The 4 Biggest Decisions You Should Make Before Retirement
Recent Employee Benefit Research Institute data reports 7 in 10 working people surveyed were at least “somewhat confident” in their ability to live comfortably during retirement.
While this is a good start, we would much rather feel “very confident” about retirement as an ideal state of mind. Consequently, check out these four significant financial decisions you’ll need to address—before retirement—to better position yourself to enjoy your golden years.
Decide what to do with your home
Housing represents, by far, the largest expense for retiree households. Therefore, downsizing your home is sometimes the best way to unlock any equity you’ve built and help fund a portion of your retirement. This is especially true if you move to a location with a lower cost of living. Should you do decide to go this route, consider taking the following steps to align your profit expectations with reality.
For starters, you’ll need to obtain an estimate of your current home value so as to not overestimate what it’s worth.
You can take several approaches here. While an online estimator can churn out results in mere minutes, corresponding accuracy isn’t always the best. For example, Zillow admits to an almost-8% median error rate for off-market homes, which can over or underestimate the value of your home. Therefore, it’s safe to assume—especially in areas outside of large cities where the turnover rate is lower—that the margin of error is pretty significant for these tools.
Thankfully, local real estate agents can provide you with a more accurate appraisal because they consider the assessed value, comparative sales, and any home features and upgrades an online algorithm cannot. You can also ask your realtor for strategies to maximize the value of your home. Nevertheless, an even better option is to hire a professional appraiser. Although this will cost you a few hundred dollars, he or she will make sure to consider each and every property feature that impacts value.
Following the home inspection, a buyer can request modifications or repairs. Thus, with the exception of cosmetic changes or upgrades, the seller may be on the hook for items such as pest damage or electrical, plumbing, roof, or foundation issues.
Closing costs—which, according to bankrate.com, can range anywhere from 2% to 7% of the home’s sale price—can include mortgage balance payments, property transfer taxes, recording fees, and attorney costs. You’ll also need to pay any real estate commissions at closing, which can ring in at up to 6% of the home’s sale price.
It’s also important to understand tax implications, knowing that Uncle Sam allows most couples to exclude up to $500,000 in gains from their taxable income (depending on how long they’ve lived in the home).
Plan for healthcare after you stop working
If you retire before becoming eligible for Medicare (at age 65, for most people) and lack coverage through another group plan, you’ll need to bridge this gap. However, know that coverage won’t come cheap. This is especially true if you don’t qualify for premium tax credits on Affordable Care Act insurance exchanges.
If you don’t retire too early, COBRA coverage represents one option: giving workers and their families who lose health insurance the right to continue group benefits. However, coverage is only temporary as COBRA is limited in length (typically up to 18 months).
Other alternatives include health sharing plans (which are limited), finding part-time work that offers benefits, or establishing a health savings account (HSA) to help cover high copays and other out-of-pocket healthcare costs.
You must also consider long-term care. These policies typically encompass out-of-pocket expenses that accompany home care, assisted living, and nursing homes: benefits not covered by Medicare and other public programs.
Ultimately, these policies boast a few key benefits. First, they help protect your savings; recent studies report median nursing home costs are almost $90,000 a year! They also provide you with more choices for care. For example, even if you qualify for Medicaid, you’re still restricted to facilities that accept program payments.
Determine when to collect Social Security
You can receive Social Security benefits beginning at age 62. However, you won’t be entitled to 100% of your benefits until you reach your full retirement age (FRA): currently age 67 if you were born after 1960.
While working during retirement is sometimes a smart way to pass the time, give you a sense of purpose and structure, and generate additional income, you should know how collecting a paycheck can impact your Social Security benefits.
The good news is that you can work and collect Social Security benefits simultaneously. However, if you work prior to your full retirement age, the dollar amount of your monthly Social Security check is sometimes temporarily reduced if you earn more than the yearly earnings limit set by the Social Security Administration.
Based on 2023 limits, the SSA will deduct $1 from your Social Security benefit payments for every $2 you earn above the annual earnings limit if you fall under full retirement age for the entire year. The current limit for this scenario is $21,240. Therefore, if your annual earnings are $25,000, Social Security would withhold $1,880 of your benefits as you’re $3,760 above the earnings limit.
Moreover, Social Security will deduct $1 for every $3 you earn above the limit if you work during the year you reach full retirement age. The 2023 limit is $56,520 for this scenario, only counting earnings prior to the month you reach full retirement age. Therefore, if you earned $60,000 from January through October 2023 and didn’t reach full retirement age until November, $1,160 would be withheld.
If you’re still working when you reach full retirement age, your earnings no longer reduce your benefits no matter how much you earn.
It’s important to note that for each example outlined above, you won’t actually lose your benefits. They are technically just deferred and then credited by adjusting your monthly benefit amount in the month you reach your full retirement age.
Ensure you won’t outlive your retirement savings
For most of your life, you’ve spent money based on the amount of income you’ve earned. During retirement, the necessary psychological adjustment is sometimes difficult to make because you’ll instead spend based on your savings and associated comfort level.
By establishing a plan prior to retirement, you’ll have a better idea of how much you can afford to spend during your golden years. While your financial advisor will help guide you through your own specific situation, consider at least following the 4% rule so you don’t overspend. This rule states that you should withdraw no more than 4% of your assets in the first year of retirement and adjust your withdrawals for inflation annually thereafter. Doing so assumes your assets will last as long as you do.
While the 4% rule may represent a solid benchmark, it’s far from perfect. It’s therefore important to develop a cash flow strategy based on your own specific situation.
In sum: financial steps to take before retirement
If retirement is on your horizon, you’ll need to make several corresponding decisions: none of which should be taken lightly as they can affect your finances for years to come. This is precisely where a financial advisor comes into play. He or she can confirm if your retirement plan is (or isn’t) on track and thus guide you regarding which potential actions to take.
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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.
Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.
