Approaching retirement can be a scary time. There are major decisions to make. You need to decide when to collect Social Security. You need to determine a withdrawal strategy for your retirement assets. Plus, you need to make determinations about medical insurance and long-term care. And you need to do all this while facing a tightening budget and a lot of unknowns about the future.
People are continuing to live longer and longer. Health care costs are rising. Markets are volatile. Social Security’s a mess. Taxes are uncertain. Why wouldn’t the butterflies in your stomach feel like pterodactyls?
Yet people retire successfully. In my experience, current retirees tend to be less concerned about these issues than those approaching retirement. They have the benefit of experience. In lieu of experience, knowledge and planning can help ease the emotional turmoil associated with retirement’s many decisions. You can quell the pterodactyls.
Health care is generally the largest fear for those approaching retirement. Many health issues are age related. Understanding your options helps make the decisions pretty straightforward. Most people become eligible for Medicare when they’re 65. Medicare has several parts.
Medicare Part A is hospital coverage. It's generally free, with some exceptions. Medicare Part B is medical insurance, and you pay a premium for coverage.
Medicare Part C, also called Medicare Advantage, is an optional replacement for traditional Medicare. You may incur additional costs with an optional Part C plan. Medicare Part D is your prescription drug coverage. Costs for Part D plans vary.
Unless you are carrying health insurance from a prior employer for life, you will most likely go onto Medicare. Your health status, family history, and budget will likely steer you toward a particular set of plans. There’s no single, definitive “this is the way to go.” It depends on your individual health and finances.
You may also want to consider a Medicare Supplement plan, also called a Medigap policy. A Medicare Supplement plan pays benefits that original Medicare doesn’t, such as copays and deductibles. You have to have traditional Medicare to get a Medicare Supplement.
One big issue is geographic coverage.
Traditional Medicare doesn’t cover you when you travel outside the U.S. However, many Medigap policies do.
While this would be an additional cost over and above traditional Medicare, it provides additional benefits. It can be especially important if you’ll be doing a bit of international travel.
Also in the realm of medical coverages is long-term care insurance. The statistics are ugly. The coverage is expensive. The alternative of no coverage may be worse.
If you’ll be single when you retire, a nursing home can deplete your assets. If you’re in a relationship, it can deplete assets needed for your significant other to maintain his or her standard of living.
It really comes down to two issues. The first is whether or not your assets are needed for someone else to maintain a certain standard of living if you’re in a nursing home. The second is whether or not you’re looking to leave a legacy. Those are the two things long-term care insurance really addresses from a financial standpoint.
If all that you have is a home and a couple hundred grand in retirement savings, it’s not likely worth it. If you have a half-million or more, you probably should have it. This is a monumental decision. You should have all of the information and a knowledgeable adviser to guide you through your options.
This tends to be retirement concern No. 2: fear of running out of money. We know people are living a lot longer than they used to live. We know costs keep going up and up. The amount of money it takes for a comfortable retirement is significant. And it’s worse for women, who tend to both live longer and have less saved.
If you’re a ways out from retirement, you’ll want to do some calculations.
You don’t want to find out how much money you need for retirement when it’s right around the corner.
So the sooner you get this into perspective the better. You don’t need to be a math whiz. There are good calculators you can use. But you need to use them.
Here’s the problem: It can look like a pension, Social Security, and some modest savings will be plenty. But that can be a very false picture. Pensions and Social Security don’t generally keep pace with inflation.
If you estimate inflation at four percent, costs will roughly quadruple across a 30-something year retirement. And most of that needs to come from your assets. This doesn’t mean things are hopeless if you have only a pension and Social Security. It probably means you have it better than most. But if you’re spending all of that early in retirement, you’ll quickly run into trouble as costs continue to rise.
If you have time, you can run the calculators and see what you’ll need for retirement. Even if you don’t have time, you still need to run the calculators. Only now it’s to determine what you can afford, what you can do in the remaining time until the big day.
The third major obstacle appears similar to the second. But it comes from a different place. Some people are concerned that their sources of income will be insufficient to meet their ongoing needs. The difference from concern two is that they’re concerned about cash flow trouble in the present as opposed to running out later in life.
The solution here is also planning and saving. Having a sufficient cash reserve is as important in retirement as it is during the working years. There will still be unexpected expenses, and you will still need to be prepared.
The solvency of Social Security is a concern for many people. When people refer to Social Security going broke at some point in the future, it doesn’t mean that payments would stop. They might be significantly reduced, but not stopped.
Remember that retired people are a very large contingent, and they tend to vote in large numbers. The people in Washington are aware of that. They may be unwilling to spend the political capital to fix the problem in advance, but ultimately they’ll be very careful with such a large portion of the voting population.
Cash flow planning is essential in retirement. You should have a budget and a set monthly amount of income coming in.
Even if your primary source of income is your assets — especially if your primary source of income is your assets. Don’t fall into the trap of spending as you need. Far too often it leads to overspending. This fear is best addressed through careful planning.
This one probably wouldn’t have made this list 20 years ago. However, today’s retirees have a lot more debt. And we’re not talking bigger mortgages. Credit card debt in retirement is now a significant issue.
Debt is an anchor dragging at financial progress. This is true in retirement, just as it is before retirement. It doesn’t mean you shouldn’t ever have debt in retirement, but you need to be smart about it.
If you have time, you should pay off credit card debt before retirement. If not, you should have a debt reduction plan in place. Retirement dollars are far too precious to waste on high-interest payments.
But many retirees incur debt in retirement. It can be very reasonable to take out a car loan, continue a mortgage, whatever proper use of debt makes sense. But credit card debt should be dealt with expeditiously.
The last of the big five retirement concerns is taxes. Many people are concerned about the insidious effects of taxes eroding their retirement incomes. And rightly so.
Your tax picture is driven by where you chose to live and how your assets are positioned. Where you live, in terms of city, state, and local taxes is something you have to decide. There’s a phenomenal difference in taxes from state to state. But there can be other factors, such as availability of health care, that mitigate the advantages of lower taxes.
A big error is spending the wrong assets too early in retirement. Many people postpone spending taxable assets from retirement plans as long as possible, even when they could spend a small amount with little or no tax consequences. You need to understand your tax situation, where you fall in your tax bracket, and really be in an informed position to choose the proper assets to spend. Or you can simply get someone to help you with that. Careful planning won’t make taxes go away. But careful planning can prevent unnecessary tax expense. And that’s what really matters.
There’s a lot of uncertainty in retirement. There’s always uncertainty in life. We can never know what the future will bring. But we can use history to have an idea of what the range of things it might bring could look like. And we can plan. And we can become more knowledgeable.
Uncertainty doesn’t negate the importance of planning. Uncertainty makes planning essential. But there’s a lot of resources, a lot of collective experience, and a lot of proven strategies and techniques. Invest the up-front time in proper planning, and these major retirement concerns won’t be costing you sleep at night.