financial resources, it makes sense to delay collecting Social Security benefits until you are of full retirement age.
   • If you will have high expenses in your retirement, such as if you devote much of your retirement income to an entrepreneurial goal or if you are in poor health, it may make more sense to begin collecting Social Security benefits at a younger age. This makes sure that you have a steady enough income through this time to support your living expenses.
2. Apply for benefits. Apply for your Social Security Benefits three months before you want them to begin. You can choose to begin collecting Social Security before you stop working. If your full retirement age is over the age of 65 and you want to wait to apply for Social Security, you should still apply for Medicare three months before your 65th birthday.
   • You can apply for retirement benefits or Medicare online at https://secure.ssa.gov/iClaim/rib.
   • To apply by phone, call 1-800-772-1213 or TTY 1-800-325-0778.
   • To apply in person, visit your local Social Security office. To find your local office, visit the website https://secure.ssa.gov/ICON/main.jsp and enter your zip code.
   • If you live outside of the United States, contact the nearest Social Security office, U.S. Embassy or consulate. You can find the contact information by visiting https://www.ssa.gov/foreign/ .
3. Coordinate benefits for your spouse. If you have a spouse who has not worked enough to qualify for their own Social Security benefits, they may be able to qualify for spouse's benefits. These benefits follow the same age rules as regular benefits. That is, a qualifying spouse must be at least 62 years of age and will receive benefits at that age at a lower amount than they would at their full retirement age. Former spouses (from divorce) who were married to you at least 10 years may also be entitled to spouse's benefits.
4. Provide the required documents. When you apply for Social Security benefits, you will need to provide documents to prove your identity. The documents must be either original or certified by the issuing office. You can mail them or personally bring them to your local Social Security office. The documents will be copied and returned to you.
   • If you don’t have all of the required documents, the people in the Social Security office can help you to get them.
   • You will need your Social Security number.
   • Have your birth certificate from the state where you were born.
   • Bring your W-2 forms from your last year of employment.
   • If you were in the military, bring your military discharge papers.
   • If your spouse or children are applying for benefits, bring their birth certificates and Social Security numbers.
   • If you were not born in the United States, bring proof of U.S. citizenship or lawful alien status.
   • Provide the name of your bank and bank account numbers so your funds can be directly deposited into your account.
5. Notify the Social Security Administration (SSA) of any changes that affect your benefits. If any circumstances arise that affect your ability to collect your benefits, you must immediately notify the SSA. These changes include a change of address, marital status or direct deposit accounts. Also, if your citizenship status changes or you are leaving the United States for more than 30 days, you must notify the SSA. Finally, the SSA must be made aware if you are convicted of a criminal offense, become unable to manage your funds or die.

Affording Healthcare in Retirement

1. Enroll in Medicare when you turn 65. Medicare is health insurance from the U.S. government for people 65 and older. Enroll by visiting the Social Security website at www.socialsecurity.gov or by calling 1-800-772-1213. If you want your coverage to start the month you turn 65, enroll three months before your 65th birthday. Medicare has several parts.
   • Medicare Part A is hospital insurance that covers your inpatient care in a hospital. It is free for most people 65 and older.
   • Medicare Part B covers doctor’s visits, outpatient care and other services not covered by Medicare Part A. You have to pay a premium for Medicare Part B. It is based on your annual income. As of 2012, the premiums ranged from $99.90 to 319.70. The premium is deducted from your monthly Social Security check.
   • Medicare Part C is the Medicare Advantage Plans. This is insurance provided by a private company that contracts the Medicare to provide you Medicare Part A and Part B coverage. It also usually provides prescription coverage. You pay a monthly premium that varies depending on the plan you choose.
     • If you have a Medicare Advantage Plan, you don’t need a Medigap policy.
   • Medicare Part D is prescription drug coverage.
2. Purchase Medigap insurance. Some people choose to purchase an additional health insurance policy to cover anything not covered by Medicare. These expenses include co-pays and annual deductibles. You can purchase Medigap insurance from a private health insurance company.
   • You can choose from 12 different Medigap policies. They are known as Medigap A through F. Medigap A is the most basic, and each subsequent policy offers more coverage.
   • If you are married, you and your spouse must each purchase a Medigap policy.
3. Save money to pay for healthcare in retirement. When you reach 65, you will be eligible for Medicare, but this doesn’t cover everything. You will have to pay a premium for some of your Medicare coverage, and you will also likely want to purchase Medigap insurance. In addition, you will have to pay out of pocket for anything not covered by your insurance, such as co-pays and deductibles. Fidelity Investments estimates that a retired couple will need to spend $240,000 of their own money to cover 20 years of healthcare expenses.

