In this post, we reflect upon conversations we’ve had with clients and combine that intel with findings revealed in a recent Employee Benefit Research Institute study. Our goal? To arm future retirees with the knowledge they need to enjoy a more comfortable retirement. Let’s dive in…

Don’t let potential Medicare surcharges surprise you

IRMAA—income-related monthly adjustment amount—is the additional amount you may need to pay along with your Medicare premiums. Why? Because Medicare imposes surcharges—as much as a few hundred dollars a month—on higher-income beneficiaries for Medicare Parts B and D.

The surcharge is calculated based on tax returns you reported from two years prior: meaning your 2023 income determines your IRMAA in 2025, your 2024 income determines your IRMAA in 2026, and so on.

For those unfamiliar with IRMAA, the two-year lag can create unpleasant surprises when you first enroll in Medicare—especially if your income declines substantially when you retire. IRMAA can also creep up on you later in life when you begin taking RMDs, as the surcharge is reevaluated every year based on your previous two years of income. Therefore, make sure you plan for Medicare a few years before you enroll.

Employ a long-term care strategy

U.S. Department of Health and Human Services data indicate that someone celebrating a 65th birthday today has an almost-70% chance of needing some form of long-term care (LTC) services in his or her remaining years. What’s more, women are expected to need 3.7 years of care compared to 2.2 years for men. An estimated 20% of today’s 65-year-olds, meanwhile, will require care for more than 5 years.

Many people incorrectly assume Medicare covers long-term care. The truth is that it doesn’t, except in very limited circumstances. 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. Even if you qualify for Medicaid, you’re still restricted to facilities that accept payments from the program—whereas an LTC policy offers additional care choices.

While everyone’s situation is different—especially if you have a family history of illness at a young age—experts recommend you obtain a policy in your mid-to-late fifties so you can lock in a lower premium.

Though several reasons help drive this decision, the primary factor is that you must qualify for long-term care insurance: meaning you must be healthy to buy coverage. As many people experience a slight decline in their health beginning in their 50s, it’s perhaps no surprise that 30.4% of people aged 60-64 who submitted long-term care applications were denied in 2021. This number rose to over 38% for those aged 65-69 and was significantly higher for those aged 70+.

Another reason to buy a policy when you’re younger is that long-term care premiums are based on your age when you apply. That said, avoid doing so too early as people aged 70+ file more than 92% of long-term care insurance claims. In other words, if you buy a policy in your 40s, you’ll likely pay premiums for more than two decades before you ever file a claim.

While alternatives to stand-alone LTC policies do exist—including self-funding and adding a rider to your life insurance policy—a financial advisor can help you evaluate your options and make recommendations based on your own unique situation.

Eliminate unnecessary investment risk

It’s typically wise to invest more conservatively as you get older, scaling back the proportion of equity holdings (stocks) invested in your retirement accounts to reduce risk: which is especially critical as you may lack the luxury of awaiting a market bounce-back after a dip.

While the actual number varies based on everyone’s individual situation, a general rule of thumb is to subtract your age from 100 to pinpoint the percentage of your investment portfolio to keep in stocks. “Safe” assets—such as bonds and CDs—should round out your other investments.

Keep in mind that due to longer lifespans, some experts have modified this rule and now recommend you subtract your age from 110 (or more!) to avoid running low on funds.

Despite this widely available knowledge, a recent Fidelity report claims investors—specifically 37.6% of Baby Boomers—are exposing their retirement accounts to unnecessary risk via too much investment in stock.

Thankfully, you can obtain a risk report from your financial advisor to not only learn if you’re overexposed to risk but also arm you with the knowledge you need to make changes, accordingly.

Align expectations with your spouse before you retire

Engaging in insightful conversations with your partner about how you envision your retired life can spark a renewed sense of excitement and purpose. While it’s fair to assume you’ll likely encounter a few bumps along the road toward mutual alignment, remaining honest about your expectations and finding common ground is paramount to successfully navigate retirement with your spouse.

One specific conversation you’ll want to have involves timing—understanding whether or not each of you will retire at different times—thus relieving any potential tension before it arises in this regard. Beyond this, basic considerations such as rising at the same time every day, assigning household chores, and staying occupied while not feeling trapped at home (especially if your spouse remains employed) are often significant factors involved in maintaining a healthy marriage.

