When it comes to retirement, you're well-served to remember the carpenter's rule: Measure twice, cut once. You don't want to claim your Social Security at age 62, for example, and then realize six months later you have to return to the workforce. Missteps like that can be costly.
As you approach retirement, it's wise to check and recheck your financial health -- but it's critical in this period of market volatility. Yes, your retirement savings balance is in flux. And yes, this market downturn, like all the rest, is temporary. But a review of where you stand today, outside of your savings balance, may inspire you to make different choices that'll benefit you tomorrow. If you hope to retire before 2025, here are six steps to measure your retirement readiness.
1. Find out what to expect from Social Security
View your estimated Social Security benefits by creating an account online at My Social Security. Once you log in, you'll see three estimates of your benefits, depending on when you claim:
- Age 62. This is the earliest you can apply for Social Security. You'll see that your benefit is lower when you claim early.
- Full Retirement Age (FRA). Your FRA is between 66 and 67, depending on the year you were born. You qualify for your full benefit at FRA.
- Age 70. Your benefit increases if you delay claiming beyond your FRA, but reaches its maximum when you turn 70.
If your estimated Social Security benefit is disappointing, take steps to increase it while you're still working. The benefit calculation relies on your average monthly income in your 35 highest-paid, income-earning years. Raise that average and you raise your benefit, too.
As with any average, you'd increase it by replacing lower values with higher ones. If your income is at or near its peak, continuing to work will naturally raise your average. Your salary this year, for example, replaces your lower salary of 35 years ago in the calculation. The only time this doesn't apply is if you've earned the Social Security income limit for 35 years straight. That income cap in 2020 is $137,700.
2. Estimate pension benefits
Quantifying your pension income is straightforward if you still have access to the pension administrator. Simply reach out to that administrator and ask about your expected benefits.
Things are trickier if you've lost track of your pension details. In that case, search the Pension Benefit Guaranty Corporation's unclaimed pensions database. Also look through your old employment paperwork, and call former employers' benefits departments and inquire about pension benefits.
3. Know your living expenses
Knowing your living expenses in detail is one of the most productive retirement planning steps you can take. That's because your living expenses ultimately determine how much money you need to retire. It is possible to retire as scheduled even when your portfolio is down 20% -- but you'd have to adjust your living expenses now and going forward to make that happen.
Start tracking your spending today. You can use an app like Clarity Money or Mint, or you can regularly download and review your bank transactions manually. The manual review may be more productive, because you have to put your eyes on each transaction to make sense of your spending. That exercise alone often reveals savings opportunities. You might realize you don't need the Friday morning latte or two separate streaming services. Or, when you see the auto-billed charge for your car insurance come through, you might be motivated to shop around for cheaper rates.
4. Understand your retiree benefits
You may qualify for retiree benefits through your employer, a union, the military, or the VA. These benefits might include full extension of your healthcare coverage. Or you might get smaller perks, like discounts on hearing aids, glasses, or contacts. Meet with your benefits administrator at work and representatives at any other organizations to get the details. Every perk counts.
5. Plan for healthcare
Healthcare is a wildcard for retirees. You should qualify for Medicare at age 65, but that coverage still leaves you with deductibles, copayments, and coinsurance. By some estimates, you'll spend nearly $300,000 in out-of-pocket medical expenses for you and your spouse in retirement.
If you do qualify for retiree healthcare, it is an option to keep that plan and apply for Medicare too. Typically, Medicare would function as your primary insurer and the other coverage would be secondary. You'll have to weigh potential savings against the cost of premiums for the group plan. See if your benefits administrator can help you with this analysis.
Funds saved in a Health Savings Account, or HSA, will also help you manage healthcare costs in retirement. To qualify for an HSA, you must have high-deductible health insurance. Specifically, that means your individual deductible is at least $1,400 or your family deductible is at least $2,800.
Contributions to your HSA are pre-tax, and withdrawals used for medical costs are tax-free. The HSA contribution limit in 2020 is $3,550 as an individual or $7,100 as a family. But if you're 55 or older, you can increase those limits by $1,000. Make those deposits today while you can; you can't make HSA contributions once you transition to Medicare.
6. Revisit your life insurance coverage and strategy
Review your life insurance coverage and accumulated cash value in light of your current financial priorities. Accumulated cash value is an asset, and you could use it to bridge a savings shortfall. Your policy should allow you to borrow or directly withdraw that cash value. You could also surrender the policy and the insurer would pay out the accumulated cash value, less any surrender fees. You could even sell your life insurance through a life settlement company. Know that these strategies may have tax implications, so check with your accountant before proceeding.
On the other hand, you may want to protect the death benefit in your policy. In that case, keep paying your premiums and don't withdraw or borrow against your cash value. Pulling cash out of your life insurance generally reduces the death benefit immediately.
Know where you are to get where you need to be
A 2025 retirement may still be within striking distance, despite the current stock market craziness. The only way to know is by measuring where you stand today. Go through this exercise and you may realize you're in better shape than you thought. If not, make adjustments and measure again. That's how to get where you need to be.