There’s a lot of content out there on how to make the most out of your retirement once you actually retire, and there’s even more about how you can best plan and prepare for retirement (I’ve even written one of those), but there isn’t much that outlines the exact steps you’ll take during the few months before and after retiring.
Ultimately, retiring is a huge moment in someone’s life and because of that it might seem more complicated than it really is. When in reality, retirement is only complicated because it comes with a lot of choices, and while that might seem daunting, it really isn’t.
The reason there’s nothing scary about all these choices is because, in many ways, you’ve actually already made them. For example, if you’re trying to decide which form of healthcare you should get, the best option for you almost entirely depends on what job you had previously and any health conditions that you currently have.
So, why are there so Many Choices?
Retiring involves federal, state, and local programs often all compiling on top of one another. This is even more complicated when you add your workplace’s benefit programs too. These programs often overlap, which is where choices come into play. While that might sound frustrating its actually a good thing.
Much like snowflakes and airplane rides, no two retirement plans are the same. There are a lot of variables in life, and that doesn’t change when you turn 65. You might need a more comprehensive healthcare plan than your fellow retirees, or maybe you have a pension, or a maxed-out 401k. Because of this, its good that there are a lot of choices you get to make, so that way you can make the most out of retirement.
What Choices am I Making?
Social Security, 401(k)s, & Pensions
The biggest tip I’ve heard from retirees is that they wished they talked with a financial planner before retiring. There are a lot of rules and restrictions surrounding all forms of retirement income, and even the most expensive financial advisor will probably save you more money than they cost. SDPEBA highly recommends you seek out a personal financial advisor within 5 years of retiring. That way you can get yourself squared away and come up with a custom action plan that works for you. While the following tips are not financial advice, they are things I heard from real retirees.
Social Security
The biggest choice you have to make regarding Social Security is when to file. There is no correct answer to this question as it really depends on what your needs are.
Basically, when you file for Social Security, you’re assigned a benefit percentage that follows you for the rest of your life. This percentage increases with time, meaning you’ll get more money the longer you wait to start receiving benefits. Generally, the percentage increases aren’t massive enough where you’re shooting yourself in the foot if you file early, but it can make a substantial difference in the long-run, especially since 33% of retirees live to age 90.
That being said your monthly Social Security check isn’t actually set in stone, that number changes based on cost of living, inflation, and your current work status.
As you can see, Social Security is pretty complicated, but basically what you need to consider is your plan. How much is it going to cost per month for you to have the retirement of your dreams? Do you need to wait a few years to file to make it happen? Or, by filing early, would you still be able to afford it? What other income sources do you have in place? Could you leverage those for a higher payout later?
For more on that, you can check out this retirement age calculator and see what percent you’ll receive at different ages. Note that whatever year is “100%,” that year is your “full retirement age.” If you were born after 1960, that age is 67, anyone born prior to 1960 has a retirement age between 66-67, you can click here for more info on finding your full retirement age.
401(k)s and IRA’s
If you thought Social Security was complicated, well. Buckle up.
If you, at any point, take money from your 401(k)/IRA before you are 59 ½ years old, there will be a 10% penalty fee paid to the IRS. So, the first tip I heard was “don’t do that.” The other thing I learned is that 401(k)s/IRAs can vary drastically depending on your plan administrator.
For the most part though, once you retire, you have three options.
- You can withdraw a lump sum from your 401(k) or you can take qualified distributions.
- You can let it lie, and continue to accrue interest with your employer.
- You can transfer it to an IRA and manage it on your own.
The biggest thing to keep in mind is that if your 401(k) is a traditional plan (as opposed to a Roth plan) you will pay income taxes on it. Since your 401(k) can be a relatively large sum of cash, you’ll need to be mindful of the choice you end up making.
There are a lot of different rules and regulations that vary based on your age, how much money you have, your income prior to retiring, and how your plan is regulated, so I’m going to take this time to repeat that this isn’t financial advice, and that you really should contact a financial planner.
Pensions
Pensions are heavily dependent on the employer that’s providing them. Basically, you should have a long talk with your employer and your financial planner to make the best choices.