Save as much as possible

According to an Employee Benefits Research Institute survey, the majority of respondents (70 percent) would advise altering savings habits by saving or investing more and/or earlier. Why? Because retirement is expensive! You must therefore not only determine how to afford retirement but also ensure you don’t outlive your retirement savings.

While individual situations of course vary, a common rule of thumb is that you’ll need 70 to 90% of your pre-retirement income to maintain your chosen standard of living during your golden years. For example, if you earn $100,000 a year before retirement, you’ll probably need to live on $70,000-$90,000 annually during retirement. While this number may seem high to you (and it just might be!), the latest U.S. Bureau of Labor Statistics Consumer Expenditure survey reports that the average retiree household (led by someone age 65 or older) spends $52,141 per year.

You’ll also want to keep in mind that as soon as you turn 50, the IRS allows you to make annual “catch-up contributions”: additional contributions you can make above standard annual limits to your 401(k)s and IRAs.

This feature is offered to encourage savings and help ease the financial burden of retirement, but unfortunately, very few people fully maximize this benefit; according to Vanguard, only 15% of eligible 401(k) participants take advantage of catch-up contributions when offered. These low rates are likely due to affordability, as almost all plans (98%) permit catch-up contributions.

If it makes sense for your overall plan and you can afford to make catch-up contributions, you should take advantage of this benefit as tax-deferred growth can significantly boost your retirement savings. For example, if you contribute an additional $625 per month (or $7,500 per year) to your 401(k) from age 50 to age 65, you’d accumulate over $179,000 based on a 6% return.

As of 2023, you can contribute $22,500 to a 401(k) and $15,500 to a SIMPLE 401(k); with catch-up contributions, you can kick in an extra $7,500 for the former and $3,500 for the latter. Roth & traditional IRA contributions ring in at $6,500 for 2023, and with catch-up contributions, this means you can kick in an extra $1,000 as the cherry on top.

Account for significant home expenses

Just because you’re moving into a different home doesn’t mean you’ll avoid repairs and/or renovations. For example, keep in mind that most houses aren’t designed with old age in mind. Therefore, if you require wheelchair accessibility or need to expand a bathroom or convert existing space so all key areas are on one level, related expenses can quickly pile up. Even a brand-new home isn’t immune to accidents and weather damage that homeowner’s insurance may not cover.

Delay claiming Social Security benefits

The age at which you decide to collect Social Security will determine your monthly benefit amount. Choosing to receive benefits before you reach full retirement age (when you’re entitled to 100% of your benefit), however, means you’ll get hit with a permanent reduction.

More specifically, Social Security benefits increase by approximately 7% each year between age 62 and your full retirement age (and then rise approximately 8% each year between your full retirement age and age 70).

To illustrate, let’s assume the full amount of your Social Security benefit—what you’d receive if you wait until your full retirement age—is $1,000 a month.

If you claim benefits at age 62 instead, your benefit will decrease by approximately 30% to $700: meaning you’d miss out on $3,600 a year! Multiply that by five years (when you’d reach full retirement age), and that’s approximately $18,000—per spouse! Alternatively, if you wait until age 70, your monthly benefit would ring in at approximately $1,266. As you can see, claiming Social Security benefits too early can leave a lot of money on the table.

Optimizing your Social Security benefits can also help you combat inflation risks during retirement, a noted concern among survey respondents as outlined in the Employee Benefit Research Institute’s Retiree Reflections report.

Realize you may pay higher taxes during retirement

Though you may pay higher taxes when you retire due to several reasons, tax-deferred accounts such as 401(k) and traditional individual retirement accounts (IRAs) are a common culprit. The reason? When you begin drawing money down from these accounts while generating other retirement income from Social Security benefits or rental property payments, for example, you can easily find yourself in a higher tax bracket than when you were employed.

The best way around this situation is to engage in pre-retirement tax planning so you can properly structure your retirement accounts with your best interests in mind.

In sum: retirement advice from retirees

Now that you’re aware of concerns shared by many current retirees, your next step should be to plan ahead—ideally with the help of a CFP® professional—to get the most out of your retirement.

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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.