After a very difficult 2020, you may have reached the point where you're ready to bring your career to a close in 2021. And if that's the case, there are a few things you should know about retiring in the coming year. Here are a few to think about as you prepare for this exciting new stage of life.
1. You can claim Social Security if you were born in 1959 or older
Full retirement age for Social Security purposes is either 66, 67, or somewhere in between. But you're allowed to sign up for benefits as early as age 62, so if you were born in 1959, that'll happen at some point in 2021. Now one thing you must realize is that claiming Social Security at 62 will reduce your monthly benefit for life. If you were born in 1959, your reach full retirement age is 66 and 10 months, and signing up at 62 will slash your monthly income by nearly 30%. But if you've saved well for your senior years, filing for Social Security at 62 may be the thing that allows you retire in 2021 when you want to.
2. You may not be eligible for Medicare
Medicare eligibility begins at age 65, but some people retire before that age. If that's the case, you'll need to figure out what you'll be doing for health coverage before pulling the trigger. If you're close to 65 but not quite there, you may opt to continue your existing employer coverage through COBRA. With COBRA, your costs may be quite expensive, but if you're talking about just a handful of months, it may be worth it to retain the coverage you're used to until Medicare kicks in. Otherwise, you can look for a health plan on the open marketplace until you're old enough to enroll in Medicare.
3. You should have at least a year's worth of expenses in cash
Given the fact that the coronavirus pandemic isn't over, and won't be over by the time 2021 kicks off, the stock market may be volatile next year, and so you may land in a scenario where taking retirement plan withdrawals means locking in major losses you struggle to recover from. That's why it's very important to enter retirement with a good year's worth of living expenses in cash. That way, you'll have a means of paying your bills while you leave your retirement investments alone.
4. You'll need a withdrawal strategy for your savings
Generally speaking, you should be mindful of the way you take withdrawals from your IRA or 401(k) once retirement begins. In fact, it's a good idea to establish a withdrawal rate before leaving the workforce so you don't get too aggressive early on in retirement and increase your risk of depleting your nest egg in your lifetime. For years, financial experts have sworn by the 4% rule, but that may be too high an annual withdrawal rate if your retirement plan isn't heavily invested in stocks. A better bet may be a 2.5% or 3% withdrawal rate, especially if you're retiring on the earlier side and need to stretch your savings out. Put some thought into how you'll take distributions so you get it right from the start.
The more prepared you are going into retirement, the happier you're likely to be. If 2021 is the year you're ready to enter that next state of life, give the above items some thought. And remember, if you're on the fence about retiring next year, you can always sit tight for a few months and see how things play out, especially in light of the pandemic. If you're working from home right now, it could pay to continue doing so rather than leave your job only to be stuck at home with no entertainment or income.