Making Sense of Retirement Planning (4): Decisions You'll Need to Make as You Get Closer to Retiring
As you get closer to actually retiring, you'll have decisions to make. We're going to cover some of these today by topic. Today's discussion is geared to those who have some time before retiring. We're not going to get into too much detail; rather the point here is to be aware of the decisions you'll need to make so you can spend time researching and studying each in order to make the best decision.
When to Claim Social Security Benefits
If you retire early, you may want to defer collecting your social security. These benefits are available starting at age 62, and indeed the majority of Americans apparently sign up then, even if they haven't stopped working. If you need the money, the decision's a no-brainer. But if you don't need it right away, you need to at least understand two factors:
The "earnings test limits" imposed on distributions before you qualify for full benefits, which will be the case if you start taking social security at age 62, will cause your benefits to be suspended.
For married couples, taking benefits early will impact survivorship benefits. These are the payments that the surviving spouse receives after the first spouse dies. The survivor is entitled to the full payment made to their partner, if that amount exceeds their own payout. But if the survivor had started taking benefits early, that survivorship benefit will be lower than if they had waited. For some this won't mean that much. But for many, the loss of hundreds of dollars of monthly could impose real hardship.
Taking Pension Distributions
While most Americans no longer receive fixed guaranteed monthly pension payouts upon retirement, many still do. The age at which you take these will impact how much you get. Similar to Social Security, if you claim early, the payout will be less. Conversely, deferring payment increases your payout; however, there's a cap on much you will receive if you do wait.
Traditionally, pension plans paid a monthly benefit to retirees, similar to Social Security. They still do. As with Social Security, if you take your pension early rather than later. the amount you receive will be reduced. In addition, you'll need to decide on several "annuity options." These can differ depending on the company offering the plan. But they typically include the option to take a reduced amount so that your spouse can receive something if you should die before him or her. Most plans present options for payouts that last for a lifetime. That assures you won't run out of money. Individual circumstances dictate which will be best in your own case.
But now, instead of taking a guaranteed monthly payment, you can instead choose take a lump sum when you retire. If you do that, you get no monthly payouts. You typically role that lump sum into a personal Roll-Over IRA and you now have responsibility to make sure the money lasts. If you spend it all down too soon you could run out of money. Despite this, it seems that's the most popular form of distribution these days.
Best Way to Cover Health Care Expenses
If you're taking Social Security early, let's say age 62, because you retired early, remember to plan on what you're going to do about health care expenses. That's because while you can take social security payments early, that's not the case with Medicare, which won't be available until you're 65. So what do those who retire early do here? Here are four options to consider:
If you qualify, you get Part A Medicare free. Part B will cost you. You'll also need to decide if you need or want to sign up for Part D, the various Medicare Drug Plans. Given the fact that Parts A, B, and D don't cover all health care expenses, you can consider a supplemental plan to fill in most, if not all, gaps in coverage.
Alternately, you can forego Part A and B and opt for Part C Medical Advantage Plans, a managed care or HMO option some prefer. These may include drug coverage, but you'll need to review plans offered in your geographical area. These plans vary depending on where you live.
In all cases, you should make these decisions as soon as you qualify, which as of this writing included the time starting three months before your 65th birthday, ending three months after. If you don't make your decision at this time, you'll pay more in premiums by waiting. That's usually not a good idea. There's no real advantage to doing that. Of course, if you're not retired at age 65 and you continue working full time, you may be able to retain your company's coverage. But they'll likely demand that you sign up for Part A anyway. You need to understand what your company requires. Typically, if you're still on a company plan, you don't need to sign up for Part B and won't be penalized signing up for it when you eventually do retire.
If all this sounds like it's getting a bit complicated, join the club. However, the Social Security website's Medicare section actually does try to explain it all in fairly understandable language. Still, the complexity of all this can get a bit daunting. That's why we noted you need be aware of the decisions you'll need to make so you can spend time researching and studying each in order to make the best decision. If you're smart, you'll start your considering these items well before you decide to retire.
While we may be able to get into more detail in future posts, I think it's important that you take responsibility here. Start by becoming familiar with each of the areas we listed here today. Think about your personal circumstances, read up on this stuff, get advice when it makes sense from a good, reliable source. And remember that even the best advice won't make the actual decisions for you. That's going to be up to you. So build up the knowledge and confidence you'll need to make good decisions when the time comes.
