Preparing for Retirement
July 06, 2017
You’ve worked your entire life, it seems, and now you’re finally thinking about enjoying “the golden years”. When making this decision, there are some important financial items to consider.
Maximize Social Security
- Work at least 35 years. Social security payments are based on earnings from your 35 highest income years. By working at least 35 years, you will maximize your payments during retirement. If you work fewer than 35 years, zeroes will be factored in the calculation which will reduce your potential payments.
- Work until full retirement age. If you were born prior to 1960, your full retirement age is 66; if born in 1960 or later, the age is 67. Retiring early, typically age 62, will reduce your benefit approximately 30%. However, if you choose to wait until age 70 to begin collecting, your full retirement age benefit increases by approximately 8%. While the breakeven point for determining the best time to begin receiving your benefit is based on several factors including life expectancy, tax rates, inflation and rate of investment, a general rule is that a breakeven age can range from 81 to 86 ½ for early retirees and 84 to 87 for delayed collection.
- Consider spousal payments. Spouses with a lower earnings history have a choice between collecting their benefit based on their own work history or 50% of the higher earning spouse’s benefit, whichever is higher. Collecting the 50% spousal benefit does not lower the higher earning spouse’s benefit.
- Collect benefits for dependents under age 19. If you are retirement age and have dependents under the age of 19, they may be entitled to benefits. These benefits can be invested in college saving plans to help with the cost of higher education.
- Monitor earnings from work while collecting benefits. For years prior to reaching full retirement age, your benefit will be reduced $1 for every $2 earned over the current inflation-indexed amount. For 2017, that amount is $16,920. For the year you reach full retirement age, your benefits will be reduced $1 for every $3 earned over the current limit in the months leading up to full retirement age. If you turn 66 in 2017, you can earn $44,880 in the months prior to your birthday before seeing your benefit reduced. Once you reach full retirement age, there is no limit on earned income.
The Social Security Administration’s Retirement Estimator can be a useful tool in determining benefits. It uses your actual earnings records in calculating potential benefits. For more information, including various retirement calculators, see www.ssa.gov/retire/estimator.html.
Apply for Medicare
- Automatic enrollment. If you are already collecting social security benefits when you turn 65, you will automatically be enrolled in Medicare Parts A and B on the first day of the month you turn 65. You will also be automatically enrolled if you have been receiving disability benefits from Social Security or the Railroad Retirement Board for twenty-four (24) months or if you have Lou Gehrig’s Disease (ALS).
- Self-enrollment. If automatic enrollment does not apply to you, you can sign up on the Social Security Administration’s website (www.ssa.gov/medicare/). The site boasts that enrollment takes only ten (10) minutes. You can also sign up at your local Social Security office or by phone. You have a window of seven (7) months for initial enrollment. The window includes the three (3) months before and after your birthday month and, of course, the month you turn 65. Be sure to sign up during your initial enrollment period even though it is not required. Otherwise, your premiums may be permanently higher when you finally enroll.
Manage Individual Retirement Accounts (IRAs)
- Traditional IRAs. Be aware of the RMD (Required Minimum Distribution) rule. You are required to begin taking RMDs the year you turn 70 ½. Your RMD is calculated based on life expectancy tables and the value of all traditional IRA accounts held at the end of the previous year. While it may seem like a good idea to let IRA money sit until distributions are required, doing so may result in higher RMDs and could affect your tax bracket. You can take your RMD any time during the year, but it must be completed by December 31. The only exception is the year you turn 70 ½. In this case, you have until March 1 of the following year. Be sure not to miss taking your RMD. The penalty for not withdrawing enough is 50% of the amount you were required to withdraw.
- Roth IRAs. There is no RMD requirement for Roth IRAs. Because there is no requirement to take withdrawals, you might consider converting some or all of your traditional accounts. Be sure to consider the tax implications before converting your traditional IRAs to Roth accounts. In general, if you expect the tax rate you will pay in retirement to be the same or higher than the rate paid at time of conversion, then it might be a smart move. You should do so only if you have the means to pay the additional tax at conversion from non-IRA funds. In contrast, if you expect to pay a lower tax rate in retirement than at time of conversion, converting the funds may not be advantageous.
Consult Your Financial Advisor and Accountant
When making the decision to retire or continue working, be sure to include your financial advisor and accountant. Their expertise can prove to be invaluable in determining the best timing to minimize taxes, maximize income and accomplish all the goals you’ve worked so long to achieve.