Retirement. It’s a magic word and it’s supposed to be a magic time in your life. You’ve planned for it, worked for it, anticipated it, and expected a great life that comes after it.
Today, people are retiring at a rate 27% higher than 10 years ago. Much of the increase is because of unplanned, early retirement due to declining health of the worker, leaving the workforce to care for a family member, taking an early retirement package because of worry about future employment, or they’re being laid off or fired because of current economic conditions.
Whatever the reason for retirement, you need to be prepared with an exit plan, or as the old farmer philosophers used to say where I grew up, you need to have your ducks in a row. The decisions you make or don’t make before retiring can impact you for the rest of your life, especially if you’re retiring before your Social Security Full Retirement Age (FRA), which today is between 66-67 years old. Here are some things to consider.
Health Coverage
Health coverage is one of the biggest concerns for retirees. Where will your health coverage come from? You can enroll in Medicare at age 65, but if you continue working and have qualified employer health coverage, you can enroll, without penalty, when you retire.
If you’re younger than 65 when you retire, you may be forced into the open exchanges, which many find unacceptable because of their unpredictability. You may be able to extend your employer health coverage by using COBRA health insurance, which gives workers who lose their health benefits the right to continue their employer group health plan for up to 18 months. COBRA is a very expensive option because you pay the entire amount for the coverage. There is no contribution from your former employer.
When to take Social Security
You can begin receiving Social Security benefits as early as 62, but there are consequences.
- If you take benefits before your Full Retirement Age you will receive a permanently reduced Social Security payout.
- If you have employment that pays you more than the annual Social Security earnings limit, SSA will take back $1 for every $2 you earn above the limit. Once you reach Full Retirement Age, the earnings restriction goes away and you can earn as much as you want without giving back any of your Social Security benefits.
- Waiting past your Full Retirement Age to begin receiving benefits increases your payout by 8% per year all the way to age 70.
Can you use your retirement plans if you retire early?
While it’s true that pulling money from a retirement plan can’t be done without a penalty until you turn 59 ½, there are some exceptions to the rule. For example, many 401(k) plans and 403(b) plans allow you to begin taking penalty-free distributions at age 55 if you are laid off, fired, or you permanently leave the employment of the company. This only applies to your current employer plan. The penalty-free option is not available for 401(k)s or 403(b)s at previous employers. You have to wait until 59 ½ to take that money penalty-free.
For IRAs, you can access your money without penalty because of IRS code 72(t). The rule says you can take money out before 59 ½, penalty-free, by withdrawing substantially equal periodic payments, based on your life expectancy. You have to take those payments for at least 5 years. If you change the amount of the substantially equal payments or stop the payments before the 5 years is up, you’ll have to pay taxes and penalties on everything you’ve withdrawn from the time you began taking the withdrawals.
Will you work part-time
Over the years I’ve had clients work part-time in retirement for lots of reasons; some needed extra income, some were bored, some wanted new challenges. As part of your Retirement Exit Strategy, decide if you can, should, or want to work part-time. If so, what do you want to do? What interests you? Where can you make a difference? Decide what type of part-time employment will satisfy you and meet the reason you want to work.
Where will your income come from
You don’t want any surprises here. You’ve been planning this retirement for a long time and you should have a good idea of how you’ll pay the bills in retirement-investment accounts, Social Security, retirement plans, IRAs, pensions, part-time work. But what if you need extra funds beyond that? Possibilities for hidden income include life insurance cash values or equity in your home that can be accessed by a reverse mortgage.
Taxes
Knowing where your income will come from is essential. But how much will you get to keep? Will the state you live in during retirement tax you on retirement income.
And don’t forget the federal government. It’s likely you’ll be taxed on your Social Security.
- If you’re single and your combined income is between $25,000-$34,000 you’ll have to pay income tax on up to 50% of your benefit.
- If you’re single and your combined income is more than $34,000, you’ll pay income tax on 85% of your benefit.
- If you’re married filing a joint return and combined income is between $32,000-$44,000 you’ll pay income tax on up to 50% of your benefits.
- If you’re married filing jointly and combined income is above $44,000, you’ll pay income tax on 85% of your benefit.
As you approach retirement, do a thorough review of your retirement budget. Update it using today’s figures. It’s best practice to have your Retirement Exit Strategy in place whether it’s your idea to retire or your boss’s.
