If you're getting close to putting full-time work behind you, make sure you give the financial implications of that step more than just a passing once-over.
Whether you're viewing the next phase as retirement, semi-retirement or an unknown adventure, the transition is prone to delivering surprises if you don't explore how your decisions going forward will affect your bottom line.
And while some people might have spent decades saving and planning for retirement, others might be crossing their fingers or have yet to give real thought to their transition away from 40-hour (or more) work weeks.
Regardless of where you fall on that spectrum, experts recommend taking time to make sure you've covered all your financial bases.
Here are some things to consider as you prepare to say farewell to your coworkers next year and embark on the next leg of life's journey.
The often-overlooked expense
Health-care expenses typically rise as you age. In fact, the average 65-year-old couple will spend $280,000 on health care over the remainder of their lives, research from Fidelity Investments shows.
Once you reach age 65, you're eligible for Medicare. So if you retire at or past that age, the government program generally is there for you. However, it doesn't cover everything. For example, dental, routine vision and long-term care (e.g., help with daily living, such as bathing and dressing) are not included.
The amount you pay for Medicare also depends on a number of factors, including your income, whether you pay any late-enrollment fees and whether you opt for additional coverage and to what degree.
However, if you're younger than 65, you'll need to find coverage on your own.
"A lot of people forget that, don't factor it in or find out they way underestimated the cost," said Linda Rogers, a certified financial planner and owner of Planning Within Reach in Memphis, Tennessee. "If you're 65, so you can get on Medicare, retiring is much more doable."
For people who face a gap in coverage, federal law known as COBRA requires employers with at least 20 workers to allow ex-employees (including retirees) to remain in an employer-sponsored health plan — if the ex-worker wants to pay the full cost of the premiums. Many employers pay a share of the premiums for current employees and typically won't do that for COBRA coverage.
There are potentially other options, including an Affordable Care Act plan (a.k.a., Obamacare). Depending on your income, you could receive a subsidy if you go that route.
Other choices also might be available, including short-term plans — which come with skimpier coverage and are typically only viable for healthy people with no pre-existing conditions.
Know your Social Security strategy
Although you can start taking Social Security at age 62, your monthly checks will be larger the longer you can delay. In fact, your benefit will increase by 6 percent to 8 percent yearly until you reach age 70, if you can hold off.
However, most people don't wait that long. And with the growing number of 60-somethings still working either full- or part-time, it's important to know how wage income affects your Social Security benefits.
More than half (54.7 percent) of people ages 60 to 64 were working at least part time in 2017, according to the Bureau of Labor Statistics. In the 65-to-69 crowd, nearly a third (31.2 percent) were in the workforce last year.
If you start taking Social Security before your government-determined full retirement age of about 66 or 67 — the exact number depends on your birth year — there's a limit to how much you can earn from working without your benefits being affected.
In 2019, that cap will be $17,640. If you earn above that, your benefits will be reduced by $1 for every $2 you earn.
Then, when you reach your full retirement age, the money comes back to you in the form of a higher monthly check. (And remember, depending on your overall income, up to 85 percent of your Social Security benefit is subject to federal income tax.)
At that point, you also can earn as much as you want without it affecting your benefits.
Also, if you are one of those early takers who is working and you reach full retirement age during 2019, then $1 gets deducted from your benefits for every $3 you earn above $46,920.
Evaluate income and tax strategies
In retirement, sources of income can vary from person to person and might involve a pension, retirement savings such as a 401(k) or individual retirement account, Social Security, taxable savings and investment accounts, health savings accounts, or business and trust income.
"Many people have a few different types of assets, so they want to be smart about which they tap into," Rogers said.
For instance, not all sources of income are taxed the same. Withdrawals from traditional IRAs or 401(k) plans are taxed as ordinary income, but for Roth IRAs or Roth 401(k)s, the withdrawals are tax-free. If you have a taxable investment account, you may have to pay capital gains taxes on some of the withdrawals.
Retirement savings among older workers
| Age | Average | Median |
|---|---|---|
| 45-54 | $116,699 | $43,467 |
| 55-64 | $178,963 | $66,643 |
| 65 and older | $196,907 | $60,724 |
Source: Source: Vanguard 2017 research, based on 2016 data
You also will face taking required minimum distributions — the annual amount that must be withdrawn — at age 70½ from your traditional IRA or 401(k). Roth IRAs do not have RMDs, although Roth 401(k) plans do. Depending on your income, those required withdrawals could push you into a higher tax bracket.
If that's a possibility, it might make sense to roll the assets into a Roth IRA before you reach that point, or to tap those funds before the RMDs kick in so you don't face a sudden jump in taxes.
Additionally, your annual income can affect what you pay for Medicare. With higher earners paying more, it's important to know how your income could affect what you pay for coverage.
Check risk in your retirement accounts
If you have a 401(k) or IRA, make sure your investment mix makes sense for your retirement income plan.
Exactly how much of your portfolio should be dedicated to stocks — which are riskier but typically deliver the best returns over time — will depend on how much you need to generate in income during retirement and how much risk you're able to stomach.
"We've had people come in who have been in the same investments since they were 24," Rogers said. "You want to evaluate the allocation of your entire portfolio to make sure the stock and bond composition is appropriate."
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Have a cushion
Financial advisors typically recommend that you keep several years' worth of income away from the stock market, in money markets, cash or other less risky investments.
"Don't risk the money you need in the next two or three years," said CFP Terrence Herr, managing partner at Herr Capital Management in Chicago. "You can stomach volatility in the market if you have three years of income that is safe and not subject to those ups and downs."
If the market is down, it would mean not having to sell investments at a lower price to generate the annual income you need to live.
Prepare emotionally
Many financial advisors caution that for people whose job was a big part of their self-identity, the transition to retirement can be trickier.
"Often, for the first couple of years they're happy, but then some people can get depressed," Rogers said.
Volunteering, having a strong social network and developing varied interests can help ward off feelings of loneliness or questions of self-worth. For some retirees, sharing their knowledge through teaching delivers satisfaction, Rogers said.
Also get used to the idea of watching your assets get smaller instead of grow.
"One of the hardest things that retirees face is the notion that their retirement account, which has been growing while they worked, will be going down in value over the course of retirement as they make withdrawals," Herr said. "People can get really uncomfortable with that."