Retirement might feel like the finish line in many ways, but that's far from the truth for your financial plan. If you're planning to stop working next year, then there are a handful of important things that you and your spouse should understand. Taking the right steps today will help you achieve the best retirement possible and prepare you for the important decisions coming down the road.
Social Security benefits
Social Security is an important part of most people's retirement plans, so it's a good idea to keep a firm grasp on all aspects of your plan -- including spousal benefits.
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Your monthly Social Security benefits are primarily based on the amount that you've paid into the system over your working years and the age at which you begin receiving retirement income. Everyone can view their Social Security account online, and an account statement will provide information on earnings history and future benefits. That's a useful tool for setting income expectations and budgets. It can also help with important decisions around the exact timing of your retirement and the receipt of Social Security benefits.
Make sure that you're fully aware of your retirement benefits situation if you plan to stop working this year.
Spousal and survivor benefits
Spousal benefits can be significant for households that had one primary earner. If one spouse is entitled to significantly higher Social Security income than the other, then the lower-earning spouse may actually qualify for expanded benefits that are based on the higher-earning spouse's.
For married couples, the criteria are:
- They generally must have been married for at least one year.
- The recipient of spousal benefits must 62 years old or older.
- The spouse on whose work history spousal benefits get claimed must be receiving retirement benefits.
Spouses in households that meet these criteria can receive up to 50% of the full retirement age benefit of the other member. Divorced spouses may also be entitled to similar benefits, though their marriage must have lasted at least 10 years, and they cannot have remarried. As with normal Social Security income, spousal benefits can be maximized if recipients wait until full retirement age to start taking benefits.
Survivors of deceased earners may also qualify for benefits. If you have a deceased partner who previously worked enough hours during their careers, you may be entitled to additional income from Social Security. Eligibility for these benefits is a bit more complicated than other spousal benefits, but you can contact the Social Security Administration to apply.
Retirement accounts
Retirement accounts and other investments are important sources of cash flow in retirement. People who follow the 4% rule can confidently withdraw a small portion of their account balance each year without running the risk that they'll outlive their money. If you're planning to retire this year, it's important to know your account balances and how much can be withdrawn without violating the 4% rule. This is essential for expectation-setting and budgeting.
It's also extremely important to review the asset allocation for your 401(k) or IRA. Your investments should reflect your time horizon and risk tolerance, so the best investments for a younger couple aren't necessarily the best for retirees. Your financial plan should prioritize income along with volatility management, so bonds and dividend stocks should play a bigger role relative to growth stocks. Make sure that you aren't taking on too much risk in your retirement account so that you can continue to fuel your cash needs for years to come.
Pensions and annuities
People with defined-benefit pension plans and annuities have to make a very important decision when they retire. These plans are designed to provide guaranteed income for a length of time, which is helpful for budget-setting and covering cash needs in retirement.
If you're about to enter the payout phase of a pension or annuity, then you'll likely have to choose between a few different payout structures. One of the more difficult choices is between a single-life or joint-and-survivor option. The single-life payout provides defined, periodic income as long as the contract holder is alive. The joint-and-survivor option will continue paying a spouse in the event that the contract holder passes away, but that extended coverage results in smaller periodic payments along the way. This is a difficult trade-off for many retirees to assess, and it can lead to a stressful decision.
The best option varies from family to family. Joint-and-survivor payouts are ideal for couples who are concerned about the risk of outliving their money. This could apply to households with a large age gap between spouses, or if there's one spouse with a much longer life expectancy based on health and family history. This is usually the lower-risk path for people who can comfortably take lower monthly payments thanks to supplemental income from Social Security and the assets they've accumulated over the years.
Single-life payouts are generally better for couples that have other financial resources to meet the surviving spouse's needs down the road. Having significant savings in a retirement investment account puts less pressure on the pension or annuity income to cover cash needs, so higher early payouts are more attractive. Some people also have permanent life insurance plans that can be used to replace the lost income from a deceased spouse's pension. Families with these circumstances are somewhat rare, but it's important to keep your personal situation in mind when making these big decisions.
