A good time to start planning your finances for retirement is today. No matter your age, the better you plan now, the better your situation will be when you make the decision to begin to live from your accumulated assets rather than earning new income each day.
Retirement planning focuses on three key areas: 1) Healthcare; 2) Social Security; 3) Lifetime income. While these are listed in priority order, let’s address them in reverse order, as the time to focus on lifetime income is as early as possible in your career.
I like to think of saving for lifetime income much like Social Security, in that, if you treat at least 6% of your income like a (Social Security) tax, you will be off to a great start. Using a Simplified Employee Pension (SEP), Individual Retirement Account (IRA) or a 401(k) plan (retirement plan) to accumulate these resources provides an opportunity for some tax relief either in current dollars in the case of a conventional retirement plan, or future dollars in the case of a Roth plan. These plans are relatively inexpensive to establish and prototype documents, if needed, are readily available.
A conventional plan (401k, SEP, or defined contribution) allows one to accumulate dollars on a tax-deferred basis, meaning no tax is paid on the money contributed currently but it, along with earnings on the plan, is taxed when money is withdrawn, presumably during retirement. In the case of a Roth retirement plan, taxes are paid on the contributions as they are deposited into your retirement account but may be withdrawn, along with earnings, tax-free after age 59 1/2. Two excellent resources for details on these types of plans are, RothIRA and IRS.
You must follow important details to gain the maximum tax advantage of these types of plans, but the most important consideration is to begin saving now for the sum you will use to support your lifetime income requirement. The funds saved during your accumulation years may supplement income available from Social Security and will ensure you have options for your investment plan. The stock market, annuities, and Certificates of Deposit (CDs) are all investment options to consider when planning for a life-long income plan.
Despite rumors of its premature demise, Social Security remains one of the pillars of most retirement income strategies. But it can be complicated, especially if you and your spouse are both eligible for Social Security benefits. It is best to seek professional advice to determine the optimum point at which to receive your benefit, but the Social Security website provides excellent information. Several institutions, such as Putnam Investments, Charles Schwab, and Fidelity, also have resources which will assist in determining when to begin to take your benefit. Your Normal Retirement Date (NRD) will be determined by your birth year and represents when you will be eligible for your full benefit. However, you may be able to declare your benefit as early as age 62 or as late as age 70. However, keep in mind the consequences if you elect either “early” or “delayed” benefit options. If you choose an early option, your full Social Security benefit may be reduced by as much as 30%, while if you are able to delay until age 70, your full benefit will increase by approximately 8% for each year you delay beyond your NRD.
The need for health insurance protection in retirement is perhaps one of the least emphasized retirement needs. All too often, people assume that Medicare will “kick in” at age 65 and will take care of all medical expenses. This is far from the reality. Assuming you have participated in Medicare during your career, you will have been paying for Medicare Part A coverage all along, and you will be automatically covered at age 65 for most hospital services, skilled nursing facilities, hospice care and home health care without additional expenses. However, other expenses, such as physician services, ambulance costs and lab and X-ray services, are covered under Part B, and prescription drugs are covered under Part D, both at an additional cost.
For 2018, the standard Medicare Part B Premium is $134.00, which is deducted from one’s Social Security benefit or billed monthly if you are not yet receiving Social Security, or if you have other coverage, such as employer-provided health insurance. In addition, you may be charged an income-related monthly adjustment amount (IRMAA) based on your modified adjusted gross income amount (over $85,000.01 if filing as single; over $170,000.01 if married filing jointly) from your prior year’s federal income tax return. In addition to these premium expenses, deductibles and copays often apply that can be as much as 20% of the cost of the service.
To provide financial protection for that remaining 20% of expenses, many individuals opt for a Medicare Supplemental Plan, which generally provides coverage for that remaining 20% of non-covered expenses. For personalized help with Medicare questions, you may call CMS (Centers for Medicare & Medicaid Services) at 1-800-633-4227. Be sure to have your Medicare card with you. Keep in mind that Medicare does not cover custodial care (long-term care) and this can be a substantial drain on your retirement assets.
Another choice for health insurance coverage after age 65 is Medicare Advantage, sometimes referred to as Part C. Medicare Advantage plans are usually offered by local insurance carriers, and frequently replace Medicare Parts A, B & D for a small premium, and provide comprehensive coverage that is similar to Medicare with a Medicare Supplemental plan. Many of these plans have no premium, but the carrier does receive the amounts that are deducted or paid to Medicare, so if you select a Medicare Advantage Plan with zero premium, you will still be required to pay the Medicare billed premium for parts B & D.
Considering finances in anticipation of retirement may seem very frightening, but with some forethought and additional planning, you can eliminate much of the anxiety created by the many unknown factors of aging. The advice of a good financial planner starting in your early 50s can be invaluable when you decide to “hang it up” and enjoy the fruits of your labor.
About the Author
James Toms is a lawyer and retired firm administrator and is treasurer for Lawyers Concerned for Lawyers in Boston, MA.