Countdown to Retirement: 1 Year Away
For a smooth ride to retirement, take these financial steps when you one year to go.
You're now one year from retirement. First things first: Decide when you’ll take Social Security. You can claim benefits as early as age 62, and if you retire early, you may need the money to pay health insurance and other expenses. Keep in mind, though, that your benefits will be permanently reduced by at least 25%. By waiting until full retirement age—66 or 67 for most baby boomers—you’ll receive 100% of the benefits you’ve earned. Wait past then to claim and your payouts will grow by 8% a year until you reach age 70.
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Simplify your finances. Maybe you’ve collected multiple bank and brokerage accounts, IRAs, 401(k)s or other retirement accounts along the way. (If you lost sight of an account, search for it at missingmoney.com or unclaimed.org.)
Consolidate small accounts to make it easier to track assets, reduce paperwork and possibly save money. “You may be able to enjoy some economies of scale by doing some aggregation with a single provider,” says Christine Benz, director of personal finance at Morningstar, an investment research company. “You might, for example, be able to hit the threshold for cheaper expense ratios.” Simplifying finances will also make it easier for someone else to step in to manage your affairs, if needed.
Talk to human resources. Your HR department can help you avoid leaving money on the table when you walk out the door for the last time. For example, you may need to work until a specific date to qualify for your annual bonus, profit-sharing payout or 401(k) match. You should also ask whether you’ll be paid for unused vacation days (if not, start planning that vacation now).
Get the lowdown on any retiree health benefits the company provides, particularly if you plan to retire before you’re eligible for Medicare. If you’d like to leave your savings in your 401(k) instead of rolling the money into an IRA, find out whether you can take distributions when you need them. Some companies will allow withdrawals from a plan on a monthly, quarterly or as-needed basis but may charge a transaction fee. Others require you either to leave your money in the plan or to take it all out at once.
If you’re eligible for a traditional pension, review your options for taking a monthly payout versus a lump-sum payment. “I can’t tell you how many people come to me at retirement and say, ‘I only have two weeks to decide how I am going to take my pension. What do I do?’ ” says Richard Kahler, a CFP in Rapid City, S.D. “The time to look at that is a year out so you don’t have to be panicked.”
You’ll also be able to determine whether working another year or two will significantly increase your pension. That may not be the case if you’ll receive it in a lump sum, says Glickstein, of Willis Towers Watson. Interest rates are used to calculate the value of lump-sum pensions, and when rates go up, the value of lump-sum pensions goes down. Now that rates are rising, working another year may not increase a lump sum, and could even cause the amount to decline, Glickstein says.
Do your Medicare homework. Navigating Medicare is difficult, and the barrage of insurance pitches you’ll get as you approach 65 only adds to the confusion. Start educating yourself about Medicare and how it works to avoid coverage gaps when you leave your job. Social Security beneficiaries are automatically enrolled in Medicare parts A and B when they turn 65. But people who delay Social Security until full retirement age or later—which is a good idea if you’re still working—are on their own.
Most individuals don’t pay premiums for Medicare Part A, which covers hospital care. For that reason, it usually makes sense to sign up at age 65, at socialsecurity.gov, even if you’re still working and covered by your employer’s insurance. If you’re covered by your employer’s plan, you may want to opt out of Part B, which covers doctor visits and outpatient services and charges you a monthly premium. Likewise, you may want to wait to sign up for Part D, which covers prescription drugs, until you leave your job. Check with your employer to be sure its coverage is creditable—which means it’s at least as good as Medicare’s coverage. If not, you’ll face penalties when you sign up for Part D.
Once you leave your job, you’ll have up to eight months to sign up for Part B. But if you want coverage to start as soon as you retire, plan on filing at least six weeks before your last day to make sure you’re covered.
You’ll need to decide whether to sign up for Medicare Advantage or Medicare Part B plus Part D and a medigap plan—a supplemental policy that covers co-payments, deductibles and other costs that traditional Medicare doesn’t pay for. Medicare Advantage plans provide medical and drug coverage from a private insurer that has its own network of doctors. Use Medicare’s Plan Finder to search for plans in your area and find out whether your doctors are part of a plan’s network. You can also use this tool to research Part D plans. Medicare also offers this tool you can use to research medigap plans.
Buy an immediate or deferred annuity (or not). If your employer doesn’t offer a traditional pension, you may want to go the DIY route and buy an immediate annuity. With an immediate annuity, you hand an insurance company a lump sum in exchange for a monthly paycheck for the rest of your life (and your spouse’s life, in the case of a joint-and-survivor annuity) or for a specific number of years. One strategy is to calculate your fixed retirement expenses, such as utility bills, mortgage and car insurance, and buy an annuity that will cover those costs. You can get an idea of how much you’ll need to spend to get a specific monthly payout at immediateannuities.com.
Or you could buy a deferred income annuity in your fifties or sixties. Deferred annuities provide regular income in your later years; the payments don’t begin until at least 10 years after you buy them. They are significantly less expensive than immediate annuities, but unless you sign up for survivor or return-of-premium benefits, which will reduce your payout, your heirs will get nothing if you die before payments begin.
Portfolio checkup, 1 year out
With a year to go, the mix for a moderate-risk portfolio is 50% to 60% stocks, with the rest in bonds. If you’re feeling skittish about the stock market, consider moving some money to a couple of steadier stock funds, such as Vanguard Equity Income (VEIPX) or American Century Equity Income (TWEIX). Both funds have held up well in past downturns.
Now is the time to develop a “bucket” system to protect against one of the biggest risks you could encounter as a new retiree: being forced to sell securities that have fallen in value after a stock market plunge to pay your bills. Basically, you divide your retirement nest egg into three buckets, based on when you’ll need the money. The first bucket holds enough cash for living expenses that won’t be covered by Social Security, a pension or annuity for your first one to two years in retirement (three years if you’re conservative). The second bucket holds the money you’ll need in the next 10 years and should be invested largely in short- and intermediate-term bond funds, such as Vanguard Core Bond (VCORX). The third bucket is money you won’t need until the distant future, and you can invest it in diversified stock funds.
With the bucket system, if the stock market plunges, you will have enough in cash and bonds that you won’t have to touch your stocks for more than a decade—plenty of time for them to recover (see Make Your Money Last Through Retirement). After you’re retired, review your cash bucket annually to see if it needs to be replenished from the longer-term buckets.