Investing in Retirement Plans

1. Compare pension and defined contribution plans. Pensions are defined benefit plans, meaning that they provide you with a set amount each month in retirement. Other retirement plans, like 401(k)s, are defined contribution plans which only pay out money that has been put into the account over the years. These plans may also allow you to pick your own investments. The amount distributed to the plan holder depends on how much they want to withdraw.
   • In other words, pension plans place the investment risk on the plan provider, whereas defined contribution plans place that risk on the plan holder.
2. Find out if your employer offers a pension plan. A pension plan is a retirement account provided by your employer. It pays out a fixed amount when you retire. The amount it pays is based on your salary and how long you worked for your employer. A pension is a defined benefit plan. This means that your employer automatically enrolls you in the plan. You may need to remain employed for a certain amount of time, such as a year, before you qualify for enrollment. Your employer makes all of the investment decisions, usually through an investment firm.
3. Learn about your employer’s vesting schedule. Vesting means acquiring ownership of your benefits. You may need to work for a defined number of years before you become fully vested.
   • Cliff vesting means that after a pre-determined number of years of continuous employment, you own 100 percent of your pension. However, if you leave before you become vested, you forfeit any pension that has been saved for you.
   • Graded vesting means that after a pre-determined number of years, you own a certain percentage of your pension. The percentage you own increases incrementally the longer you remain employed by your employer. After a certain number of years, you become 100 percent vested.
   • Keep your employer’s vesting schedule in mind if you are considering a career change. Unlike other kinds of retirement accounts, you may not be able to take your pension with you if you leave your job. The amount of the pension you own when you leave your job depends on your employer’s vesting schedule.
4. Access your pension benefits. You cannot access your pension benefits until you reach retirement age. The retirement age is defined by your pension plan. Typically, you must be 65 years old. Some pension plans allow you to begin collecting benefits when you are as young as 55 years of age or in the event of a disability.
   • You may be able to start collecting your pension benefits before your retirement age. However, you will not receive 100 percent of your pension if you choose this option. Ask your employer to explain how your benefits vary depending upon the age at which you begin collecting.
5. Decide how to collect your pension benefits. You can choose between a lump-sum payment or monthly annuity payments. The option you choose depends on how much money you need per month. Your comfort level with managing the responsibilities of a large sum of money also matters.
   • If you aren’t an experienced investor, you may feel more comfortable with choosing to receive steady payments from your pension plan.
   • If you choose a lump-sum payment, you must understand how to budget it wisely and how to invest it so it continues to grow.
   • A lump-sum payment may be taxed unless it is rolled into an individual retirement account (IRA).
6. Manage your lump-sum payment. If you choose to receive a lump-sum payment, you may be able to enjoy certain advantages. With the help of a trusted financial advisor, you can plan to invest the money and leave it to your heirs. However, you must also consider the responsibilities involved.
   • With a lump-sum payment, you don’t have to worry about the financial health of your employer. If your company goes out of business, you don’t have to worry that your pension benefits will go away.
   • Invest your lump-sum payment to allow it to continue to grow. You can put it into an Individual Retirement Account (IRA), and put a portion of into an immediate annuity that pays you a monthly income. This way you can enjoy a steady monthly income while allowing part of your pension to continue to grow.
7. Pay taxes. Your pension benefits may be subject to state and federal income taxes. It depends on how your employer set up the plan contributions. Generally, the taxable portion of your pension income is taxed at the same rate as your ordinary income.
   • The IRS applies separate rules for “qualified” and “non-qualified” pension plans.
   • The “General Rule” applies to “non-qualified” plans. A “non-qualified” pension plan does not get favorable tax treatment. Contributions made by your employer or you do not get taxed. But any return on the investment does get taxed in the year in which you receive it.
   • The “Simplified Rule” applies favorable tax rates to “qualified” pension plans. These are plans that accept pre-tax contributions. With these plans, the benefit is fully taxable in the year in which you receive it. However, chances are that your tax bracket will be lower when you retire than it was when you were working. Therefore, you won’t pay as much in taxes on this income.

