11 Actions to Take Before Retirement

Retirement

May 17

According to a recent Employee Benefit Research Institute report, only 30% of workers surveyed are “very confident” they’ll enjoy a comfortable retirement. In addition, nearly half of workers and over 25% of retirees claim debt has impacted their ability to save for or live comfortably in retirement. The point? Retirement is expensive, and whether it’s just around the corner or still a few years away, consider taking the following actions to better prepare.

Fully understand your Social Security benefits

You can begin receiving Social Security benefits starting at age 62. However, you won’t be entitled to 100% of your benefits until reaching what’s known as your “full retirement age” (FRA): which is based on your year of birth. For example, if you were born after 1960, your full retirement age is currently age 67.

More specifically, Social Security benefits increase by approximately 7% each year between age 62 and your full retirement age—followed by an approximate 8% annual increase between your full retirement age and age 70.

What’s the best age to begin receiving retirement benefits? The answer depends on several factors such as your cash needs, your current health, family longevity, and if you plan on working during retirement.

Evaluate your Medicare options

Medicare, the national health insurance program for U.S. citizens and permanent legal residents, is the most common insurance option for seniors. You generally qualify for Medicare when you turn 65 (earlier if you have qualifying disabilities), based on your (or your spouse’s) employment record.

The program has evolved over the years and currently includes four parts (A, B, C & D), with each offering different coverage options. Sounds simple, right? Not so fast. The truth is that Medicare is extremely complicated: a fact that becomes even more apparent when you closely evaluate your options and learn how even the simplest mistakes can be costly. With this in mind, it’s no surprise a recent Harris Poll survey claims more than 7 out of every 10 participants over age 50 wish they had a better understanding of Medicare coverage!

Since healthcare costs will likely only increase over time, speaking with a financial advisor or Medicare expert—before you become eligible—is highly recommended.

Plan for long-term care

Many people incorrectly assume Medicare covers long-term care. The truth is that it doesn’t, except in very limited circumstances. Based on recent U.S. Department of Health and Human Services data, there is almost a 70% chance someone celebrating a 65th birthday today will need some form of long-term care (LTC) services in his or her remaining years. It’s therefore a prudent approach to begin planning.

Long-term care insurance policies typically cover out-of-pocket expenses that accompany home care, assisted living, and nursing homes: benefits not covered by Medicare or other public programs.

Ultimately, these policies offer a few key benefits. In addition to helping protect your savings, they also provide you with additional care choices. For example, even if you qualify for Medicaid, you’re still restricted to facilities that accept payments from the program.

Experts recommend you obtain a policy no later than your fifties so you can lock in a lower premium. Alternatively, you may be able to add a long-term care rider to your life insurance policy. Click here to read all about long-term care.

Review your estate plan

Estate planning is the process of creating a blueprint for the preservation, management, and distribution of assets in the event of your death and/or mental incapacitation. The goal of estate planning is to maximize the value of your assets while ensuring a smooth transfer to your heir(s) (the person or people inheriting your assets).

Despite what you may think, estate planning isn’t only for the wealthy; if you own a bank account, car, furniture, or insurance policy, you have assets—however modest they are. Therefore, it’s crucial to plan for asset distribution upon your death (as a failure to do so will go down as your biggest mistake).

Utilize catch-up contributions

Once you turn 50, the IRS allows you to make annual “catch-up contributions.” These are additional contributions you can make above standard limits to your 401(k)s and IRAs. This feature is offered to encourage savings and help ease the financial burden of retirement, especially if you didn’t save enough when you were younger.

If it makes sense for your overall plan, you should take advantage of this benefit since the tax-deferred growth can help significantly boost your retirement savings. The IRS sets catch-up contributions and limits for eligible retirement plans on an annual basis. As of 2023, these are:

· IRAs: $1,000 catch-up contribution, meaning you can make a total contribution of $7,500 (limit of $6,500)

· 401(k)s: $7,500 catch-up contribution, meaning you can make a total contribution of $30,000 (limit of $22,500). This also applies to other workplace retirement vehicles such as 403(b)s, most 457s, and the government’s Thrift Saving Plan (TSP).

· SIMPLE 401(k)s: $3,500 catch-up contribution, meaning you can make a total contribution of $19,000 (limit of $15,500)

You should also know that catch-up contributions received a significant boost as a result of the Secure 2.0 Act, which was signed into law in December 2022.

Thus, the annual catchup contribution for IRAs will be adjusted annually for inflation beginning in 2024. Then in 2025, employees between the ages of 60 and 63 will receive a “special” catch-up contribution limit for most 401(k)s and other employer-sponsored plans. More specifically, this equates to the greater of $10,000 or 150% of the standard contribution limit for 2024. The $10,000 amount will also be adjusted for inflation each year beginning in 2026.

Catch-up contribution limits for SIMPLE plans will increase by 10% starting in 2024, and beginning in 2025, account holders between the ages of 60 and 63 will also receive a “special” limit: which is the greater of $5,000 or $150% of the 2025 catch-up contribution limit for other eligible workers. This amount will also be adjusted for inflation on an annual basis.

Know your RMDs

Specific retirement accounts, such as 401(k) plans and traditional IRAs, include annual required minimum distributions (RMDs): meaning you need to begin taking withdrawals generally starting at age 73. This was previously age 72 but changed due to the Secure Act 2.0 and will increase again to age 75 by January 1, 2033.

If you plan on having multiple sources of income during retirement, it’s not only critical to understand if distributions are required but also remain aware of tax implications for each source.

Revise your investment strategy

As you should typically invest more conservatively as you get older, the percentage of equity holdings (stocks) invested in your retirement accounts should decrease to reduce risk: which is especially critical as you may lack the luxury of waiting for a market bounce-back after a dip.

While the actual number varies by each individual’s situation, a general rule of thumb is to subtract your age from 100 (higher if you expect to live longer) to pinpoint the percentage of your portfolio to keep in stocks. The remainder should be comprised of safe assets such as bonds and CDs.

Assess your life insurance policies

When most people think of life insurance, they assume its only purpose is to pay a designated beneficiary a lump sum of money upon the death of the insured person. If leveraged correctly—especially during your retirement years—life insurance can help accomplish so much more. This includes providing access to cash and living benefits, should you get sick. Click here to read more about life insurance.

Plan for surprises

When it comes to planning for retirement, you’ll need to know that your income will cover your expenses. While it’s impossible to plan for every scenario, there are a few common ones that often catch retirees by surprise.

Considering such scenarios in your plan can help better ensure you’ll enjoy a comfortable and stress-free retirement.

Figure out how to fill your free time

Retirement is more than just about money; psychological adjustments in fact catch many people by surprise, who are ultimately unprepared and struggle to adapt.

For example, leaving your career most likely means you’ll also leave your daily structure and sense of purpose behind. You’ll encounter various stressors as well during your retirement, such as more arguments with your spouse (after all, you’ll likely find yourself spending a lot more time with him/her) and far less contact with co-workers you were once close to.

It’s thus critical to really think through how you’ll fill your free time during retirement.

Establish a budget

The most recent Bureau of Labor Statistics (BLS) data claims the average retiree household (led by someone age 65 or older) spent $52,141 in 2021. While everyone’s spending habits vary, at the very least, this should provide a rough benchmark regarding how much annual income you may require to get through retirement.

In sum: actions to take before you retire

As you can see, preparing for retirement isn’t so simple. Fortunately, you don’t need to go it alone; a trusted financial advisor can provide you with essential guidance and, in turn, more peace of mind as you approach your golden years.