(Editor’s note: This content is sponsored by Acts Retirement-Life Communities.)
What type of retirement will you have? There are generally two scenarios that can play out, depending on a few key financial decisions you’ll soon be making.
The first is a retirement marked by financial security, frequent travel, time for family, plenty of social engagement and new discoveries. The second is one where you live a dramatically reduced lifestyle because of a drop in income — where you’re certainly surviving, but not at all thriving. Not living the retirement life you dreamed of and worked for.
Make Good Financial Decisions for a Better Retirement
To increase the odds of making your money last, it’s important to understand a few basic truths, outlined below. And if you get confused about how to make these future money-based decisions, you’re in good company – pretty much all of us are right there with you. However, these five tips will help you make more informed decisions as you move forward:
Tip #1: Don’t Assume You Should Take Social Security as Soon as Possible
All Americans can start taking Social Security benefits once they reach 62. But that’s an incredibly young age based on today’s life expectancy. Those who are in charge of our Social Security system are well aware of that as well, so to even things out and ensure the longevity of the system, there’s a catch: if you start taking your benefits before your full retirement age, you won’t receive the full monthly amount.
The reduction is based on your full retirement age, which depends on when you were born. Let’s say your full retirement age is 67, but you opt to start your benefits at 62. Your payments will be reduced by around 30 percent.
By waiting until after age 62, your payments will go up a few more percentage points for each year you’re able to wait. To give an example that puts this in context:
If Mary has a full retirement age of 67, and waits just one more year until she’s 63, her payments are only reduced by about 25 percent. And if Mary waits until age 66, those payments are only reduced by about 6.7 percent. This means the closer toward retirement you (or Mary) wait before accepting Social Security benefits, the higher those benefits will be for the remainder of your life.
Tip #2: Don’t Assume You Should Take Social Security When You Retire
Even when you retire, you may want to think twice about beginning to draw from Social Security. It’s not required once you reach full retirement age. Lots of people retire but delay Social Security until later.
Why delay those payments, though? Because even after retirement, the later you start taking them, the higher they’ll be once you do let them kick in. Plus, once you factor in taxes, it’s quite possible that your income actually turns out to be greater when you rely on other sources of income during the first few years of retirement. Using withdrawals from your Individual Retirement Account (IRA), for example, can help you delay your Social Security start date, to allow you greater income moving forward.
Ready for social security now? Click here to read about how to apply for and start collecting, social security.
Tip #3: Thoroughly Think Out Your Retirement Plans
There’s an art to figuring out the perfect moment for retiring. As you’ve just learned, it can be good to delay drawing your Social Security benefits as long as possible.
However, both decisions — when to start your benefits and when to actually retire — require finding the right balance between saving money and enjoying retirement. If you wait too long to start enjoying the fruits of retirement, you risk minimizing the time you have to experience it. On the other hand, if you retire too early, you increase the risk of running out of money faster.
Then there’s this: some people retire in their early 60s only to find that they actually miss working, that they weren’t quite ready for retirement leisure yet. For all these reasons, you’ll need to perform some self-examination to determine whether the retirement lifestyle you have planned is sustainable, both financially and pragmatically.
Ask yourself, “what do I need to retire comfortably?” This is different for everyone and should be thought about in great detail. Click here to learn more about how you can answer that question and get a better understanding of your retirement options.
Tip #4: Study Your Pension Options Carefully
As if it weren’t already complicated enough with the way Social Security benefits work, there are also several other financial factors to consider. One is what to do with your pension.
If you’re lucky enough to have a pension, you have some important decisions to make when you retire. Some companies offer their retiring workers a choice: take a lump sum or receive monthly checks.
Taking the lump sum leads to a new scary decision of what to do with the money. Options include setting up an annuity or investing it.
Even opting for monthly checks will cause you to face a decision: take a single-life payout or take a joint-and-survivor payout.
If you need to provide for a spouse after you die, you might consider the latter. Your monthly check will be reduced but your spouse will continue to get checks — albeit usually half the original amount — after you’re gone.
Tip #5: Beware the Tax Implications of Withdrawing Retirement Money
Finally, the financial decisions you make about your retirement are interwoven with one another in ways most people can’t possibly begin to guess. You’ve just seen how the type of pension payout you choose can drastically alter a surviving spouse’s income. That’s just one example. Now consider taxes.
Taxes are complicated enough, but when it comes to retirement, it seems to compound even further. Another more slightly complex concept to grasp is the delicate interplay between Social Security taxes and withdrawals from your 401(k) or your IRA.
Taking extra withdrawals from your IRA, for example, can drastically increase your tax rate for that year. There are similar repercussions with 401(k) withdrawals. Making the wrong choices in this area can result in the difference between paying taxes on 12 percent of your benefits or 80 percent!
When considering tax implications, have you thought about retiring to a location that benefits seniors? Click here to learn about tax breaks for seniors and see a list of the most inexpensive places to retire.
Suffice it to say you’ll need to coordinate your decisions carefully once you reach retirement age. If all this makes you feel as though you’re in over your head, one final tip might be to seek advice from a financial advisor. For most folks, and considering what’s at stake, doing so could save you a lot of grief (and money) down the line.
Want to learn more? Click here to read more tips and financial planning advice for seniors.
Acts Retirement-Life Communities is the largest not-for-profit owner, operator and developer of continuing care retirement communities in the United States. Headquartered in suburban Philadelphia, Acts has a family of 23 retirement communities that serve approximately 8,500 residents and employ 6,200 in Pennsylvania, Delaware, Maryland, North and South Carolina, Georgia, Alabama and Florida. For more information about Acts visit actsretirement.org.
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