They may have grand notions about sailing around the world and taking up new hobbies or missions in life, maybe even changing the world, but when it comes to how their own lives are going to change, they’re probably not as savvy as they think they are.
One area in particular they might not be too well informed about is that of finance—and some requirements they’ll have to fulfill or be penalized, whether they’re aware of them or not.
And that’s just one facet of retirement they really should know about before they jump in with both feet, lest they overlook some essential action that can end up costing them big time.
The Motley Fool very kindly lined up six things that employees really ought to be clued into before they head out the door for the last time, and we present them here for your retirement delectation:
6. Required minimum distributions can seriously raise your costs.
One somewhat baffling requirement of retirement is the required minimum distribution—that regulation that says that once you hit age 70½, you have to take money from any traditional IRA and traditional 401(k) plan.
And not just that first year, but each year thereafter, with those distributions starting out relatively small but increasing as a percentage of your account balance every year after the first until you reach age 115.
Why is that a big deal? Well, since withdrawals from these kinds of accounts are treated as taxable income, you’re going to owe income tax on the amount you withdraw.
No biggie, you may be thinking; I’m in a lower tax bracket now so even if it goes up a bit, it won’t eat up too much of my income.
Not so fast. You see, what’s even more critical, depending on how much you are required to withdraw, is that those extra funds could boost your income enough that they could expose your Social Security benefits to taxation as well.
Oh, and that’s not all. Since your Medicare Part B premium rises right along with your income, that means that if your income is high enough, Part B can cost you as much as $428.60 per month. Now that’s gonna eat up a lot of income.
5. Medicare premiums can eat up your Social Security increase.
Okay, you may be consoling yourself with the thought that most retirees get an inflation adjustment in their Social Security benefit every year to help them keep up with rising costs.
But—and face it, you knew there would be a but—what most people don’t know is that those pesky increasing Medicare Part B premiums can actually eat up most, if not all, of that inflation adjustment.
It’s true that there’s a “hold harmless” provision that keeps Part B premium increases from taking more than that inflation adjustment, but that’s small consolation if it’s eating up whatever increase you got in your Social Security check.
You see, standard Medicare Part B premiums increased from $104.90 per month in 2015 to as much as $134 per month in 2017, and even though they’re not expected to rise beyond $134 in 2018, that’s not much comfort when net monthly Social Security checks have risen by less than $8 since 2015 because of Medicare Part B premium hikes.
Kind of makes you grit your teeth at that old saw “Don’t spend it all in one place.”
4. It gets a lot harder to ride out a down market once you retire.
As long as you still have a paycheck-producing job and are feeding your retirement accounts,if the market goes south you have your paycheck to cover your costs of living.
With money coming in, you don’t have to touch your retirement accounts and can wait till the market recovers—and maybe even take advantage of low stock prices to add to your holdings. Not a bad scenario, if a little nerve-wracking.
However, once you’re dependent on those retirement assets instead of a paycheck for daily expenses, a down market could become downright terrifying.
If you have to sell stocks to take care of expenses and can’t wait till prices recover, you’re going to run through your retirement assets a lot faster than you anticipated, because you’re going to be doing the reverse of that old adage “Buy low, sell high.”
But if you put together your retirement finances so that you have at least a five-year buffer of bonds and cash to see you through typical bad spells, you’ll forestall the need to sell off when prices are low and your assets will last longer.
3. You could end retirement with bigger retirement account balances than you started with.
But wait, I can almost hear you saying. That’s not a bad thing, is it?
Well, it is if you’ve been denying yourself retirement pleasures—whether trips, restaurant meals or household renovations that would have made your life easier for 10–20 years—so that you’d be sure of having enough to last for the rest of your life.
Adhering to the 4 percent rule—the one that says, with a diversified stock and bond portfolio, you can spend 4 percent of the initial value of your nest egg in the first year of your retirement and then increase your withdrawals annually based on inflation—should mean that, over the course of a 30-year retirement, you’ll be very unlikely to run out of money.
But in an extended bull market, the growth your accounts experience could mean that you’re leaving opportunities on the table by sticking to the 4 percent rule.
Says the report, “Michael Kitces of Pinnacle Advisory Group analyzed models of the 4 percent rule over various 30-year periods all the way back to the late 19th century, and he found that the median follower of the 4 percent rule would end up with about 2.8 times their starting balance at the end of those 30 years.”
And having that money at the end of retirement means you’ve missed out on potential opportunities for enjoyment, improvement or just worry-free living.
2. Other than health-related costs, your expenses might actually go down in retirement.
Americans’ annual household spending, the report says, “tends to decrease once a family is headed by a person aged 55 or older, according to the U.S. Bureau of Labor Statistics.”
Such milestones as paid-off mortgages and adult children who can actually support themselves cut down on what people have been spending on for decades.
In addition, seniors also get (at least for now, but Congress could change that) tax benefits like a larger standard deduction, greater medical-expense deductions, and freedom from the Social Security and Medicare payroll tax.
Plus, as people age they tend to slow down. While they might do lots of traveling at first, the older retirees get, the more they tend to stay put and thus spend less.
You might want to think about that and make sure you get in any years-anticipated trips while you can still enjoy them the most.
1. Time could weigh heavily on your hands.
Unless you have plans in place and a supportive circle of friends with whom you’ve already planned to socialize more, you could find yourself heading for depression—a common problem for retirees.
People who are too dependent on their jobs for social interaction and mental stimulation can find that they’re suddenly at loose ends—and not know what to do about it.
But those who really enjoy retirement have something to do that rewards them—whether with pay, like a part-time job, or with satisfaction, such as volunteering or new hobbies or even going back to school to follow a new course of study.
Bear that in mind as you plan your retirement, and make some plans for leisure as well as financial issues.