Your Retirement Questions Answered
Jason 0 Comments Retire Wealthy Retirement Planning Tips for Retiree's
Nobody teaches you how to retire in school, so you might have a lot of unanswered questions as you approach retirement. We're going to talk about some of the most frequently asked questions, including Social Security, health care, how much money you need, and more… So let's start with how much money you need to retire. There are a couple of ways to answer that, and the best and most honest way is that it depends on a lot of factors, including how much money you have saved up, what you're going to earn or lose on that money, and over what period of time you're going to take withdrawals.
Some people want a quicker answer, so a couple of tips for you: one is to use a chart that shows you some basic check points and it make some assumptions that you need to make sure that you're comfortable with and on board with. But you can use this to at least get a ballpark idea of where you stand for retirement. The other way to do it is to multiply the amount you want to withdraw from your savings (this is not necessarily the amount you want to spend in retirement because you might also have income from Social Security and pensions, but the amount you want to withdraw) multiply that by 25 and that can give you a lump sum amount that you might want to have saved or retirement.
This is just based on sort of a rule of thumb, and it's not a perfect number, it's not gonna guarantee anything, but it can help you estimate using the opposite of the 4% rule, how much money you might want to have, so as an example, if you wanted to withdraw $40,000 per year from your savings, we would multiply that by 25 to arrive at a number of $1 million that you would want to have saved a retirement. Again, 40,000 times 25 equals 1 million. That's going to be your goal. Again, neither the chart or the multiply by 25 who are perfect, and we would love for you to actually do a detailed cash flow projection and estimate taxes and all that other stuff, but these can at least give you a ballpark idea, next is when to take your social security benefits, you can claim your benefits as early as age 62, but if you do that, you get a reduced benefit as compared to your full retirement age benefit, so that reduced benefit means you get less money each month, and if a surviving spouse takes over your Social Security income, they are also stuck with that permanently reduced amount, so it can be problematic to claim early, now you can claim at your full retirement age, and that depends on your birthday, or you can delay claiming and wait until age 70 as you delay.
You get effectively about an 8% per year race, it happens every month, so you don't have to do it on your birthday, but you get about an 8% per year raise, and then those increases stop once you reach age 70, so there's not much benefit. And waiting past that, this confuses a lot of people because they might think, Well, if I retire at age 62, I think I wanna start taking Social Security right away at age 62. And that might make sense and that might be the right answer for you, but it's always helpful to do some calculations to figure out maybe you can spend from your assets and delay claiming and get a bigger social security paycheck when you claim later in life by the way in the meantime, they're in between your retirement date and your first social security payment, you might have the opportunity to do things like convert some assets to rot or pre pay some taxes during your very low income earning years.
So a number of strategies you have, in general, for a lot of people, unless you have major health issues, it pays to wait to claim Social Security. Next is How much will healthcare cost in retirement during your working years, your employer has probably been paying a portion were all of your health insurance premiums, and when you retire, that changes and you are responsible for those costs. So if you are age 65, you're typically gonna go on Medicare, and that's fairly straightforward, although you have a couple of options, and we'll go over some rough cost there, but if you're retired before age 65, it's quite a bit more challenging. You might need to get a plan from the exchange, or you might need to use Cobra or your state's continuation program, so that you can keep using your former employer's healthcare for, let's say, 18 months at a maximum unless California.
But that can be quite expensive. So you need to be aware of those costs, you might also be able to switch to a spouse's coverage. So Let's talk about some Medicare cost. If you're a 65 year old woman, you might expect to spend about 7000 on your first year of retirement on out of pocket expenses, and that assumes you have decent health, but one or two issues, and if you have poor health, it's gonna be more expensive than that. A study from Fidelity tells us each year what retirees should expect in terms of healthcare spending for 2020, that number was 295000 of out of pocket costs, and that ignores any potential long term care costs, so this isn't something that you need to write a check for at the beginning of retirement, that full 295000, but it's what two people might spend between age 65 and the end of their life.
Next is a logistical question. People often wonder, How do I actually spend the money that I have saved up? It's in this account, how do I actually get it out and pay whoever I'm paying, and the answer is, oftentimes, you're gonna move your money to an IRA or an Individual Retirement Account, and you can typically link that account, let's say it's an investment account, with a discount broker or with a financial advisor, you can link that account to your bank account and you can just transfer money over electronically, it's very easy, you can also set up automatic monthly payments to kind of replicate what your income was like during your working years, or if you need a lump sum, you can call them up and say, The furnace broke, send me several thousand dollars, whatever the case may be, and you can make that happen and you get the money within a couple of days, so that's typically how the logistics work.
You should be aware that if you're taking withdrawals from retirement accounts, that's gonna generate taxable income for you, so you can't necessarily spend every penny that you have saved in retirement accounts, if you have 100000 in a retirement account, you're gonna have to pay… Who knows, it might be 18 30000 in taxes to the IRS. So you don't necessarily wanna spend every penny of that Talk to your CPA and figure out exactly what that's gonna look like, just be aware for now that you can't spend all that money. The Other thing to know is that you wanna make sure that this money lasts for the rest of your life, we don't want you to outlive your money, so you need to withdraw at a rate that draws down your account balances gradually or slowly enough so that you don't run out of money, a couple of techniques for that, one of them we touched on with that 4% roll above, and you can learn more about that elsewhere.
