5 Frequently Asked Retirement Questions
Planning for retirement can be one of the most nerve-racking things. You probably have a lot of questions about what you will need to do and when, how to ensure you will have enough money set aside, and how you will cover your expenses. Here are answers to 5 of the most commonly asked questions about retirement to get you started:
When Should I Begin Taking Social Security?
Social Security allows you to choose when you receive benefits. You can start taking Social Security as early as 62, but you must start receiving benefits by the age of 70. Choosing to start benefits before full retirement age — which may be 65 to 67, depending on your birth year — will reduce your benefit amount by up to 30%. If you wait until you reach full retirement age, your benefits will not be hit with a reduction.
Delaying Social Security benefits, when possible, is the best course of action. For every month you are eligible but do not receive benefits between your FSA and the age of 70, your benefit will increase. Your annual increase for delaying benefits may be up to 8%.
If you start receiving social security benefits and due to unexpected circumstances you change your mind about when they should start- it is possible that you can withdraw your Social Security claim and then re-apply at a later date. Please note – you must do this within 12 months of your original retirement date.
How Long Will My Money Last in Retirement?
Living longer is a great thing, but you definitely don’t want to spend your golden years worrying about money. As life expectancies continue to increase, more retirees find themselves with a big problem: outlasting their savings. You want to be around for as long as possible to enjoy your retirement, but that means it’s important to plan on a retirement that may last 25 years or longer.
How long your money will last depends on many factors, of course:
- How you invest your money
- How much you have saved at the start of retirement
- Your withdrawal rate, or how much you take out each year
- Whether you have other sources of retirement income like Social Security
Withdrawing the right amount every year based on your timeline is the most important thing you can do to make your money last. If you plan on a 30-year retirement, invest wisely, and withdraw about 4.2% per year, your money will last. If you work until 70 or otherwise plan on a shorter retirement of 25 years, you can set a withdrawal rate of 4.6%.
In general, you should withdraw no more than 4-6% of your savings during your first year of retirement. This amount can be adjusted upward every year for inflation, no matter what happens to the market.
If you’re very concerned about ensuring you have money throughout retirement, another option is an annuity. These products can offer a guarantee of steady income until death, but they can eliminate your access to your money and they can be subject to strict rules.
How Much Money Do I Need to Retire?
Conventional wisdom often says you need $1 to $1.5 million to retire, or 10-12 times your current annual income. The truth is a little more complicated than that.
These rules of thumb are usually based on maintaining the level of spending you have now, but many people plan to dramatically change their spending patterns once they retire. For some retirees, their cost of living is lower. For others, spending increases significantly with expensive hobbies and travel.
To determine how much you will need, create conservative estimates of what you will spend and build in wiggle room. By estimating your retirement expenses first and working your way backward, you will have a more accurate estimate of what you will need to save. Don’t forget to include any income you will receive from Social Security and/or a pension and assume you will withdrawal 4% from your savings to determine what you will need.
How Will I Pay for Medical Expenses in Retirement?
For many retirees, the cost of medical care comes as a big and unpleasant surprise. According to a recent Fidelity Investments study, the typical 65-year-old married couple will spend $260,000 out-of-pocket for medical expenses, which doesn’t include long-term care coverage. You can expect health care to become one of your biggest expenses in retirement. There are many ways to help cover your medical expenses, but it’s important to start planning early.
Medicare is a start once you qualify, but the premiums and deductibles can be costly. For basic Medicare coverage, you will pay about $3,000 per year. Medicare also does not cover many expenses, including hearing aids and routine eye and dental care.
Here are some options to consider to pay for medical bills:
- Employer or retiree insurance, if available.
- Veterans benefits through the VA.
- Health Savings Account (HSA) if you have a high-deductible health plan. This allows you to contribute pretax money that grows tax-free and can be withdrawn without paying taxes when used for medical care.
- Medigap insurance which helps cover costs Medicare won’t pay. These policies are offered through private insurers with an average annual premium of about $2,100.
How Much Will I Spend in Retirement?
The general rule of thumb is you should plan to spend 70% of your current income in retirement. Actually, your replacement ratio should be closer to 80%. This concept is only good for general retirement planning, however. Once you’re within five years of retirement, you should have a more accurate assessment of your expenses in retirement and how much you will need to spend.
About 25% of retirees report basic living expenses are higher than they expected before retirement. Health care spending is one of the hardest and biggest expenses to accurately predict as well with many retirees paying more than they expected.
To determine how much you will spend, create a retirement expense budget to determine if and how you will need to cut back spending to avoid outliving your savings. You should also consider your lifestyle and how you plan to live after retirement. The amount you spend will obviously be very different from your spending today if you plan to travel rather than living a simple lifestyle. A retirement calculator, like the one from AARP, can help you estimate if you will have enough saved.
Many retirees often opt to have a part-time job in retirement, as this allows for their savings to continue to grow. Not only that, but some part-time jobs offer health insurance – which can come in handy for those that don’t quite yet qualify for Medicare.
It is advised to do thorough research, planning, and to start saving early on – so you won’t be in a tight spot when the time is right for you to retire.