Are you retiring soon or have you recently left the workforce? If so, before you begin your life of leisure, you have some big financial decisions to make. These can affect your finances for many years to come, so it's important to think carefully and make fully informed choices.
Here are five big ones -- along with some tips on how to make the right choice for your situation.
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1. Should you downsize or relocate?
Housing is one of the primary costs for many seniors. Moving to a smaller home could allow you to significantly reduce your housing expenses, making your money last longer. This is especially true if you still have a mortgage on your current home and you could live mortgage free. But downsizing isn't necessarily the right choice for everyone. If you have kids who will continue to live with you in retirement or a big family that comes to stay often, you may find a smaller home won't work. Likewise, if you're tied into your local community, giving up those connections could be a bad idea at a time when you're already losing the structure and social opportunities provided by working.
Relocating may also be worth considering, depending on where you live and the size of your retirement nest egg. Some places have more favorable tax rules for retirees and lower costs of living than other locales. Some locations allow you to live a walkable lifestyle, meaning you could save money by selling your vehicle and you could remain independent longer should you lose the ability to drive as you age.
Think carefully about how your housing costs and your current location will affect your retirement savings when you decide where to live. If it's very expensive to keep living in your home and you haven't saved enough to ensure financial security in retirement, moving sooner rather than later could be essential.
2. What kind of supplemental medical insurance do you need?
Medicare provides far less coverage than many seniors think, and estimates suggest retirees will need substantial savings to cover healthcare costs during retirement.
One way to control your costs is to choose the right kind of supplemental insurance to go along with Medicare. Traditional Medicare not only has many coverage gaps; you also have to pay 20% co-insurance costs for Medicare Part B services. To get help covering expenses, it often makes sense to buy a Medigap plan that provides additional coverage. Alternatively, some seniors find it best to sign up for a Medicare Advantage Plan, which is an alternative to traditional Medicare. Private insurers offer Medicare plans, all of which must meet certain minimum requirements, and many plans provide broader coverage with lower co-insurance expenses.
You can only sign up for Medigap or choose a Medicare Advantage Plan during open enrollment, which runs for a limited time during the year. Carefully research different insurance options to find coverage that fits your needs during open enrollment. Consider premium costs as well as medical services you and your family will use when deciding which policy is right for you.
3. What is your Social Security strategy?
Don't assume you should claim Social Security just because you've retired. If you have enough money to delay claiming for a while, you'll earn delayed retirement credits until age 70. This could boost your monthly Social Security income for the rest of your life, and could even boost survivors benefits for your spouse if you pass away first.
Stanford experts ran an assessment of many different approaches to funding retirement and, based on this research, recommend waiting to claim Social Security until 70. If you have the cash to put off claiming, and you're relatively healthy, this could be a good approach. However, you'll need to see if it makes sense for you.
To do this, multiply your current projected benefit, which you can find my making a my Social Security account, by the number of years you'll delay claiming to determine how much income you'd give up by waiting. Divide this amount by the extra income you'd receive each month if you wait until 70 compared with claiming today. This will show you how many months it would take you to make up for the delayed claim. If you don't think you'll live long enough, you should claim now and get the lower benefit. Otherwise, waiting can make a lot of sense, if you can afford it.
4. How much can you withdraw from savings annually?
Retirees typically can't live on Social Security benefits alone. You'll have to begin withdrawing from your retirement savings, but don't take money out too quickly or you'll risk not have enough left to last the rest of your life.
One common rule of thumb is that you can withdraw 4% of your retirement savings during the first year of retirement and then increase that amount by inflation each year. However, experts now believe the traditional 4% rule is outdated and flawed, meaning it could leave you at risk of running out of money.
Center for Retirement Research recommends instead you determine how much to withdraw by using tables the Internal Revenue Service has created to calculate required minimum distributions (RMDs) from tax-advantaged savings accounts. You can look at the RMD tables and see how much is safe to withdraw each year based on your age.
5. Should you buy long-term care insurance?
Finally, another big decision relates to how you'll prepare for affording nursing-home care. Anyone 65 and over has close to a 70% chance of ending up in a nursing home or requiring home care for at least some time. This can be a big problem because nursing homes and home care are so expensive. Costs are not covered by Medicare for routine nursing care, so you could end up devastating your savings by paying out of pocket.
Long-term care insurance can help cover costs, but some policies have gaps or limitations that make them ineffective. If you can find an affordable policy that provides comprehensive coverage, buying it may be worthwhile early in retirement so you're protected in case something happens. If you opt out, work with an estate planning attorney to make an asset protection plan and ensure Medicaid will cover care when necessary, or set aside dedicated savings in case you or a spouse need to go into a care facility.
Make these decisions ASAP
The sooner you make decisions about retirement income, housing, and healthcare, the better off you'll be. Housing and medical care are two huge costs you must plan for, while running down retirement savings too quickly would be a devastating mistake that could leave you broke later in retirement. Sit down today and make a plan to protect your future.