Saving with Retirement Savings Accounts

1. Open a defined contribution plan with your employer. Depending on the type of company for which you work, your employer may either offer a 401(k) or a 403(b) plan. You may be automatically enrolled in this type of plan and have employer matching (where your contributions are matched by your employer), depending on your employer's policies. These accounts are separate from individual retirement plans like IRAs or Roth IRAs, which do not involve your employer.
   • Contributions are made pre-tax. This means you only pay income taxes on the portion of your salary that you did not contribute to the retirement account.
   • The funds you contribute to the account are then invested to allow them to grow. Your employer may offer you a default investment. Or, you may be able to choose how to invest the money.
   • Your employer may also offer a matching program. This means they may match your contributions up to a certain amount.
   • You must comply with the limits for contributions. The contribution limits depend on your age and marital status.
   • As of 2015, for those under the age of 50, the maximum an individual can contribute is $18,000 per year or $1,500 per month. Couples can contribute up to $36,000 per year.
   • Those over the age of 50 can contribute up to $24,000 per year per individual, or up to $48,000 per year for a couple.
   • You pay income taxes on the money when you collect it during retirement.
2. Open a traditional Individual Retirement Account (IRA). This is a bank account that allows you to save money for retirement in a tax-advantaged way. Also, age and the amount of contributions you are already making to retirement accounts at work affect the tax advantages of your IRA account.
   • With a traditional IRA, you may be able to deduct contributions to your IRA on your tax return.
   • A Rollover IRA is funded with money from a 401(k) or 403(b) from a previous employer.
3. Open a Roth IRA. The tax advantages for which your IRA qualifies depends on the type of IRA account you open. With a Roth IRA, you make contributions to the retirement account post-tax. The money then grows tax-free over time. This means that when you withdraw the money during retirement, you don’t pay any taxes on it, but you cannot deduct contribution from income as made.
4. Open a Health Spending Account (HSA). An HSA account allows you to save for certain kinds of expenses, such as doctor visits, prescription medications, dental and eye care and related costs. Then, these expenses become tax deductible when you are preparing your annual tax return. Unlike other kinds of retirement accounts, you can use the money before you retire. The funds roll over from year to year, and you must only use them on healthcare-related expenses. However, once you are 65, you can withdraw the funds and use the money for anything.
   • The maximum annual contribution is $3,350 for an individual or $6,650 for a family. The amount increases by $1,000 if a family member is 55 years of age or older.

Deciding Where to Live

1. Choose the right time to move. Downsizing is a part of many people’s retirement plan. However, leaving the family home may also require leaving behind a community and connections that are important to you. Picking the right time to leave your family home is a personal decision. For some, the change happens when both partners in a marriage are still alive and want to spend time together in a different place. For others, the death of a spouse prompts the decision to move. When you decide that the time has come to look for new housing in retirement, consider not only your budget but also your lifestyle, the proximity to your family and the status of your health.
2. Consider your health. If you are in good health, you can choose to live independently. However, you must accept that changes in your health are an unavoidable part of aging. Your health status can change gradually, or you may experience a sudden decline in health. If you have enough money, you can stay in your home and arrange for professional caretakers to help you. If not, you may have to arrange to either live with a family member or move to a facility where you will be cared for.
3. Decide on a living arrangement. Retirees have many different kinds of housing options. Each has its own advantages and shortcomings. Choose your living arrangement based on your needs, lifestyle and family circumstances.
   • Staying in your family home is one option to consider. If it’s not too big for you to manage, it might be the best place for you because you are already connected to the community. To make this work, you may need to make plans to get help with home maintenance. Also, down the road, you may need to arrange for home health care.
     • If you stay in your home and have significant equity in that home, you may be able to get a reverse mortgage. This loan pays you for the equity in the home. It is only available to those over the age of 62.
   • Moving to a townhouse or condominium community is an option if you don’t want to have to worry about property maintenance. You can choose a mixed-age location or a 55-and-older community, depending on your preferences.
   • Retirement communities are independent living quarters where you are provided with amenities such as chef-prepared dining, inside and outside property maintenance and a 24-hour nursing staff.
4. Contemplate the consequences of moving to a remote locale. When you were younger, you may have dreamed of retiring in a tropical paradise. However, actually doing this may isolate you from people you really need in retirement. Think about the effect of detaching from your community connections and family ties on a permanent basis. This is an even bigger consideration if you are single. If you can afford it, consider purchasing a vacation home where you can live for part of the year. This way, you can have the best of both worlds.
5. Factor in your budget. Where you end up in retirement will depend largely on your net worth and your monthly income. Retirement communities, townhouses, and vacation homes are expensive. So are in-home personal care and skilled nursing services. If you haven’t already done so, create a monthly budget. Begin to plan for the long-term and think about how you are going to support yourself physically and financially as you age. Enlist the help of you children and other family members in making these decisions.

