A record-breaking 11,000 Americans are expected to retire every day in 2024, what the nonprofit Alliance for Lifetime Income calls “the year of Peak 65.” As Baby Boomers leave the workforce, this is a reminder for anyone heading into retirement in the coming years to stock up and prepare for this exciting transition. Here are five important considerations for anyone approaching retirement.
1. How should I spend my time?
Before you retire, it’s wise to ask yourself: What do you want your retirement to look like?
Possible answers may include:
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- Play hobbies like golf or pickleball several times a week
- Doing voluntary community service
- Working part-time in a new career or business
- Spend more time in the second home
The answers to these questions shape one’s financial plan, so the more you think about it, the more accurate your retirement plan will be.
2. How do I manage cash flow?
While the conventional wisdom is that you will spend less in retirement, the reality is often different. It is important to realize and plan for fluid expenditure rates during the retirement years. Most of the retired clients we work with follow a spending pattern known as the “retirement smile.”
The concept is that retiree spending follows the arc of a smile — high in the early retirement years when a person’s health is good, with more spending on travel and leisure activities.
As one reaches the age of 80, spending generally decreases, travel decreases, but health care spending does not increase. Then, in late life (late 80s and 90s), discretionary spending decreases, and health care costs increase.
3. Will I have enough money to meet my spending needs after losing my regular income?
Most people fear losing a regular paycheck and for good reason. You’ve spent your entire life in accumulation mode, watching your net worth increase — now is the time to scale back. That means creating a plan to replace your income in the most tax-efficient way, while balancing market risk with long-term goals.
An important part of retirement income is Social Security, and it’s important to consider the claim method that works best for you. You can read more about this in the article When is the Right Time to File for Social Security?
Another important cash flow consideration is how to best structure portfolio withdrawals. Planning for current and future cash flows should be calibrated to balance risk tolerance and income needs with tax planning to help ensure that funds are obtained in the most efficient manner possible.
In some cases when you retire, your taxable income will decrease significantly, especially if one defers Social Security at age 70. This period offers a unique planning window to “fill- on” the lower income tax brackets even on IRA withdrawals, partial Roth conversions or capital gains. harvest, depending on your personal situation.
4. What is my plan for health insurance?
Health insurance for early retirees (those who retire before age 65, which is when Medicare eligibility begins) is often a costly expense. Many people rely on their employer for health insurance. If they retire early, they lose this coverage and have to find alternatives, which can be expensive and less comprehensive.
Private health insurance can be expensive, especially for those in their early 60s. This age group is generally more likely to have health issues than younger people, leading to higher premiums. If you retire before the age of 65, you need to have a plan for health insurance. COBRA can be attractive (though often expensive) as a short-term solution or bridge to Medicare. In some cases, retirees can maneuver income for several years to qualify for Affordable Care Act coverage before becoming eligible for Medicare. This strategy often requires help from a financial or tax planner.
5. What is my long-term care plan?
The truth is that we all need to plan for what happens when we are no longer able to take care of ourselves or live independently. Just a few of the aging considerations are:
- Will you be aging in your home or in a continuing care retirement community (CCRC) or assisted care facility?
- Who will provide your care, and what will it cost?
- Can you “self-insure,” or do you buy long-term care insurance (LTCI)?
- If LTCI is attractive, when should you buy it, and what policy features should you get?
The bottom line: There is a LOT to think about when planning for your retirement. Planning ahead is not only smart, it will likely save you time and money in the long term.
This article was written and presents the views of our contributing advisor, not the Kiplinger editorial staff. You can check advisor records using DECLARED by SEC or with FINRA.