Common Retirement Questions, Answered

The closer you are to retirement, the more you’ll wonder about how this next phase of your life will play out—musings that will include several questions. In this post, we’ve compiled answers to some of the most common retirement questions to help you progress in your journey.

What is a good retirement income?

How much money you need ultimately depends on the lifestyle you want to live in retirement. However, according to the most recent U.S. Bureau of Labor Statistics Consumer Expenditure Survey, annual spending by retiree households—defined as those run by someone aged 65 and older— averaged $48,872 (or $4,073 a month) in 2020. While this number can provide you with a target, keep in mind that costs will only continue to increase as time marches on. For example, average retiree household spending was approximately $3,800 a month in 2016. Therefore, the further you are from retirement, the higher this threshold will be.

Does working after full retirement age reduce Social Security benefits?

If you’re still working when you reach full retirement age (currently age 67 if you were born after 1960), your earnings no longer reduce your benefits no matter how much you earn.

However, if you work prior to full retirement age, the dollar amount of your monthly Social Security check is sometimes temporarily reduced if you earn more than the yearly earnings limit set by the Social Security Administration.

What should I do, say, five years before retirement?

Generally speaking, you can take several steps to better prepare for retirement. Some specific examples include reducing debt, particularly high-rate debt such as credit cards and housing debt—including your mortgage. This is critical since the average retiree household spends an average of $1,455 on monthly housing expenses. You should also continue to save by maximizing your retirement contributions.

For example, the IRS allows you to make catch-up contributions when you turn 50, meaning additional contributions you can make above standard annual limits to your 401(k)s and IRAs. Eliminating any unnecessary risk in your investments is also a good idea since you may lack the luxury of awaiting a market bounce-back after the next dip.

Developing a vision for your lifestyle is another way to prepare for retirement—specifically where you want to live and how you want to spend your days. This may take some time, but doing so will help you better grasp your retirement living expenses. If you haven’t already, get started on an estate plan. At the very least, ensure your account beneficiaries and policies are up to date and that your will and medical directives are complete.

How will I pay for medical expenses in retirement?

Healthcare is expensive. In fact, the Centers for Medicare & Medicaid Services projects that these prices will grow at an annual rate of 2.5% over the next decade due to healthcare inflation and improved longevity. Consequently, recent Fidelity research reveals that the average couple celebrating a 65th birthday may need to spend almost $300,000 in after-tax money to cover healthcare expenses in retirement: not even including long-term care.

The good news is that with proper planning, you can ensure healthcare expenses won’t eat up too much of your savings. Taking advantage of catch-up contributions, delaying Social Security benefits, planning for long-term care, considering a health savings account (HSA), understanding your Medicare options, and investing in an insurance policy with living benefits or those allowing you to build cash value are just some of your options.

Should I take a lump sum pension offer?

A lump sum payout may make sense if you believe you can make more money investing on your own, don’t need the money, want to protect your legacy, are in poor health and need the money, and/or are concerned about your employer’s financial situation: particularly if your pension lies with a religious institution. If you’re married, worried about retirement savings, and/or are not a disciplined saver, you probably shouldn’t take a lump sum offer.

What is the 4% rule?

The 4% rule states that you should withdraw no more than 4% of your assets in the first year of retirement and adjust your withdrawals for inflation annually thereafter. Put simply, doing so assumes your assets will last as long as you do.

For example, let’s say you determine that $50,000 a year will allow you to live comfortably in retirement. Let’s further assume you’ll receive $20,000 a year from Social Security, which means you’ll only need to withdraw $30,000 from your retirement savings each year.

As a next step, you’d divide $30,000 by 4% and get $750,000: the total amount of money you’ll need in your retirement savings to last 30 years. It’s important to know that this rule is outdated, as it was developed when bond interest rates were much higher than they are now. It was also designed around a single retirement account—such as an IRA or 401(k)—rather than the diversified mix of accounts and assets most people own today. Therefore, it’s important to develop a cash flow strategy based on your own unique situation.

What is the rule of 25?

Essentially the same concept as the 4% rule, the rule of 25 estimates the annual retirement income you need from your investments and multiplies that number by 25. The result—mirroring the 4% rule—is the amount of money you should save to finance 30 years of retirement. In the previous section, we determined $30,000 a year from investments was necessary. Multiply that number by 25, and you get $750,000.

Should I buy an annuity?

Annuities aren’t for everyone. However, they are sometimes a reasonable choice in specific situations. For example, if you’re a conservative investor seeking financial confidence via a guaranteed source of income for the rest of your life and/or worry about running out of money during retirement, an annuity can help you. 

Another reason to purchase an annuity is to protect your legacy because—assuming you have a death rider—you can pass your annuity to one or more named beneficiaries. A final reason to consider an annuity is if you have already maxed out other retirement vehicles and want to continue funding your retirement. 

When should I claim Social Security?

The age at which you decide to collect Social Security will determine the amount of your monthly benefit. Choosing to receive benefits before you reach full retirement age (age 67, if you were born after 1960) means you’ll receive a permanent reduction of your monthly benefit. More specifically, Social Security benefits increase by approximately 7% each year between 62 and your full retirement age (and approximately 8% each year between your full retirement age and age 70).

How do I apply for Social Security benefits?

When you decide to collect monthly Social Security benefits, you must apply with the Social Security Administration (SSA) to do so: either online, in person, or over the phone by calling 1-800-772-1213.

How do I enroll in Medicare?

If you’ve received Social Security or Railroad Retirement Board benefits for at least four months before age 65, the government—in most cases—automatically enrolls you in Medicare Part A and Medicare Part B at age 65. Your Medicare card will typically arrive in the mail with instructions three months before your 65th birthday.

All other eligible people have a seven-month window to enroll in Medicare, with an enrollment period beginning three months before you turn 65 and ending three months after your birthday month. You can apply for Medicare benefits online or over the phone.

If you miss your initial enrollment period, you can sign up during Medicare’s general enrollment period (January 1-March 31), and your coverage will start on July 1.

Is a reverse mortgage worth it?

A reverse mortgage is sometimes a potential option to help solve financial problems: especially if you’re struggling to keep up with expenses during retirement. If you need cash and can’t afford the monthly payment accompanying a home equity loan or line of credit (and are comfortable with the fact that when you and your spouse die, less is left to your heirs), a reverse mortgage is worth considering—but only after you’ve exhausted all other options.

The bottom line on frequently asked retirement questions

There’s a lot to consider in retirement, and answers to these questions will vary based on your own unique situation. It’s therefore best to work with a CFP® professional and in turn receive the clarity and guidance you need to enjoy retirement to its fullest.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business. 

Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Withdrawals made prior to age 59 1⁄2 are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.  Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing.  All guarantees are based on the claims paying ability of the issuing insurance company.