Next is, when do most people retire, and you can, of course, retire whenever you have the financial resources to stop working, according to the Employee Benefits Research Institute, most people retire around age 62, an interesting fact that is a lot of people find themselves forced into retirement earlier than they expected. So that's about 40% of people, and a lot of times the reason for that is healthcare, you might be experiencing problems yourself, or you might be caring for a loved one, and that takes you out of the workforce, so that creates a challenge in terms of planning for retirement, because you might not work as long as you had initially thought, the other leading cause of leaving the workforce early at an unexpected time as changes in your job, your employer might reorganize, start doing things differently. Who knows what the case is, but that can often surprise people and put them out of the workforce for the rest of their lives, that Leads us to the question of working longer…
Is that beneficial? So if you work part time or if you're looking at your retirement prospects and it doesn't look as good as you want, should you keep working a couple of extra years, and the answer is it typically is quite helpful for you, and here's why. Number one, your Social Security benefits might improve because social security looks at your 35 highest earning years, and if you continue working later in life, you're typically at your peak earning years, you have earned your promotions, you've developed in a career, and you might presumably be learning some of the IS salary you've ever earned in your life, so as you can add more years at that higher salary, that helps your social security… The concept is the same for pensions, many pension systems look at your highest three years of earnings and they're gonna base your pension payout on that, so if you've got higher earnings for more years, that can just help you out.
The Other way it helps is that you might delay taking your Social Security or your pension at a later age, and as you take those benefits later, you tend to get more each month, so again, we said Social Security, you can claim as early as age 62, but you get that reduction. And if you wait a couple of years till your full retirement age, you get more than at age 62, and you can further increase that by waiting until age 70. Another way that working longer helps is that you have fewer years of retirement to fund, this might sound morbid, but essentially we're looking at the period of time between when you stop working and when you die, and we need you to have an income during that period, but if you keep working longer, that puts you closer to the day you die, and that means fewer years of funding that we need to provide, and finally, as you keep on working, you have the opportunity to say more, you have income, so you can set aside some of that money in your retirement accounts and that provides resources that you can spend later.
Next is the question of annuities. Does an annuity make sense for you? This is a huge and complicated world to deal with, and we can't possibly cover it in a couple of minutes here, but what I would say is that the simplest and purest form of an annuity is something where you just give the insurance company some money and a lump sum, then they pay that money back out to you over time, and they typically guarantee that those payments would last maybe for the rest of your life, or maybe for you and a spouse is life, or maybe for at least 10 years, if you are both of you died within just a few years, those are the simplest types of annuities, and those tend to make the most sense. Other types of annuities get extremely complicated, they can be problematic, you wanna be very careful in approaching those kind of annuities, so just be aware that there are different flavors of annuities out there, and I would suggest talking with the only financial planner to evaluate which annuities might or might not make sense for you.
The only advisors don't get any commission, and so that can take the commission piece out of the question, if somebody is recommending an annuity, you wanna know if they're getting a commission and exactly how much that commission is, it is pretty much never clear. You're probably not gonna know that, so you wanna try and get unbiased advice on these questions, next is the question of taxes in retirement, you are going to most likely pay some taxes, so as I mentioned earlier, is you take money out of pre tax retirement accounts, you typically generate taxable income, and you might have to pay taxes on that income, people also wonder about Social Security, so do you owe taxes on that? And the answer is, it depends. If your earnings go above a certain level, and that number can change from time to time, so probably not worth getting into it, but if you go above a certain level, 50% of your Social Security income might be taxable if you go above a higher level, 85% of your Social Security income could be taxable income, so you wanna try and manage what your taxes are gonna be in retirement, there are several strategies for doing that, that can include timing when you take different withdraws from different accounts, it might include strategies like Roth conversions, you just wanna look at all of these different opportunities to manage what you've pay in taxes so that you have as much as possible to spend on things in retirement.
Will social security run out of money? That's always a big question, and I have a separate video that pretty much just talks about this, but the answer is we don't know, but probably not… So the Social Security trust fund, as you've probably heard, was scheduled to run out of money in 2035, but that could be accelerated due to covid 19, more like 20 29. What you wanna know is that Social Security is a pay as you go system for the most part, so about 75% of the money that's needed to pay out beneficiaries to pay retirement income, let's say, on social security, comes from people's payroll taxes each year.
So if the Social Security trust fund just went away and nothing happened, when people might still receive about 75% of what they were promised, there Are several other ways to fix Social Security, and those include just making small tweaks the US, especially as a retiree, probably would not notice, we don't wanna guarantee anything 'cause we just don't know what the future will bring, but it's likely that you'll probably get the benefits that you were promised, especially if you're over…
Let's say 60 years old today, and for those who are younger, probably smart to expect the Social Security will one way or another be less generous than it has been in the past. Next is the question on pensions, so your employer pays you a pension, maybe it's a city, maybe it's a private employer, a company, and what happens if that company goes bankrupt? Well. You might not necessarily be of luck, many pensions are covered by the PGC or the pension benefit guarantee corporation, that is an agency of the US government, but it does have some limits on how much it's going to pay you, so if you are a particularly high earner, you might not get as much after your organization goes bankrupt as you were before, for 2021, the maxim a monthly benefit for a 65 year old with 634 per month, so if your pension was higher than that, you might suffer some losses in the event of a bankruptcy, but if you're below that, you might be relatively comfortable that you wouldn't see major changes… I hope this information has been helpful.
I'd love to help you plan your retirement, if you'd like to chat, please reach you out, we can look at how your retirement years might unfold, we can uncover maybe some opportunities to help you manage taxes or just to improve your chances in retirement. So please reach out, I'd love to talk. Please subscribe to this channel, and you can do that with the little red graphic there in the bottom right now, that does not cost you anything, what it does is helps you stay informed and get more information like this, and it also helps me out a teeny bit so thank you and thanks everybody. Who is already subscribed?.
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