Whether you realize it or not, we're witnessing something unprecedented in America: the retirement of more people on a daily basis than at any other point in our history.
Between 1946 and 1964, about 76 million baby boomers were born. Over the coming two decades, these boomers are expected to enter retirement at an approximate rate of 4 million people per year. Altogether, this works out to somewhere between 10,000 and 11,000 boomers retiring per day.
For the majority of us, retirement is the proverbial finish line we're headed for. However, retirement can also be a time of unwelcome surprises. Challenges you wish you'd thought of years or decades in advance can catch you off guard. I've heard and read about countless regrets of retirees who wish they'd taken the time to better prepare for retirement.
With this in mind, here are four things everyone should think about before retiring.
1. Where you retire is important
One topic that might arise post-retirement is the impact of where you live on your income during retirement.
For example, 37 states don't currently tax Social Security benefits, but 13 do. Of those 13, nine allow an exemption up to a certain dollar amount, then begin taxing the retiree on income above that point. However, in four states -- Minnesota, Vermont, North Dakota, and West Virginia -- you'll pay tax on a percentage of your Social Security dollars without any exemption.
Different states also have varied laws concerning estate and inheritance taxes. In 2015, 15 states have an estate tax. Washington state levies the highest minimum and maximum tax rates of 10% and 20%, respectively. New Jersey boasts the lowest exemption threshold of just $675,000. Additionally, six states have an inheritance tax, with New Jersey and Maryland being the two states that have both estate and inheritance taxes.
Understanding the differences in property tax rates between states (and cities) can also be critical to understanding your expenses come retirement. In Hawaii, the mean effective property tax on owner-occupied homes is the lowest in the country at 0.28%, whereas New Jersey is the highest in the nation at 2.38%. Long story short, understanding the tax implications of where you choose to retire is more important than you probably realize.
2. Social Security isn't as cut-and-dried as you thought
Secondly, far too many people enter retirement without a decent understanding of how to maximize their Social Security benefits. A recent MassMutual quiz that asked 1,513 adults 10 questions on Social Security showed that a mere 28% had a passing grade of three wrong answers or fewer. Further, just one person (yes, one!) answered all 10 questions correctly. Put plainly, we don't have a good grip on what Social Security can really do for us.
Social Security is the financial backstop that was put in place primarily to protect lower-income workers during retirement, but also to act as a safety net for the disabled and survivors of deceased workers. Even though Social Security benefits at full retirement age are capped at no more than $2,663 per month in 2015, there are ways retirees can use Social Security to boost their lifetime benefits.
For example, the "file-and-suspend" strategy allows one spouse to file for benefits but immediately suspend them so their benefits can continue to grow. Meanwhile the other spouse can begin collecting spousal benefits. It's a particularly smart strategy when spouses have very different income levels and would benefit from allowing the higher-income partner's benefits to grow until claiming them at age 70.
Acquainting yourself with the ins and outs of Social Security is a move you won't regret.
3. Know the difference between working income and retirement income
One unwelcome surprise that some people face during retirement is the jarring transition from a steady work paycheck to a likely slower stream of retirement income.
Retirees don't often realize until they actually hit retirement that there's more to it than just sleeping past their usual 6 a.m. wake-up time. Spending habits that persisted during your working years may not be prudent during your retirement years, when you need your nest egg to last as long as possible. With Social Security only designed to replace about 40% of a worker's income during retirement, some retirees could be in for quite the income surprise if they aren't prepared.
Luckily, the solution here is pretty simple: ease yourself into retirement. One of the smartest moves you can make, aside from formulating and sticking to a monthly budget, is to begin living on a lower expense budget months -- or even years -- in advance. By doing so you'll likely make the transition into retirement seamlessly, rather than feeling like you hit a speed bump at 60 mph.
Furthermore, ensure that you have a withdrawal plan in place. A recent survey from Pentegra Retirement Services showed that 56% of those surveyed didn't have plans for accessing their money in retirement. Without a plan, you're much more liable to spend more than you can afford, or pay considerably more in taxes than you need to.
One simple solution (aside from making a budget) is to consider opening or adding to a Roth IRA. Roth IRAs allow your money to grow completely free of taxation for the life of the account, and you can continue to contribute to a Roth beyond your 70th birthday, unlike a Traditional IRA. There are some income limitations you'll want to familiarize yourself with, but it's generally a smart move for people who've yet to retire and don't want to worry about the tax implications of their withdrawals during retirement.
4. It's tough to get back into the workforce if you retire
As hard as this might be to believe, CBS News recently highlighted a study from Bankers Life that showed the biggest regret of middle-income baby boomers was that they didn't work longer. More than two-thirds (69%) of boomers gave this answer in the survey.
To some extent this regret makes sense given that boomers, when taken as a whole, are in big trouble when it comes to a lack of retirement savings. But the Bankers Life study showed that it was much more than just money that was luring seniors back into the job market. About six out of 10 respondents noted that nonfinancial reasons were behind their desire to go back to work. The reasons included the desire to stay mentally sharp (18%), maintain a sense of purpose (15%), and stay physically active (15%).
However, once you leave your job for retirement, most retirees don't realize how difficult it is to find your way back into the workforce. Businesses want young workers or college graduates because they typically command lower wages than seniors, and finding a job as a senior can be incredibly difficult. If there is a silver lining, it's that seniors aged 55 and up often have the lowest unemployment rate (of those who want to remain in the labor force), but once they're out of work, seniors often have to spend a painfully long time on the hunt for a new job.
Based on data from the Bureau of Labor Statistics from August 2015, the average duration of unemployment across all age groups was 27.6 weeks, while it was 39.1 weeks for seniors aged 55 to 64 and 40.7 weeks for those aged 65 and up. If this data points out anything, it's that you should be absolutely certain you're financially set before leaving your job for good.
Ultimately, only you are responsible for setting the path your retirement will take. Thinking ahead and anticipating the "curves in the road" should help make your golden years all the more enjoyable.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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