When to Claim Social Security Benefits
If you retire early, you may want to defer collecting your social security. These benefits are available starting at age 62, and indeed the majority of Americans apparently sign up then, even if they haven't stopped working. If you need the money, the decision's a no-brainer. But if you don't need it right away, you need to at least understand two factors:
The "earnings test limits" imposed on distributions before you qualify for full benefits, which will be the case if you start taking social security at age 62, will cause your benefits to be suspended.
For married couples, taking benefits early will impact survivorship benefits. These are the payments that the surviving spouse receives after the first spouse dies. The survivor is entitled to the full payment made to their partner, if that amount exceeds their own payout. But if the survivor had started taking benefits early, that survivorship benefit will be lower than if they had waited. For some this won't mean that much. But for many, the loss of hundreds of dollars of monthly could impose real hardship.
Taking Pension Distributions
While most Americans no longer receive fixed guaranteed monthly pension payouts upon retirement, many still do. The age at which you take these will impact how much you get. Similar to Social Security, if you claim early, the payout will be less. Conversely, deferring payment increases your payout; however, there's a cap on much you will receive if you do wait.
Traditionally, pension plans paid a monthly benefit to retirees, similar to Social Security. They still do. As with Social Security, if you take your pension early rather than later. the amount you receive will be reduced. In addition, you'll need to decide on several "annuity options." These can differ depending on the company offering the plan. But they typically include the option to take a reduced amount so that your spouse can receive something if you should die before him or her. Most plans present options for payouts that last for a lifetime. That assures you won't run out of money. Individual circumstances dictate which will be best in your own case.
But now, instead of taking a guaranteed monthly payment, you can instead choose take a lump sum when you retire. If you do that, you get no monthly payouts. You typically role that lump sum into a personal Roll-Over IRA and you now have responsibility to make sure the money lasts. If you spend it all down too soon you could run out of money. Despite this, it seems that's the most popular form of distribution these days.
Best Way to Cover Health Care Expenses
If you're taking Social Security early, let's say age 62, because you retired early, remember to plan on what you're going to do about health care expenses. That's because while you can take social security payments early, that's not the case with Medicare, which won't be available until you're 65. So what do those who retire early do here? Here are four options to consider:
- Coverage through a spouse's plan
- Employer-provided continuing health care coverage
- COBRA coverage, based on what you received from your company before you retired
- Individual insurance plans
If you qualify, you get Part A Medicare free. Part B will cost you. You'll also need to decide if you need or want to sign up for Part D, the various Medicare Drug Plans. Given the fact that Parts A, B, and D don't cover all health care expenses, you can consider a supplemental plan to fill in most, if not all, gaps in coverage.
Alternately, you can forego Part A and B and opt for Part C Medical Advantage Plans, a managed care or HMO option some prefer. These may include drug coverage, but you'll need to review plans offered in your geographical area. These plans vary depending on where you live.
In all cases, you should make these decisions as soon as you qualify, which as of this writing included the time starting three months before your 65th birthday, ending three months after. If you don't make your decision at this time, you'll pay more in premiums by waiting. That's usually not a good idea. There's no real advantage to doing that. Of course, if you're not retired at age 65 and you continue working full time, you may be able to retain your company's coverage. But they'll likely demand that you sign up for Part A anyway. You need to understand what your company requires. Typically, if you're still on a company plan, you don't need to sign up for Part B and won't be penalized signing up for it when you eventually do retire.
If all this sounds like it's getting a bit complicated, join the club. However, the Social Security website's Medicare section actually does try to explain it all in fairly understandable language. Still, the complexity of all this can get a bit daunting. That's why we noted you need be aware of the decisions you'll need to make so you can spend time researching and studying each in order to make the best decision. If you're smart, you'll start your considering these items well before you decide to retire.
While we may be able to get into more detail in future posts, I think it's important that you take responsibility here. Start by becoming familiar with each of the areas we listed here today. Think about your personal circumstances, read up on this stuff, get advice when it makes sense from a good, reliable source. And remember that even the best advice won't make the actual decisions for you. That's going to be up to you. So build up the knowledge and confidence you'll need to make good decisions when the time comes.
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