Answering Five Frequently Asked Questions About Retirement

Retirement is an important milestone in life that requires careful planning and consideration. As people approach this phase, they often have numerous questions and concerns about various aspects of retirement. In this article, we will address five of the most frequently asked questions about retirement to help you gain a better understanding of this significant life stage.

How much money do I need to retire? 

Determining the exact amount of money required for retirement is subjective and depends on various factors, such as your desired lifestyle, healthcare costs, and location. However, a common rule of thumb is to aim for a retirement income that is 70-80% of your pre-retirement income. This may allow you to maintain a similar standard of living as you have in your working years. To calculate this figure, consider your current expenses, estimated inflation, and any additional costs like travel or hobbies. Be aware that the percentage of pre-retirement income you will need could vary greatly based on what sources of income you will have available.  If you have a pension or plan to work in retirement, you may be able to retire with less retirement savings.  Whereas without these income sources, you may need to have more saved in order to maintain your lifestyle.  Retirement age will also most likely play a significant role in determining how much you will need. For example, retiring at age 70, the maximum benefit age for Social Security, may also allow you to retire with less retirement savings. Consult with a financial advisor that specializes in retirement income planning to help you create a personalized retirement strategy.

How should I plan for healthcare expenses in retirement?

Planning for healthcare expenses in retirement is crucial, as medical costs tend to increase with age. According to a recent study by Fidelity, a single person age 65 in 2023 may need approximately $157,000 saved (after tax) to cover healthcare expenses in retirement, while a couple may need approximately $315,000¹.  An amount that could be significantly higher should you choose to retire before Medicare eligibility at age 65 or incur higher than average long-term healthcare expenses. Here are some important steps to consider:

•    Understand Medicare: Familiarize yourself with the basics of Medicare, the federal health insurance program for individuals aged 65 and older. Learn about the different parts (A, B, C, and D) and what they cover. 

•    Estimate healthcare costs: Research and estimate potential healthcare expenses in retirement, including premiums, deductibles, copayments, and prescription drugs. Consider factors such as your health condition, family medical history, and any specific needs.

•    Consider supplemental insurance: Medicare provides essential coverage, but it may not cover all your healthcare expenses. Explore supplemental insurance plans, such as Medigap policies, or Medicare Advantage plans, to help bridge the gaps. Consider the benefits of working with an insurance agent that specializes in Medicare and supplemental insurance plans.

•    Budget for long-term care: Long-term care, such as nursing home or assisted living facilities, can be a significant expense in retirement. Evaluate long-term care insurance options or consider setting aside funds specifically for these potential costs.

•    Maintain a healthy lifestyle: Prioritize your health and well-being by adopting healthy habits, staying physically active, and regularly visiting healthcare professionals. Preventive measures can help reduce medical expenses in the long run.

How do I minimize taxes in retirement?

Minimizing taxes in retirement can help you keep more of your hard-earned money. Here are some strategies to consider:

•    If you are still saving for retirement, evaluate the tax diversification of your current investment strategy. Consider a proactive investment strategy that takes into consideration the various types of accounts that are available and the respective tax implications of these various account types.

•    Coordinate withdrawals: Once you are retired, coordinate your withdrawals from different retirement accounts to optimize tax efficiency. By strategically balancing taxable and tax-free income sources, you can potentially reduce your overall tax burden.

•    Strategic Roth conversions: Consider converting some of your traditional retirement account funds to a Roth IRA. This can help reduce future RMDs and provide tax-free withdrawals in retirement. However, keep in mind that Roth conversions have tax implications, so it's important to consult with a financial advisor or tax professional.

•    Understand RMD rules: Required Minimum Distributions (RMDs) are minimum amounts that the IRS requires you to withdraw from certain retirement accounts, such as traditional IRAs and 401(k)s.  The age at which you must begin taking your RMD will be based on your year of birth, but currently, no later than age 75 due to the recently enacted SECURE Act 2.0.²

•    Charitable contributions: If you're philanthropically inclined, consider making Qualified Charitable Distributions (QCDs) from your IRA. QCDs allow you to directly donate funds from your IRA to eligible charities, satisfying your RMD requirements and potentially reducing your taxable income.

Will Social Security be enough to live on in retirement?

Social Security will most likely play an important role in your retirement income strategy. For many, Social Security provides the only income source in retirement that is guaranteed for life and provides annual cost of living adjustments.  However, it most likely will not be enough to sustain your lifestyle throughout retirement. Understanding filing strategies is a key component in planning for a successful retirement. 

Here's what you need to know:

The earliest age you can start receiving Social Security retirement benefits is 62. However, your monthly benefit amount will be permanently reduced compared to starting at your full retirement age (FRA). Your FRA is based on your birth year and ranges between 66 and 67. Delaying benefits beyond your FRA can result in increased monthly payments.

Consider these strategies when deciding when to start Social Security:

•    Early retirement: If you need income as soon as possible or have health concerns that may affect your life expectancy, starting Social Security at 62 could be an option. However, keep in mind that your benefit amount will be permanently reduced.

•    Full retirement age: Claiming Social Security at your FRA will result in receiving your full benefit amount without any reduction. This may be the optimal choice if you have other sources of income or are not in immediate need of Social Security.

•    Delayed retirement: Delaying Social Security beyond your FRA can result in increased monthly benefits. For each year you delay, your benefit amount increases by a certain percentage until you reach the maximum at age 70. This strategy can be advantageous if you have longevity in your family or have other sources of income to sustain you until you claim.

•    Spousal benefits: If you are married, you may be eligible for spousal benefits based on your spouse's earnings record. Understanding the rules and potential strategies for maximizing spousal benefits can help optimize your overall Social Security income.

•    Survivor benefits:  Social Security survivor benefits are available to the spouse or ex-spouse (if certain criteria are met), and dependent children of a deceased worker who qualified for Social Security benefits. Survivor benefits are generally based on the deceased worker's earnings record. The surviving spouse can receive up to 100% of the deceased spouse's benefit amount, depending on their age and circumstances. Just like with individual Social Security benefits, there are strategies to maximize survivor benefits.

•    Consultation with financial professionals: Given the complexity of Social Security claiming strategies and the impact on your overall retirement plan, it's recommended to consult with a financial advisor or specialized Social Security planner. They can provide personalized advice based on your unique circumstances.

How can I make my retirement savings last? 

To make your retirement savings last, it is first essential to have a solid financial plan in place. Consider these strategies:

•    Create a realistic budget: Track your expenses and adjust your spending to align with your income in retirement.

•    Maintain a diversified investment portfolio: Spread your investments across different asset classes to manage risk and potentially increase returns.

•    Regularly review and rebalance your portfolio: As you approach and enter retirement, adjust your asset allocation to reflect your changing risk tolerance and income needs.

•    Consider longevity: Plan for a retirement that could last several decades. Account for healthcare costs, long-term care insurance, and potential inflation.

•    Stay informed: Keep up with financial news, tax laws, and investment trends. Regularly review your retirement plan and make adjustments as necessary.

In Conclusion:

Retirement planning can be complex, but by addressing these frequently asked questions, you can gain clarity and make informed decisions. Remember, each person's retirement journey is unique, so it is advisable to consult with financial professionals who can provide personalized guidance tailored to your specific needs and goals. By starting early, staying proactive, implementing tax-saving strategies, and evaluating strategies that can optimize Social Security, you can set yourself up for a financially secure and fulfilling retirement. 

1. www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-cost
2. www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds