There is no one-size-fits-all solution for generating or maintaining income in retirement, which means that every retiree will have questions and concerns about choosing the right strategy.
Those close to retirement may have more pressing concerns than those still five to ten (or more) years away.
What do you do if you’re within two years of retirement but don’t have enough in your nest egg to support you? Can you afford to retire early? Should you work part-time after you retire? What happens if you delay Social Security? Should you choose an annuity?
The answer to those questions vary depending on income needs, the amount you already have saved, and what your overall goals are for generating money after you retire. Some of the answers we’ve covered before (here, here and here for example), but others may still have you scratching your head.
Here are three of the most commonly asked retirement income questions that we haven’t yet covered.
Which Income Source Should I Tap First?
One of the biggest questions we receive when it comes to generating income in retirement is related to income sources: Should I collect Social Security before I tap into my 401(k)?
Many retirees naturally rely on Social Security to make up a certain percentage of their after-retirement budget, so it makes sense for them to look to Social Security as the first step in the retirement process. But the longer you delay taking Social Security, the more benefits you will receive. So should you really tap into Social Security first? Maybe not.
The decision ultimately depends on a few elements:
- How much you already have saved in your retirement and non-retirement investments
- How much you have invested or plan to invest in income generating investments
- How much you can expect to receive from Social Security
- How much your Social Security benefits will increase if you hold off
- Your overall health and expected retirement longevity
- Your income goals during retirement
For retirees with a significant nest egg, postponing Social Security as long as possible and relying instead on other investments as well as a payout from your 401(k) is a better option. In reality, it’s actually better to postpone withdrawals from your tax-deferred 401(k) if possible too. If you can, living off after-tax investments, like those from your portfolio or from general savings may be the best option early in retirement.
For lower income earners, Social Security will cover a great percentage of your pre-retirement income. This creates greater flexibility to start early, at 65 when Medicare begins, or full retirement age. Finally, some baby boomers are eligible for a pension payment from either their current or previous employer. Like Social Security, these are a great source of reliable income. Deciding when to start your pension should be done hand-in-hand with your Social Security planning.
How Do I Estimate Healthcare in Retirement?
Healthcare is another common retirement concern and one of the most difficult ones to address. The amount you’ll ultimately spend on healthcare is dependent on how healthy you are, and how healthy you’re likely to stay, which is, unfortunately, difficult to predict. Healthcare costs and insurance premiums are increasing rapidly and governmental impact is another unknown.
Medicare health care coverage begins at age 65, but, on average, it will only cover about 50% of your total health care expenses in retirement. You will have out of pocket expenses for eye care, dental, hearing, co-pays, Medicare Part B premiums, and premiums for other supplemental insurance policies you may purchase such as a Medigap policy and long-term care insurance.
Retirees with minimal health issues are likely to spend less than those with multiple medical conditions, but as a general estimate, the average 65-year-old couple can expect to spend $260,000 over the course of a 20-year retirement.
This doesn’t include long-term expenses like nursing home care, however, and medical expenses can vary widely by geographic location, but on average, expect to spend about $5,000 – $10,000 per year per person.
The first place to start is by estimating your current medical needs (AARP has a medical expense calculator here) and then creating a contingency plan for any health issues that may creep up later in life.
Many retirees have the misconception that income needs will decline as they grow older. Unfortunately, due to higher healthcare costs that is not always the case. Early in retirement, more money may be spent on travel or entertainment, but later in life extended hospital stays and complicated medical procedures will replace those expenses.
What Happens If My Retirement Ends Early?
Another question that many retirees have is what happens to their retirement funds or investments should they pass away sooner than expected. When planning for retirement, we often take into account how much money we will need if we live out the remainder of our days in the same (or better) lifestyle as we have now – we don’t want to outlive our money, after all – but we often fail to account for an unexpectedly short retirement.
For the sake of your spouse or other family members, it’s essential to ensure that funds and assets get into the right hands after your death. Here is a general breakdown of how that works.
IRAs are not covered in your will. When you open an IRA, you should complete a beneficiary designation form that will enable your loved ones to receive these funds in the event of your death. You can amend this form at any time, but keep in mind that whoever is on the form at the time of your passing will receive funds, no matter their relationship standing to you (e.g. ex-spouse or disinherited child).
Your spouse typically receives funds from your 401(k) account. You may still complete a form that designates who will receive your 401(k) benefits should you pass away early, but typically speaking, the law dictates that your current spouse receives these funds if you pass away. Keep in mind that this is true even if you’ve been legally separated and are living with someone else or alone. If you’re single, your beneficiaries named on your designation form will receive your 401(k) funds. Less flexibility and plan rules surrounding death are big reasons to roll your 401(k) to an IRA after retirement. (See more reasons here.)
Social Security will pay a one-time death benefit of $255 to your spouse. That is if he or she has been living in the same house with you. Spouses can receive full survivor benefits once they reach their full retirement age, between 66 and 67, depending on their birth year. They may be able to receive some payouts earlier if certain conditions apply. If you are unmarried, your children or next of kin will receive the benefits, but they must apply for this payment within two years of your death.
Like your own payouts, the size of survivor benefits depends on your average lifetime earnings. Naturally, the more money you made, the larger the payments to your spouse. and widowers have the option of collecting their survivor benefits first, then switching to their own benefit at a later date if that is higher.
Because every retiree’s needs and circumstances will be different, planning for income in retirement will require some thought and consideration. You will need to assess your ultimate goals, your current income and savings, and your ability to generate income in retirement to ensure that you live life to the fullest after you hang up your hat.
When it comes to the unexpected – like medical concerns or premature death – plan for the worst but expect the best. Have a plan in place for passing off your retirement funds to a spouse or heir in the event of your passing, and make sure you budget for any necessary medical expenses before that time comes.