“I have to admit, at first, it was really overwhelming, and I would get stressed about putting things together. Now, it’s like trying to figure out a puzzle piece, and I love that.” – Selena Gomez
Planning for retirement is easy. Well easier than planning in retirement, at least. When saving for retirement, “all” you need to do is save a portion of your income, earn a decent rate of return, and avoid awful decisions. Depending on how young you are, even then, the “awful decisions” may not be catastrophic.
Planning in retirement (or retirement income planning in financial advisor jargon), to paraphrase Selena Gomez (someone who I never thought I would be quoting), is like figuring out a puzzle. Each of you may know the pieces of the retirement puzzle, such as social security, pension, IRA, house, insurance. You also know what the reward for completing the puzzle will be — the perfect retired lifestyle. All you have to do is put the pieces together.
The key to solving this puzzle is understanding how each choice you make will impact the different parts of your retirement. For example, if you see an income spike one year, maybe from a Roth conversion or deferred comp payout, you know you have to pay the tax on that amount. However, your income is now higher, and you may be exposing more of your social security to taxation. If the amount is large enough, you might incur a Medicare premium surcharge in two years.
Another example that surprised people: taking a trip around the world. Medicare doesn’t typically cover outside of the US. You may want to change your Medicare Advantage or Medigap plan in case something goes awry on your trip. However, since you can only switch plans during certain times of the year, you need to plan. Since you are probably increasing your coverage, the premiums will be higher.
What many people find scary is all of this spending now comes from your savings. Every choice you make is paid for by you; no employer is providing an income. When the unexpected happens, it falls on you to adjust. Thus, ongoing planning is needed to lessen stress and errors.
Retirement income planning can get confusing with all the ages you have to keep straight. Ages such as 59½, 62, 65, 66-67, and 72 all have significance*, and getting them wrong can create problems. Additionally, there are deadlines to be concerned with that, some of which are time periods (60 days after…), while others are specific dates (by 12/31 after…).
When you were working, you made a decision each time you cashed your paycheck between immediate spending and delayed spending (savings). During retirement, the choice is between income certainty and income flexibility. Income certainty is a guaranteed check like social security, a pension, or an annuity. You know you will always have the money, but it will not grow, and if you need extra, there is nothing you can do. Income flexibility is savings. You can take as much or as little you need whenever you want, and it has the potential to grow. However, there is no guarantee that your savings will last for the rest of your life.
The point is not to confuse or intimidate you but illustrate how retirement income planning is distinct from any other type of financial planning you may have dealt with in the past. On the plus side, once you retire, you may have more time to stay on top of these issues. Of course, wanting to spend the time doing it is another question. As you have heard me say before, the decision to hire a financial advisor comes down to three questions:
-Can I do it myself?
-Will I do it myself?
-Is this how I want to use my time?
Connecting puzzle pieces becomes a lot easier if you have the final picture to follow. Creating a plan for the time after you enter retirement is like having that final picture.
59½ – Penalty free withdrawals from retirement accounts
62 – Earliest age to claim Social Security
65 – Eligible for Medicare
66-67 – Full retirement age for Social Security
72 – Require Minimum Distributions start
Kevin focuses on helping people with retirement income planning. He is concerned that too many people become overwhelmed as they shift from building their retirement savings to using their retirement savings to support their desired lifestyle. By engaging in a robust planning process, he aims to lessen the financial fears we all have after we end our careers. Learn more about Kevin