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If retirement is right around the corner for you, you're not alone. Thanks to the size of the Baby Boom generation, about 10,000 people are reaching age 65 every day, and many Baby Boomers have thought longingly about their chance to give up their working careers and finally move forward with the plans they've made for a long time. Yet as you consider what your retired life will be like, it's important to make sure that your plans include a number of financial considerations. The stakes are too high to make mistakes in these key areas. Below, we'll go through several issues you need to know about before you retire.
Social Security
Social Security makes up the majority of retirement income for millions of retired Americans, and so you need to understand the implications of when you start taking retirement benefits. Most people become eligible for Social Security when they turn 62, but you don't have to take Social Security right away. The size of the payments you'll get for the rest of your life depends on your age when you claim your benefits.
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Currently, full retirement age for Social Security purposes is 66, and you'll only get your full benefit if you wait until then to start getting payments. Take payments at age 62, and they'll be 25% smaller. If you can afford to wait until age 70, on the other hand, you'll get a 32% boost in your payment amount.
The decision of when to take Social Security benefits depends on many factors, including the state of your overall finances, your expectations about retired life, your family situation, and your health. However, it's important to consider the trade-offs of claiming early versus waiting longer, both in terms of your immediate financial situation and what you'll face years or even decades down the road.
Medicare
Retired Americans rely on Medicare to cover a huge portion of their healthcare expenses. There are a couple of things to consider about Medicare as you plan your retirement.
First, most people become eligible for Medicare at age 65. Therefore, if you're planning on retiring before that, you need to have a plan for how to cover your health insurance needs between when you retire and your 65th birthday. Continuing coverage under the law known as COBRA is available for an 18-month period following termination of employment, but your employer will no longer cover its portion of your premium, and that can create a huge financial burden if you're not prepared for it. Similarly, the Affordable Care Act has made coverage more readily available to early retirees, but again, the costs can be substantial.
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Conversely, if you work beyond age 65, you'll still need to consider when to sign up for Medicare. If you work for an employer with 20 or more employees and have group health plan coverage, then Medicare typically takes only a secondary role in covering healthcare costs. For smaller employers, Medicare is the primary payer, and your group health plan provides the backstop in coverage. It's important to talk with your employer about coordinating your group health plan benefits with Medicare in order to decide whether signing up makes sense.
Finally, Medicare imposes penalties on those who don't sign up at the proper time. Generally, regular enrollment takes place within a seven-month window that starts three months before your 65th birthday. If you're covered under a group health plan, then a special enrollment period allows you to sign up later without penalty. However, starting Medicare late can increase your monthly premiums either temporarily or for the rest of your life, so it's important to stay on top of enrolling in a timely manner.
Investing
Many people believe that retirement investors should be extremely conservative with their money. It's true that a shorter time horizon suggests that you should be less exposed to the volatility of the stock market. But many people underestimate just how long their time horizon is. The average life expectancy at age 65 is more than 20 years, and many can expect to live 30 years or more as advances in medicine extend lifespans.
As a result, you'll need your money not just to provide income during retirement but also to produce at least some growth. That requires a greater portion of your assets be invested in higher-risk investments, especially given the low interest rates on safer investments like bank CDs and government bonds right now. You don't have to be incredibly aggressive, but incorporating dividend stocks and other income-producing assets that have growth potential can go a long way toward helping you keep up with rising costs during your retired years.
Retirement is an important milestone in your life, and you only get one chance to get it right. By taking care of key financial issues before you retire, you'll be certain that you've started out the most exciting chapter of your lifetime on the right foot.
