Turning Off the Tap - Are You Ready for Retirement?

Making the decision to retire is one of the biggest financial milestones most people face in their lives. Retirement often comes with uncertainty, anxiety, and many adjustments including those not readily foreseen (like spending 24/7 with your spouse!). As Certified Financial Planners™, it is our job to help you identify financial pros/cons and potential blind spots, no matter when you retire, by creating comprehensive financial plans that assess your probability of success and margin of safety. No two plans are the same since no two people are the same, so we are speaking in generalities for those of you who have yet to create your own customized financial plan.

Retiring “Early” (Ages 50-64)
Pros
• Not working! Retiring while you still have the health and energy to live life to its fullest and maybe pursue new interests.
• Ability to use the years with little/no income to convert IRA dollars to tax free Roth dollars while in a low tax bracket.

Cons
• Potential to run out of money!!!! Miscalculating the amount you need to retire and not being able to jump back into the workforce to remedy the situation when necessary.

• Budget pitfalls may include:
  • Private insurance - Individual health insurance prior to Medicare is expensive! Private health insurance costs have consistently and significantly outpaced general economic inflation.
  • On-going home maintenance. (A/Cs, appliances, new roofs, etc.) Every home owner knows there are hidden costs to owning a home. Make sure you plan for the unexpected.
  • New cars every few years; car repairs, or second cars.
  • Education costs for children/grandchildren.
  • Potential wedding contributions for sons/daughters. The average wedding now costs $35,000!
  • Family support for aging parents.
  • Boomerang Kids. Family support for children falling on hard times.
  • Long term care of a spouse or yourself.
  • Expensive hobbies – travel, golf, elegant dining/wine.
  • Death/Divorce of a spouse.
  • Social Security – Social security income (SSI) is calculated based on your average contribution for the previous 35 yrs. Have you factored in the reduced SSI benefit for each of the years prior to Full Retirement Age (FRA) that will now be zero? Zero years will reduce your SSI benefit even if you wait until FRA or later to begin distributions.

Normal Retirement (Ages 65-70)
Pros
• Congratulations! You qualify for Medicare. Be sure to get a good Medicare supplemental policy, preferably with vision/dental, because switching later in life is more expensive than the amount you’d pay at age 65.

• Maximizing social security. Little to no gap in time between your salary and collecting social security.

• Less likelihood you’ll run out of money with a thorough financial plan given the shortened time frame.

Cons
• If you retire after the age of 65, be sure to file for Medicare Part A regardless of having private medical insurance. Accepting Medicare Part B may be an optimal choice as well, depending on your employer’s provider, as there could be policy repercussions for NOT electing to take Medicare at age 65.

• Up to 85% of your social security benefit may be taxed (at your marginal tax rate), if your earned income exceeds a certain threshold.

• Your health may not allow you to do all the things you wanted to do in retirement

Late Retirement (Ages 71+)
Pros
• Hopefully you are still working because you love your job. It provides purpose, mental exercise, and connection.

Cons
• Your traditional IRA will require minimum distributions (RMDs) that are taxed as ordinary income. Working past your RMD age means paying taxes on your current and past income simultaneously. (Note that there is no RMD for Roth IRAs).

Anyone considering retirement who has not yet had their life planned out in numbers (known as a Financial Plan) should consider review with a Certified Financial Planner™ or similar professional. At PASI our approach to addressing client retirement goals and predicted success is to create a comprehensive financial plan entailing the following three steps:

1. Start your plan with an approximate 1-hour call to go over everything you own, everything you owe, all finances coming in and all finances you expect/plan to go out.

2. Sit back and relax as the PASI team builds your financial plan and strategizes on solutions/analysis of the timeline you wish to pursue.

3. Review the details of your financial plan with a 30-60 minute in-person meeting at our office, or by videoconference.

Creating a comprehensive financial plan is a valuable exercise at any point in your financial life, but especially important as you approach retirement. The results can help you refine your game plan, or simply offer peace of mind confirming that you are on the right track with a high liklihood of success.