Preparing Emotionally for Retirement

1. Anticipate the emotional impact of giving up your career. If you are someone who felt defined by your career, you may experience a significant sense of loss upon your retirement. Also, the thought of somebody replacing you at work can make you feel unimportant. It can be difficult to validate yourself without the connection to a career. Over time, you may begin to feel depressed or anxious, and you may even begin to second-guess your decision to retire.
   • Build a new identity for yourself by using your time to find meaningful ways to connect with other people and use your talents in a positive way.
   • Some retirees find second “careers,” either paid or on a volunteer basis, that they find very gratifying.
2. Adjust to spending more time with your spouse or family. When you are both working full time, you and your spouse may have become accustomed to your independence from each other. The changes to your daily routine in retirement may cause you to feel you’ve given up some of this autonomy. Remember that with time you will learn to adjust to spending more time at home with your spouse. However, it’s important to schedule some activities apart pursuing your separate interests.
3. Decide how you will structure your days. Think about how many hours per week you devote to your job. Not just the 40-hour work week, but also commuting and spending time at home getting ready for work. All of these hours will be free during your retirement. Plan how you will spend that time being productive to avoid boredom.
   • Do volunteer work. Many people feel find fulfillment by devoting time to meaningfully giving back in some way.
   • Spend more time being active. Participate in outdoor activities that you enjoy such as golf. Exercise frequently. The physical activity will have an emotional and physical benefit.
   • Plan to travel. Plan to visit children and grandchildren who do not live nearby. Schedule vacations to places you’ve always wanted to see.
4. Find other sources of social interaction. Some people are homebodies and relish the idea of spending time on their own at home. Others are social butterflies and thrive on being around other people. Whichever you are, you will need to schedule activities that give you social interactions. Joining clubs or groups, taking classes or getting a part-time job can provide you with the relationships you need to feel vital.

Working in Retirement

1. Extend your current employment. According to a study, nearly 40 percent of Americans age 55 and older are working. In fact, workers aged 55 and older accounted for virtually all of the workforce growth in the United States between 2007 and 2014. If you are physically still able to work, consider extending your current employment as long as you can, even if you qualify for retirement. Doing so will help you save even more for your eventual retirement.
2. Start a new career after retirement. According to a study done by Merrill Lynch in 2014, nearly 40 percent of Americans age 55 and older are working. In fact, workers aged 55 and older accounted for virtually all of the workforce growth in the United States between 2007 and 2014. Nearly 60 percent of retirees venture into a new line of work after the age of 55. Also, working retirees are three times more likely to be entrepreneurs than their younger counterparts.
   • Delay tapping into your nest-egg. Some people choose to continue working for financial reasons. For example, many companies have eliminated pensions. Also, recent economic uncertainty has eaten away at many people’s retirement savings.
   • In addition, if your full retirement age for Social Security is 67, you may choose to continue working until you can collect your full benefits.
   • Stay mentally active. Choosing to work in retirement isn’t all about the money. It is a way for people to stay mentally active as they age. Others are motivated by increasing life expectancy, which means their retirement may last 20 years or more. They are therefore motivated to find greater purpose, social connections and fulfillment.
3. Stay within the income limits for Social Security. If you sign up for Social Security benefits before your full retirement age, you will likely have your benefits withheld while you are still collecting a salary. As of 2009, if you earn more than $14,160, you must give $1 back to Social Security for every $2 you earn. If you are of full retirement age, the limit is higher. As of 2009, those at full retirement age could earn up to $37,680 and still collect Social Security benefits without a penalty.
4. Estimate the effect on your pension benefits. Most defined-benefit pension plans are calculated based on a pre-determined number of years. If your tenure with the company exceeds that number of years, you won’t get any additional pension benefits. Also, remember that your pension benefit is going to be based on your income for the last few years you worked. If you work reduced hours in your later years, your lower earnings could reduce your pension benefit.
5. Delay enrolling in Medicare Parts B and D. If you are still covered under your employer’s health insurance policy, don’t pay the premiums to also enroll in Medicare Parts B and D. That would be double-paying for health insurance. Also, if you are enrolled in Medicare, your company’s health insurance plan is going to try to make Medicare your primary insurance. This means you’ll be responsible for the co-pays and deductibles stated in your Medicare plan, which may be higher than those stated by your company’s healthcare plan.
6. Calculate the impact on your income tax. If you have already started to receive Social Security benefits or are collecting retirement income from a pension or an IRA, continuing to earn a paycheck on top of these income streams may bump you up into the next tax bracket. This could cost you thousands of dollars in taxes. If you are going to be receiving distributions from a 401(k), you can delay the payments until after you stop working. But, if you have a traditional IRA, you must start receiving payments once you turn 70 ½, even if you are still working.

Tips

• You should consider saving for retirement not only during the prime of your life but also after retirement. Investing when retired ensures that you have a steady flow of income throughout your life.
• If you plan to retire early, you'll need to craft an investment plan based on your current age and the age at which you plan to retire. For example, you'll need a different approach if you want to retire at 50 than you would if you want to retire at 40.

References

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Quick Summary

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See also

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• Use Life Insurance in Your Retirement Planning
• Transfer Retirement Funds to a Roth Ira
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• Retire from a Job You Love
• Prepare for Early Retirement
• Prepare for Retirement in Your 20s
• Plan for Long Term Care

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• Calculate How Much Money You Need to Retire