Retirement marks a significant life transition, bringing both anticipation and a fair share of questions to the surface. For those approaching this stage, tackling the right pre-retirement planning questions can provide clarity and confidence. Interestingly, a recent survey found that 66% of Baby Boomers feel less prepared for retirement than they’d hoped.
The best way to ease that uncertainty is to plan thoughtfully. As you get closer to retirement, take time to consider these five essential pre-retirement planning questions.
1. How Will I Maintain a Consistent Cash Flow in Retirement?
On average, Social Security covers roughly 39% of one’s income in retirement. So, where will the other 63% come from? It’s essential to have a proper cash flow plan for retirement so you can maintain a consistent income. There are a few potential sources of retirement income, including working part-time, retirement accounts, pensions, fixed annuities, savings, and other investments. Looking at all these income sources, you’ll want to determine if they’ll cover your needs.
If your projected expenses don’t match your income and savings, you’ll either need to reconsider your expenses or increase your retirement income. Consider working part-time, contributing more to your retirement accounts, and developing a strategy to generate more income from your retirement portfolio. This can be done by ensuring your asset allocation still meets your risk tolerance and time horizon and investing in assets that will diversify your income stream.
2. How Will My Investments Hold Up in Various Market Conditions?
Market volatility can mean the difference between living comfortably in retirement or just scraping by. Facing a decline in the early years of retirement can be disastrous. Considering those who retire during or near a bear market are more likely to run out of money, it is crucial to understand how your investments may react during an economic downturn.
It’s important to regularly analyze your portfolio to ensure that it lines up with your risk level and that you haven’t become too reliant on any one asset category. It may be time to diversify your portfolio (if you haven’t already), rebalance, and utilize a Monte Carlo simulation to stress test your plan. This can help you see how your portfolio will react to various market conditions.
3. When Should I Claim Social Security Benefits?
Social Security benefits can be claimed between the ages of 62 and 70; however, the timing of benefits will impact the total amount received.
Early Retirement
You can start receiving benefits as early as 62, but your monthly benefit will be lower than if you waited longer. Your basic benefit is reduced by a fraction of a percent for each month you begin receiving benefits prior to full retirement age. Retiring early can permanently reduce your benefit by up to 30%.
Full Retirement Age
Your full retirement age (FRA) changes based on the year you were born. FRA is 66 for those born between 1943 and 1954 and increases by two months for every year after that you were born until it settles at age 67 for those born in 1960 or later. If you wait until you reach full retirement age to begin collecting your Social Security benefits, you will receive your full benefit amount.
Delayed Benefits
If you’re still working or don’t need the money immediately, you can delay receiving your benefits. Your benefit will increase by 8% for each year that you delay. You cannot delay and increase your benefit indefinitely, though. Once you reach age 70, the amount of benefits you receive will not increase any further.
Be sure to reference your Social Security statement in the years leading up to retirement. This important document tells you a lot about your expected benefits, so it can help you in your decision-making process.
In general, the best time for you to claim your benefits depends on your personal situation and health. If you expect to live longer than average, your overall lifetime benefit will be greater if you delay claiming your benefits to increase your benefit amount. If the opposite is true and you see little chance of making it into your mid-80s, you would likely receive a greater lifetime benefit by taking it sooner, even though it would be a smaller monthly payment.
4. Am I Properly Utilizing Tax-Reduction Strategies?
As the saying goes: “It’s not how much you make, but how much you get to keep that matters.” This is especially true as you approach retirement. Once your income sources become fixed, managing and minimizing your taxes should be your top priority. If you haven’t already, consider working with a financial advisor to review your potential options, including:
- Charitable donations
- Qualified charitable distributions
- Roth conversions
- Health savings accounts
- Tax-loss harvesting
Your income plan during retirement will also play a major role in how long your money will last and how much will be lost to taxes.
Each retirement asset has different tax characteristics, whether it be a 401(k), a Roth IRA, an annuity, or some form of equity compensation, and understanding the timing of distributions from each source is a significant part of managing your overall tax bill in retirement.
5. How Much Can I Expect to Spend on Healthcare?
Choosing the appropriate insurance coverage is the first step to take when planning for unexpected healthcare costs in retirement. According to a Fidelity Retiree Health Care Cost Estimate, the amount needed at 65 to cover healthcare costs for a couple is roughly $330,000 after tax. For those who had employer healthcare coverage, retirement may mean paying more for medical insurance (Medicare Parts B and D and Medicare Supplement policies). Even with insurance, some expenses will be paid out of pocket.
Planning for unexpected healthcare costs begins with choosing appropriate insurance. For those aged 65 and above who are eligible for Medicare, it means understanding options under Medicare and choosing insurance to supplement Medicare. Look at your eligibility and premium estimates to get an idea of what to expect. Thorough research of your supplemental coverage options can help ensure your healthcare costs won’t eat into your retirement savings.
Your Trusted Partner in Pre-Retirement Planning
The good news? You don’t have to tackle pre-retirement planning alone. At Wilkinson Wealth Management, we have the experience, tools, and resources to help guide you through this transition with clarity and confidence.
If you’d like to see how we work with clients to answer their most important pre-retirement planning questions, let’s connect for a no-obligation get-acquainted meeting. Reach out to us at 434-202-2521 or use our Contact Us page to schedule an appointment.
About Tom
Tom Antonelli is a Senior Wealth Advisor / Financial Advisor at Wilkinson Wealth Management, a trusted team of CFPs in Charlottesville. He joined our team in 2019, is a Chartered Financial Analyst®, and has over 40 years of experience in investment and portfolio management. He believes that an individualized, custom investment process coordinated with the clients’ overall financial planning and wealth goals creates an excellent opportunity for success.
Tom is married and resides in Lynchburg, Virginia. He enjoys traveling with his family and friends, especially when it involves his favorite outdoor activities of skiing, tennis, and mountain biking.
This article was prepared for Tom Antonelli’s use.
Disclosures: A diversified portfolio does not assure a profit or protect against loss in a declining market. Rebalancing may be a taxable event. Before you take any specific action be sure to consult with your tax professional.