The biggest question pensioners are faced with when retiring is to take a lump-sum or an annuity. This again varies case by case. Since a pension is paid out entirely by your employer, you need to keep in mind the health of your company, is there a chance they’re going to run low on funds or go out of business? You also should consider how much money you’re going to need monthly and if you’re going to outlive your pension pot.
A lot of people out there will recommend you take a lump-sum and invest it. This comes with a huge amount of risk. So, guess what? I recommend you talk with a financial advisor before making these kinds of choices.
If you’re still concerned about income in this regard, check out this article that goes into way more detail about everything we just talked about!
Medicare and Supplemental Insurance
Ahh, Medicare. A riddle wrapped in a mystery inside an enigma. Except, well, it’s actually not that complicated.
When it comes to Medicare you have two basic options that have branching paths from there. The big choice is, “do I take Original Medicare or do I take Medicare Advantage?”
Original Medicare refers to Medicare Parts A and B. Medicare Part A is free for anyone who has put at least 10 years of income into Medicare, which is basically 99.9% of all Americans looking to retire, you can think of it as insurance that covers short-term inpatient care. So, if you’re temporarily in a nursing home, hospice, or are staying overnight in the hospital, this is what’s going to help you pay for it.
Medicare Part B is basically a traditional health care plan. You pay monthly for it (as of 2021 the average price is $148 a month, but rates vary based on your income prior to retiring). And it basically covers 80% of your medical bills for you.
On top of Medicare Parts A and B you can add Medicare Supplemental Insurance, which come from 3rd party insurance companies and or your former employer. This is a plan that stacks on top of Medicare Parts A and B and often costs just a bit more to cover the remaining 20% of your Medicare Part B plan.
Medicare Part C is a full package plan that replaces Medicare Part B and often includes dental and vision insurance too. These plans are run by 3rd party insurance companies, but are sponsored by Medicare. They are a bit more expensive than Original Medicare + Supplemental insurance, but offers more coverage.
Ultimately, the choice is based on what your former employer might offer, what you can afford, and what you think you’ll need in terms of care.
If you’d like to learn more about that, you can check out this article that goes into way more detail about all of the parts of Medicare and Supplemental insurance.
Steps Surrounding Retirement
Once you’ve got a good handle on all of these choices, the next step is to actually start retiring, right?
Well. Not quite. Initiating the process of retiring usually takes around 6 months, so talk to your employer or RISK Management and let them know when you’re planning on retiring. Often times they’ll help you with the paperwork required to get started on Social Security, Medicare, and everything else. Once you’re set on that, there are a couple of other steps you should take while you’re waiting for those 6 months to pass by.
The first step is to really take a look at your assets. What do you own and what do you owe? Do you plan to sell anything to help pay for retirement? Or do you plan to make any large purchases? If so, how will that affect your finances?
Next, is to realistically plan and budget your expenses. How much does the lifestyle you want cost and what will you do if you can’t afford it? How much do you need to cover basic expenses? Do you have an emergency fund? What needs do you have?
Then, with that in mind, draw up a plan. Where will you live, are you going to travel, are you going to continue working, when will you pull money from Social Security? Have these big ideas and their costs mapped out so you’re able to make them happen!
And finally, get an Estate Plan. You probably already have one, but it’s really important to have health directives, power of attorney, and your will/trust lined up just in case something does happen to you.
Once you’ve done all that, have gotten all your choices squared away, and are through your retirement process at work, you finally are ready to retire, and by now, you definitely earned it.
Now that all the hoops are jumped through, paperwork is filed, and financial advisors are met with, things sort of work themselves out from there! Anything that needs to come up, will come up, but other than that, you’re set to peacefully live out the rest of your days playing Canasta and going birding.
Which, I guess brings me to the last step. Every retiree I’ve talked to begged me to include get a hobby as a final step. Which, I suppose is easier said than done. Many suggested charity work/volunteering, others suggested more creative endeavors, and one even recommended that you learn to build a boat, which… I don’t know if that’s something I can really get behind, but I suppose its best if you do whatever makes you happy. Just make sure you’re doing something.