Retirement planning at any age can be challenging. Still, there are certain steps to take when you're in your mid-60s and beyond to make sure you're ready for those golden years.
KEY TAKEAWAYS
- Many people choose to continue working past retirement age for extra income or to stay engaged.
- If you were born in 1960 or later, your full retirement age for Social Security benefits is 67.
- You can sign up for Medicare at age 65, whether or not you're retired.
- Required minimum distributions for traditional IRAs and 401(k)s start at age 72, although they have been suspended in 2020 due to the CARES Act, passed amid the COVID-19 pandemic.
At one time, the common age for retirement was 65, but times have changed. Even the Social Security Administration (SSA) has increased the age when full retirement benefits are available.1 Also, there has been a shift from defined-benefit plans to defined-contribution plans in many company-sponsored plans.
Adding to these changes is the fact that many savings programs are not producing projected returns. It's easy to see why many individuals may need to postpone retirement.
Of course, even if you are financially secure, reaching age 65 does not always mean it's time to retire. Many people who are 65 years old love their jobs and want to continue working. Still, there are a few things to consider—and take care of—as part of retirement planning in your mid-60s and beyond.
Determine Your Retirement Readiness
If your employer's policy is to offer retirement at age 65, think about whether you are really ready to quit from a psychological and a financial perspective. If not, consider whether you want to ask your employer to allow you to work a few more years, or if you'd like to be hired as a consultant.
Ideally, you will do this at least a year before you reach 65, as some employers start the retirement process early. Many employers now focus on hiring and retaining employees who are experienced and "know the business" to strengthen their intellectual banks.
Staying on as a salaried employee not only means you continue to receive a steady income, but you will also continue to receive health coverage and other benefits your employer offers. On the other hand, going the consultant route offers you more flexibility and could allow you to have more of a working retirement.
Create a Retirement Budget
Retirees who have saved up for many years can feel that reaching retirement age means it's time to enjoy the fruits of their labor. Fair enough, but the risk is that people can go overboard and spend it all in a few years.
To avoid falling into this trap, budget your expenses. Be sure to include new costs you plan to incur, such as extra travel. This will help you make a realistic determination of how easily you can afford some of those future plans.
Once you are no longer working, a budget is even more important, as your income will likely come from your savings, Social Security, and any pension plans you may have.
According to William DeShurko, chief investment officer at Fund Trader Pro: "An easy way to do a budget is to take out your most recent pay stubs. Look at the net pay amount after all deductions have been made. Convert that to a monthly number. Add or subtract amounts that will be different in retirement. Usually, this number doesn't change much. If anything, it goes up to account for more travel. If you have to budget down to every expenditure, don't retire. You can't be cutting it close with a 30- or 40-year period of spending ahead of you."
Decide When To Take Social Security
Social Security is usually included in an individual's financial projections for retirement. One key decision when factoring Social Security into your equation is to determine whether you will receive full or reduced benefits.
If you were born before 1938, you are eligible to receive full retirement benefits from the SSA at age 65. If you were born in 1938 or afterward, your full retirement is determined by how long after 1937 you were born.1 See the following table for details.
Source: Internal Revenue Service1
If you take Social Security benefits before you reach your normal retirement age, your annual benefits will be lower than if you waited until you reached full retirement age.1
If you do not need the payments when you reach full retirement age, consider waiting until age 70 to garner the maximum possible benefit. Waiting any longer will not raise what you'll receive.2
"Factors that drive when it is best to take Social Security include the historical income of you and your spouse, your ages and life expectancy," says Mark Hebner, founder and president of Index Fund Advisors and author of Index Funds: The 12-Step Recovery Program for Active Investors.
"Most adults who are healthy would benefit from suspending their Social Security until they reach age 70," Hebner adds. "There are online resources for investors to help them maximize their potential Social Security payout.”
To get a complete understanding of your Social Security benefits, including determining how much you are projected to receive, visit the Social Security Administration website.
Sign up for Medicare
Medicare can be used to cover certain medical-related expenses instead of using your savings to cover those amounts. Medicare provides hospital insurance—for in-patient care and certain follow-up care—and medical insurance coverage for physician services that are not covered under the hospital insurance.
Medicare is available to individuals who are age 65 and older. (The age can be younger for individuals who are disabled or have permanent kidney failure.) The medical portion of the insurance is available at a premium and is optional.3
If you are covered by a health plan at work, you may not need the medical portion. You can compare the costs and features of both and choose the one that is most suitable for you. The hospital insurance is available at no additional cost to you, as you have already paid for it as part of your Social Security taxes while you were working.3
Even if you will not retire at age 65, you may still want to consider signing up for Medicare, as Medicare may cost you 10% more if you sign up later.4
Use Your Home for Income
If you live in a large place, it may be time to consider whether you should move to a smaller home that is less costly to maintain or to an area where the cost of living is lower. Changing residences could provide some additional funds to add to your retirement nest egg.
If you are not willing to move or sell your home but need additional income, consider whether the risks involved in a reverse mortgage are suitable for you. Under a reverse mortgage program, a lender uses the equity in your home to provide you with tax-free income.
Before applying for a reverse mortgage, be sure to ask as many questions as possible, including how much in fees you'll pay, the terms of the mortgage, and your receipt-of-payment options.
Manage Your Income During Retirement
If you need to take income from your savings to finance your retirement, take steps to ensure that you minimize taxes and maximize what you get to keep. Your unique financial profile will determine the most opportune time to use certain types of income.
From a general perspective, withdrawals from tax-deferred accounts such a traditional IRAs and employer-sponsored plans should occur during the years when your income tax rate is lower. This will help to minimize the amount of income tax you owe on those amounts.
Take Required Minimum Distributions
Of course, if you are of the required minimum distribution (RMD) age, you must satisfy your RMD amounts from those accounts—regardless of your tax rate.
For years, the RMD age was 70½. The SECURE Act, which became law in Dec. 2019, bumped it up to reflect increased life expectancies. You now have until age 72 to start taking RMDs from your traditional IRAs and 401(k) plans. However, if you miss an RMD, you will owe a 50% penalty on the amount you should have withdrawn.5
Keep in mind that Roth IRAs don't have RMDs.5 You can keep your money in a Roth as long as you want and pass the entire account to your beneficiaries.
For 2020, you don't have to take any RMDs, as a result of the March 2020 passage of the CARES (Coronavirus Aid, Relief, and Economic Security) Act. The $2 trillion stimulus plan was established amid the economic downturn set in play by the global coronavirus pandemic.6
The Bottom Line
You will likely read lots of advice about timing your retirement and ways to manage your income. Still, one thing to remember is that there is no one-size-fits-all solution.
Working with a financial planner or retirement counselor can help you design a solution tailored to your needs and income. Ideally, start planning for retirement as early as possible, and don't forget to rebalance your investment portfolio as often as necessary.
