Retirement planning is no easy feat. It requires saving, investing, knowledge, and foresight to accumulate enough resources to generate a predictable income for your estimated lifespan. As financial planners, we know this can be nerve-wracking for many. We see it almost daily.
When you are working, you already know exactly how much you can spend and save each month. Retirement opens an entirely different challenge- figuring out exactly how much income you can safely withdraw from your investments without running out of money, keeping up with inflation, and protecting your assets.
While the task may be daunting, there is a formula in which to approach the planning process. The first step is to review how much is coming in each month from guaranteed sources, such as a pension or Social Security. A part of every retirees’ monthly income is Social Security.
Social Security Planning
When it comes to social security planning, the most pressing consideration is when to begin taking benefits. Essentially, there is a financial bonus for delaying benefits while there is a penalty for claiming them early, or before your full retirement age. Technically, you can begin receiving benefits as early as age 62, but you will not be entitled to your full benefit amount until you reach your full retirement age. Your full retirement age is determined by the year you born and can be discovered on the SSA website.
Generally, it is best to wait to claim benefits until your full retirement age, but there are several factors that could affect this decision from individual to individual including life expectancy, employment, and spousal benefits. An individual who isn’t in great health, for example, and doesn’t anticipate a long retirement may choose to begin taking benefits at age 62 in order to help protect their other investments for their heirs. Or, in the case where a person decides to retire before their full retirement age and has to draw down other assets (significantly impacting the longevity of their assets), it may be wiser to begin taking benefits early.
Employment and spousal benefits will also influence your timeline. If someone decides to continue working, it may make sense to delay taking benefits as benefits are reduced $1 for every $2 earned before full retirement age over $18, 240 and $1 in benefits for every $3 earned in the year of your full retirement age for earnings over $48, 600.[i] Additionally, if you are married and share income with your spouse, you will want to coordinate your benefits to maximize the total benefits received between the both of you. A general rule of thumb is that the person with the largest benefit should delay taking their benefits as long as they can in order to maximize their own benefit as well as that of their surviving spouse should they pass away.
Adding Medicare to the Mix
As we age, our healthcare needs often increase, making healthcare one of the largest expenses in retirement. Like social security, the big decision with Medicare is when to start taking it. Individuals become eligible during a seven-month window surrounding their 65th birthday—three months prior and three months after the birthday month. If individuals fail to sign up for Part B in this window, their payments could increase by 10% annually for every 12-month period that benefits are delayed. The only exception is if an individual is still working at age 65 and has employee-based coverage. However, when a person stops working, they will have to apply immediately to avoid penalties and fees.
The last thing a retiree wants is to be underinsured. So many times individuals who choose Medicare Part A, which covers hospital stays, Part B which covers physician care, and Part D which covers prescription drugs will need to purchase supplementary policies to “fill the gap.” There are several surprising medical costs not covered by Medicare that can put a severe strain on a retiree’s budget. The key is to purchase the right supplements to help protect your income from these potential expenses.
It is also important to shop around for a new Part D plan each year as the cost of these plans change frequently. Retirees should use the open enrollment period each year from October 15th to December 7th to compare plans and see if a change would be fiscally beneficial. This is especially true for individuals who may have changed medications during the previous year.
Putting the Pieces Together
Social Security and Medicare are an important part of the foundation of your retirement plan. From there, you and your financial professional can begin to use your other investments to fill the income gap where social security leaves off. The process ensures that your expenses are covered with as many guarantees as possible. Maximizing social security and being properly equipped to cover your medical expenses can potentially save you thousands of dollars each year over the course of your retirement.
At URS Advisory, we understand the exact risks you will face in retirement and pride ourselves on helping you mitigate these risks as much as possible throughout your planning process. If you’d like to learn more about our comprehensive retirement planning services, we invite you to schedule a complimentary conversation with us. We would love to get to know you and see if our advisory firm would be a good fit.
Disclaimer: Advisory services are offered through URS Advisory LLC, a Registered Investment Advisor in the State of Florida. Insurance products and services are offered through URS Insurance, an affiliated company. URS Advisory LLC and URS Insurance are not affiliated with or endorsed by the Social Security Administration or any government agency. Investing involves risk including the potential for loss, and past performance is no indication of future results. Opinions expressed herein are solely those of URS Advisory. All written content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Material presented is believed to be from reliable sources; however, we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your financial adviser or qualified professional before making any financial decisions.