Whether retirement is on the horizon or decades away, it's never too early to start securing your financial needs for your golden years. The best-laid retirement plans can easily go astray due to health or family situations. In fact, the average reported U.S. retirement age is 61, according to Gallup.
The key to positioning yourself for a secure retirement is a planning process. When you follow a defined process, you know what to do and when to do it. That creates more confidence around your retirement plans, making it easier to accomplish the tasks involved.
Retirement is a journey, not a destination. It is one that must be navigated successfully over decades. In order to do that, you must allocate your assets appropriately to generate sufficient income and provide for increasing health care needs as you age. To accomplish those tasks, consider simplifying your retirement finances and collaborating with a financial adviser experienced in retirement income distribution planning.
If you're like most Americans, your retirement income will come from four sources:
- Retirement investments
- Social Security
- Property, including rental property and farmland
Merely possessing those assets doesn't mean you are ready for retirement. You must leverage those sources of potential income in the most appropriate manner.
That includes deciding on the best ways to diversify your retirement investments to generate the ongoing income you need. Income could come from corporate dividends, bond interest or an ongoing annuity payout, depending on your risk tolerance, the size of your investment portfolio and your expected lifespan.
Protecting that stream of income with guaranteed* sources of income helps ensure that you don't run out of money as you get older. Don't make the mistake many do, which is underestimating your life span. One in four 65-year-olds will live past age 90. The average 65-year-old man will live until age 84.3, while the average 65-year-old woman will live until 86.7, according to Social Security statistics.
Providing for health care expenses
The average 65-year-old couple is likely to spend $404,253 on health care costs in retirement. While Medicare provides coverage for hospitalization and certain other expenses, it doesn't provide blanket coverage by any means.
In fact, premiums for Medicare are deducted from Social Security, and Medicare doesn't cover expenses such as:
- Hearing aids
- Dental care
- Long-term care
Health care expenses are just one reason why guaranteed income in retirement is so important. When you have sufficient income to cover fixed and discretionary expenses, you can relax and enjoy your retirement.
Steps for retirement success
With that in mind, here are six steps that will help position you for a secure retirement.
1. Roll over your 401(k)
A defined benefit plan held with an employer, such as a 401(k) or an IRA, is an essential facet of most workers' plans for retirement. However, by the time you reach retirement, it is likely that you and your spouse -- if you have one -- have changed employers numerous times, leaving a trail of retirement accounts with different providers.
An essential part of preparing for retirement is rolling over all of your 401(k)-type retirement accounts into an IRA. This will give you a more holistic view of your retirement investments and make it easier to position these assets for the ongoing income you need.
2. Manage Medicare
On average, you should only expect Medicare to cover about half of your health care expenses in retirement. To avoid delayed benefits or extra fees, you generally must sign up for Medicare benefits during the seven-month period around your 65th birthday.
An exception to enrolling in Part A may be if you are still working and have employer health coverage that takes the form of a high-deductible plan and a health savings account. Or even for Part B, if you continue to work past age 65 and have group health insurance from an employer for whom you or your spouse is still working, you may be able to delay signing up for Part B without penalty. The size of your employer can determine whether you can delay signing up. If your employer has fewer than 20 employees you should sign up when you're first eligible -- if it has 20 or more employees, you may be able to wait. Be sure to talk to your financial professional to know what to plan for and expect.
One powerful tool that can help make up the difference is a Health Savings Account (HSA). If you have a high-deductible health plan, you can save money today for tomorrow's health problem in an HSA. These plans are triple tax-deductible -- you pay no taxes when you contribute, funds accumulate interest tax free and you pay no taxes upon withdrawal when used for qualified health care expenses. Keep in mind that there are limitations on who can contribute to an HSA after age 65.
3. Maximize Social Security
Although Social Security is the No. 1 source of income that retirees rely on, uncomplemented by some of these other tactics, it isn't a fully fleshed-out retirement income strategy. Indeed, Social Security pays benefits that are on average about 40% of what you earn before retirement.
While you can collect Social Security as early as age 62, there are some potentially significant benefits to delaying them to your full retirement age or longer. If you collect at 62, you may see a permanent reduction of up to 30% of your annual benefits vs. what you would have received at full retirement age. On the flipside, you can permanently increase your annual benefit by delaying filing beyond your full retirement age. Benefits increase by 8% for every year you defer, up to the age of 70. So, if your retirement age is 66 and you wait until 70 to file for Social Security, that's 32% more a year you'll be earning for the rest of your life.
The table below illustrates the advantages of waiting to claim Social Security for a person with a full retirement age of 66 (born from 1943-1954) who lives until age 85.
Advantages of Waiting: Total Benefits Paid
|Total Benefit to 85||$216,000||$240,000||$253,440|
4. Transfer wealth
Wealth transfer, or estate planning, provides for the surviving spouse and future generations.
You need to clearly state your wishes for what should happen to your assets after you're gone. If everything is secondary to supporting your spouse, you need to put that down on paper. If you want your successors to carry on with your goals, get past the ingrained aversion many people have to talking about their own death.
Creating or updating a will and other estate planning documents ensures that your wishes will be carried out after you pass away.
5. Manage debt
Nearly two out of three current workers call debt a major problem, and more than 40% say it's negatively impacting their ability to save for retirement. Now, rather than later, is the time to get a handle on your debt so you're not left worrying about a problem that you truly can't afford. Setting a goal of retiring debt-free means your income will go further in retirement, because it won't go toward paying off a mortgage, student loans or credit card bills.
6. Consolidate accounts
Once you've rolled over your retirement accounts, don't stop there. You likely have other accounts, such as savings and investment accounts. Consolidate those with one financial services provider that you are already comfortable with or that works through your financial adviser. Account consolidation makes it easy to see where your assets are and to make adjustments as needed. It can also save money and time.
The above six aspects of retirement planning only make sense in relation to each other as part of an overall plan. Learning about them, it becomes clear that when it comes time to look at retirement, you need a firm or provider that can attend to all of your retirement needs in a holistic manner.
* Guarantees are backed by the financial strength and claims-paying ability of the issuing company.
This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author. It has been prepared for informational and educational purposes only and is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
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Copyright 2018 The Kiplinger Washington Editors