The following content originally appeared in an article by Jane Bennett Clark in the October 2016 issue of Kiplinger Personal Finance. The article also appeared in The Charlotte Observer.
7 important steps to take in the year before you retire
You wouldn't dream of running a marathon without undergoing months of training. Or heading into the wilderness without making sure you have adequate provisions. Or betting your life savings on a business venture you haven't thoroughly researched.
But when it comes to entering retirement—when a failure to plan can have devastating consequences—a surprising number of people are unprepared. More than half of workers older than 55 haven’t developed a plan for paying themselves in retirement, according to a recent study by Ameriprise, and almost two-thirds haven’t identified which investments they’ll tap first. Many wait until they’ve set their retirement date to put together any kind of plan at all.
Planning late is better than never planning, but your chances of a secure retirement will improve if you start making decisions and checking items off your to-do list at least a year out. Among the issues you’ll face: how and when to sign up for Medicare and Social Security, how much income you’ll need for essential expenses, and how to take advantage of employer benefits before walking out the door.
1. Sign Up for Medicare
One item on your to-do list you can’t ignore is signing up for Medicare. You’re eligible at age 65, and you can sign up without penalty anytime from three months before until three months after the month of your 65th birthday. (If you claimed Social Security benefits early, you’ll be automatically enrolled at age 65.) Medicare Part A covers hospitalization and is premium-free, so there’s generally no reason not to sign up as soon as you’re eligible. One exception: You can’t contribute to a health savings account if you enroll in Medicare. If you have an HSA and want to keep fueling it, don’t sign up for Medicare until you retire. (To enroll, go to www.ssa.gov.)
Part B covers outpatient care, including doctors’ visits. It costs $121.80 a month for singles with an adjusted gross income (plus tax-exempt interest) of $85,000 or less ($170,000 for couples) who sign up in 2016. Above those income levels, you’ll have to pay $170.50 to $389.80 per month. You’ll also have to pay a surcharge of $12.70 to $72.90 a month on top of the premium for Part D prescription drug coverage (see below).
If you don’t sign up for Part B during the seven-month window around turning 65, and you do not have coverage through your current employer, you may have to pay at least a 10% penalty on premiums permanently when you do sign up. If you work for a company with fewer than 20 employees, your group coverage generally becomes secondary to Medicare at age 65, so you should sign up for both Part A and Part B—otherwise, you may not be covered at all.
Employees of larger companies can choose to keep group coverage while still working and hold off on signing up for Part B. But you must sign up for this coverage within eight months of leaving your job or, once you do enroll, you’ll pay at least a 10% penalty on premiums for the rest of your life.
Medicare doesn’t cover everything: You may want to pick up a Medicare supplemental policy (medigap), which fills in gaps in the coverage that Medicare offers, as well as a Part D policy, for prescription drugs. There are 10 types of medigap policies, each identified by letter; the average price for the most popular, Plan F, is $172 a month, according to Weiss Ratings, which provides financial strength ratings for insurers. As for Part D, the average monthly premium is $34 in 2016.
Rather than combine three plans, you could join Medicare Advantage, offered by private insurers. Advantage plans cover the same services as Medicare and include prescription drugs. They typically have lower premiums than a Part B/Part D/medigap combination but higher co-payments and more restrictions (see Get the Most Out of Medicare).
2. Make a Retirement Budget
In a separate column, list discretionary expenses, for costs such as travel, entertaining and dining out. Note that some expenses will go down or disappear when you’re no longer working—you won’t be paying payroll taxes or saving for retirement, and your wardrobe will cost less when every day is casual Friday. But some expenses, such as for travel and health care, could also go up.
Paul and Bonnie Blanton, of Escondido, Calif., had a wonderful first year of retirement, with sojourns in Paris, Palm Desert and Panama, but they discovered that their travel costs were higher than they had expected, and they hadn’t considered one-off costs, such as airplane tickets to visit a sick relative. Their advice: Add 10% or 20% to whatever you’ve determined your total costs will be.
Once you’ve identified your fixed, essential expenses, match them to your resources. Ideally, guaranteed income—Social Security and maybe a pension or an annuity—will cover the basics. If not, you’ll have to use your retirement savings to close the gap, as well as to cover the nonessentials.
If your nest egg seems too skimpy to go the distance, better to know that before you leave your job, says Joe Tomlinson, a CFP® in Greenville, Maine. “You don’t want to think later, I wish I’d worked another three years.” Working longer not only lets you continue to save for retirement but also means you have fewer years in retirement to finance, and it helps you delay taking Social Security.
3. Maximize Social Security
You can sign up for benefits as early as age 62 (full retirement age is 66 for people born between 1943 and 1954). But by claiming early, your benefits will be reduced by about 25% to 30% of the amount you’d get at full retirement age. For every year you postpone taking benefits after full retirement age until you hit age 70, you get an 8% boost.
Although the government recently axed two lucrative claiming strategies that mainly benefited married couples, couples still have more options than singles...