Your retirement date isn’t always a choice.
If that wasn’t already obvious enough to older workers, the coronavirus has cleared things up.
As the pandemic drags on, more and more people are being nudged toward the finish line a little faster than they planned — either because their jobs have gone away or because they don’t want to put their health at risk by showing up at their workplace every day (opens in new tab).
Some had planned on retiring soon anyway, and this was going to be their last working year. Some were laid off and simply are not up for the process of looking for a new job. Others are self-employed and do not have the energy to start all over with a new business.
And what they all really want to know is: Am I prepared to retire during uncertain times?
The answer is maybe. But maybe not.
Hopefully, you have a solid plan in place and you can find a way to transition to that plan a little early without running into too much trouble. In my new book available on Amazon, “Wall Street and Your Retirement (opens in new tab): What the Bulls and Bears Don’t Want You to Know,” I address the problems and potential solutions of retiring in uncertain times.
If you aren’t sure where you stand, however, here are a few things to consider:
1. Know what your sources of income will be in retirement, and have a good idea of how long your money will last.
Retiring without an income plan is like flying an airplane without knowing if you have enough fuel to get where you’re going. If your plan is to follow the old “4% rule,” you might want to rethink it. That guideline, which has been around since the mid-’90s, says that if you withdraw 4% of your nest egg in your first year of retirement, then adjust annually for inflation, a moderate 60/40 stock-bond portfolio mix should last for 30 years.
But the 4% rule has been criticized for years as too aggressive for most modern-day retirees — and current market volatility isn’t changing any minds. According to noted retirement expert Wade Pfau, a safer post-pandemic rate would be closer to 2.4% (opens in new tab).
Research and experience have shown that depending on the stock market to provide all or a large portion of the income you’ll need in retirement can be a scary prospect. But there are solutions, including adding a fixed index annuity to your portfolio to provide reliable income that you won’t outlive.
There are fixed index annuities available now that allow investors to participate in a portion of the gains of the market with none of the losses on the downside, and there are products with no annual fees. (Be cautious when checking out contracts. This is not the same as a variable annuity or a fixed index annuity with an attached benefit, such as an income rider.)
2. Know your Social Security claiming options, and maximize this significant income source.
Knowing all the Social Security claiming strategies available is important for every individual, no matter when they retire. But if you’re suddenly retiring earlier than planned, it’s critical to keep a few things in mind.
- The longer you delay filing, the more money you’ll get each month. You can file for benefits as early as age 62, but your benefits could be permanently reduced by up to 30% (opens in new tab), depending on your full retirement age (FRA), which is based on your birth year. If you delay your benefits beyond your FRA, you’ll receive a delayed retirement credit (opens in new tab) of 8% per year (or two-thirds of 1% each month) up to age 70.
- If you decide to keep working after claiming, you may have to return some of your benefits. The Social Security Administration sets annual earnings limits (opens in new tab) for those who claim benefits before they reach their FRA. For 2020, the earnings threshold is $18,240 during the years leading up to your FRA, and $48,600 for the year you reach your FRA. If your earnings go over those limits, a portion of your benefits could be withheld.
- A bump in Social Security benefits might be in your future (thanks to your higher-earning spouse). If you’re the lower-earning spouse, you may choose to file for a reduced benefit at 62, then file to add on a partial spousal benefit (opens in new tab) later on, when your higher-earning spouse claims his or her benefits. If your spousal benefit is more than your own benefit, you should see an increase in your monthly check. Just keep in mind that both your own and your spousal benefits will be reduced because you filed before your FRA.
3. Know what your health care options and costs will be in the years before you qualify for Medicare.
If you’ve had health insurance coverage through an employer for many years, the premiums offered on the Health Insurance Marketplace (Obamacare) may give you sticker shock. Marketplace savings are based on your expected household income (opens in new tab) for the year you want coverage. That means counting the income from everyone in the household, and it includes Social Security payments and withdrawals from a traditional IRA or 401(k).
If you can’t get what you want or need from the marketplace with a premium and deductible you can afford, another option might be to check out short-term medical insurance. These policies, which vary in cost and coverage options, can offer a budget-friendly way to fill the gap before you reach Medicare eligibility.
Unfortunately, it’s impossible to predict or control what’s coming next for our economy — whether it’s more pain from this pandemic or something else that could affect the dreams you have for your retirement. What you can do, though, is gather up as much knowledge and good advice as possible. And, if you have not already, formulate a plan that’s built for both good times and bad.
Kim Franke-Folstad contributed to this article.
This article was first published in 2020 during the COVID pandemic. Principles outlined in this article remain generally true for those nearing retirement during economic uncertainty and unforeseen economic events. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual's situation. 1473875 – 9/22
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
As an Investment Adviser Representative and founder of Retirement Planning and Investment Solutions LLC (www.freshstartplans.com (opens in new tab)), Ronald Anno focuses on creating tax-efficient retirement plans that help people achieve their financial goals and strives to ensure they won't run out of money during retirement.
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