1Source: Employee Benefit Research Institute, 2024
2Note that if you work while receiving Social
Security benefits and are under full retirement age, your benefits may be
reduced until you reach full retirement age.
3Working with a tax or financial professional
cannot guarantee financial success.
4Source: Employee Benefit Research Institute, 2025 5A complete statement of coverage, including
exclusions, exceptions, and limitations, is found only in the LTC policy. It
should be noted that carriers have the discretion to raise their rates and
remove their products from the marketplace.
| | 10 Years and Counting: Points to Consider as You Approach
Retirement
If you're a decade or so away from retirement, you've
probably spent at least some time thinking about this major life change. How
will you manage the transition? Will you travel, take up a new sport or hobby,
or spend more time with friends and family? Should you consider relocating?
Will you continue to work in some capacity? Will changes in your income sources
affect your standard of living?
When you begin to ponder all the issues surrounding the
transition, the process can seem downright daunting. However, thinking about a
few key points now, while you still have years ahead, can help you focus your
efforts and minimize the anxiety that often accompanies the shift.
Reassess your living expenses
A step you will probably take several times between now and
retirement — and maybe several more times thereafter — is thinking about how
your living expenses could or should change. For example, while commuting and
other work-related costs may decrease, other budget items may rise. Health-care
costs, in particular, may increase as you progress through retirement.
Try to estimate what your monthly expense budget will look
like in the first few years after you stop working. And then continue to
reassess this budget as your vision of retirement becomes reality.
According to a recent survey, 41% of retirees said they were
"very confident" that they would be able to meet their basic expenses in
retirement, while only 30% showed similar levels of confidence in meeting
health-care costs.1 Keeping a close eye on your spending in the
years leading up to retirement can help you more accurately anticipate your
budget during retirement.
Consider all your income sources
First, figure out how much you stand to receive from Social
Security. The amount you receive will depend on your earnings history and other
unique factors. You can elect to receive retirement benefits as early as age
62, however, doing so will result in a reduced benefit for life. If you wait
until your full retirement age (66 or 67, depending on your birth date) or
later (up to age 70), your benefit will be higher. The longer you wait, the
larger it will be.2 You can get an estimate of your retirement benefit at the
Social Security Administration website,
ssa.gov.
You can also sign up for a my Social Security account to view your
online Social Security statement, which contains a detailed record of your
earnings and estimates for retirement, survivor, and disability benefits. Your
retirement benefit estimates include amounts at age 62, full retirement age,
and age 70. Check your statement carefully and address any errors as soon as
possible.
Next, review the accounts you've earmarked for retirement
income, including any employer benefits. Start with your employer-sponsored
plan, and then consider any IRAs and traditional investment accounts you may
own. Try to estimate how much they could provide on a monthly basis. If you are
married, be sure to include your spouse's retirement accounts as well. If your
employer provides a traditional pension plan, contact the plan administrator
for an estimate of that monthly benefit amount.
Do you have rental income? Be sure to include that in your
calculations. Might you continue to work? Some retirees find that they are able
to consult, turn a hobby into an income source, or work part-time. Such income
can provide a valuable cushion that helps retirees postpone tapping their
investment accounts, giving the assets more time to potentially grow.
Some other ways to generate extra cash during retirement
include selling gently used goods (such as furniture or designer accessories),
pet sitting, and participating in the sharing economy — e.g., using your car as
a taxi service.
Pay off debt, power up your savings
Once you have an idea of what your possible expenses and
income look like, it's time to bring your attention back to the here and now.
Draw up a plan to pay off debt and power up your retirement savings before you
retire.
Why pay off debt? Entering retirement debt-free —
including paying off your mortgage — will put you in a position to modify your
monthly expenses in retirement if the need arises. On the other hand, entering
retirement with a mortgage, loan, and credit-card balances will put you at the
mercy of those monthly payments. You'll have less of an opportunity to scale
back your spending if necessary.
Why power up your savings? In these final few years
before retirement, you're likely to be earning the highest salary of your
career. Why not save and invest as much as you can in your employer-sponsored
retirement savings plan and/or IRAs? Aim for maximum allowable contributions.
And remember, if you're 50 or older, you can take advantage of catch-up
contributions, which enable you to contribute an additional $7,500 or $11,250 (depending on your age) to your
401(k) plan and an extra $1,000 to your IRA in 2025.
Manage taxes
As you think about when to tap your various resources for
retirement income, remember to consider the tax impact of your strategy. For
example, you may want to withdraw money from your taxable accounts first to
allow your employer-sponsored plans and IRAs more time to potentially benefit
from tax-deferred growth. Keep in mind, however, that generally you are
required to begin taking minimum distributions from tax-deferred accounts once
you reach age 73 (75 for those who reach age 73 after December 31, 2032), whether or not you actually need the money. (Roth IRAs are an
exception to this rule.)
If you decide to work in retirement while receiving Social
Security, understand that income you earn may result in taxable benefits. IRS
Publication 915 offers a worksheet to help you determine whether any portion of
your Social Security benefit is taxable.
If leaving a financial legacy is a goal, you'll also want to
consider how estate taxes and income taxes for your heirs figure into your
overall decisions.
Managing retirement income to result in the best possible
tax scenario can be extremely complicated. Qualified tax and financial
professionals can provide valuable insight and guidance.3 Account for health care
The Employee Benefit Research Institute reported that
the average 65-year-old married couple retiring in 2024 with median
prescription drug expenses would need about $366,000 in savings to have a 90%
chance of meeting their insurance premiums and out-of-pocket health-care costs
in retirement.4 This figure illustrates why health care should get
special attention as you plan the transition to retirement.
As you age, the portion of your budget consumed by
health-related costs (including both medical and dental) will likely increase.
Although Original Medicare (Parts A and B) will cover a portion of your costs,
you'll still have deductibles, copayments, and coinsurance. Unless you're
prepared to pay for these costs out of pocket, you may want to purchase a
supplemental Medigap insurance policy. Medigap policies are sold by private
health insurers and are standardized and regulated by both state and federal
law. These plans offer different levels of coverage and may pay many of your
out-of-pocket costs.
Another option is Medicare Advantage (also known as Medicare
Part C), which is a bundled plan that includes Parts A and B, and usually Part
D prescription coverage, and may offer additional benefits Original Medicare
doesn't cover. If you enroll in Medicare Advantage, you cannot also purchase a
Medigap policy. For more information, visit
medicare.gov. Also think about what would happen if you or your spouse
needed home care, nursing home care, or other forms of long-term assistance,
which Medicare and Medigap will not cover. Long-term care costs vary
substantially depending on where you live and can be extremely expensive. For
this reason, people often consider buying long-term care insurance. Policy
premiums may be tax deductible, based on a number of different factors. If you
have a family history of debilitating illness such as Alzheimer's, have
substantial assets you'd like to protect, or want to leave assets to heirs, a
long-term care policy may be worth considering.5 |