Those nearing retirement often think about the places they’ll go and the things they’ll do with all their new-found free time. Before dreaming of what they’ll do, however, soon-to-be retirees need to determine when they’ll make some major decisions leading up to that time.
The vast majority of older working Americans will struggle to maintain their pre-retirement standard of living if they choose to retire at age 65.1 Baby Boomers in particular will face this tough reality and even tougher decisions as they approach retirement. Discussing these five major areas with your investment clients can help shed some light on potential concerns and on opportunities to mitigate the risk of potential financial shortfalls.
1. When to Retire and Collect Social Security
Arguably, the largest decision looming over many pre-retirees is when to stop working and start collecting Social Security. Many factors outside of finances can influence this decision, including family issues and other life circumstances, especially health-related issues.
Several studies indicate that retiring early may lead to a longer life. Research in the Netherlands indicated that those who retired early were 2.6 percent less likely to pass away within the next five years. In contrast, another study published in the Journal of Epidemiology and Community Health found that people who worked a year longer lowered their chance of death even further — by 11 percent.2
There are many unknowns in retirement. When working with clients, it’s important to help them focus on things that are under their control, including whether they’re willing to sacrifice a portion of their Social Security benefits prior to reaching full retirement age. Depending on the year of birth, retiring at age 62 rather than 65 or later can significantly reduce benefits over time, anywhere from 20–30 percent.3 Uncertainty about the future of Social Security aside, pre-retirees need to seriously consider whether they can afford such a drastic reduction. For some, staying in the workforce longer needs to remain an option.
2. When to Withdraw from Retirement Accounts
Another consideration involves deciding whether to tap into investment savings. Early distribution penalties for those who withdraw from retirement plans before age 59-½ need to be considered as part of such a decision, as does any income taxes that may be owed. Large withdrawals may even qualify a person for a higher tax bracket and, because the IRS is prone to changing income ranges for tax brackets periodically, you’ll need to make sure your clients are aware of all the potential pitfalls.4
Deferring withdrawals from 401(k) accounts until minimum distributions are required at age 70-½ allows those investments to maximize their earning potential.5 While circumstances may warrant the need for earlier withdrawals, be sure to explore other options with your clients that have the potential to minimize loss and provide guaranteed income.
3. When to Downsize
Lowering expenses after retirement is a key strategy for overcoming potential income gaps and can help delay the need to withdraw from retirement accounts, or reduce the amount being withdrawn. Selling a high-value home and moving into a smaller one can provide instant cash flow that can supplement one’s income, and it can reduce other expenses including insurance, utilities and various services.
Downsizing a home isn’t always an easy decision or the best option, however. For example, if the mortgage is paid off, any savings could be negligible, or capital gains from the sale of a home could take up a sizeable chunk. Additionally, choosing to move to a retirement community could mean paying more for amenities, association fees or upkeep, negating any savings. Aside from the financial impact, distance away from family and friends could also have social implications due to a lack of a strong support system. Help clients consider all the factors — both financial and personal — that go into decisions about whether to downsize.
4. When to Enroll in Medicare
Many of those who continue working are able to take advantage of employer-sponsored healthcare and only pay a portion of insurance premiums. Some providers recommend enrolling in Medicare Part A as soon as a person is eligible, even if employer coverage is in place.6 Prior to making a decision about enrolling in Medicare while still covered by an employer, it’s best to have your clients check with their benefits administrators to ensure their coverage won’t change as a result.
It’s important for those approaching retirement to know the rules for signing up for Medicare when they’re first eligible. There is a seven-month window of opportunity around a person’s 65th birthday in which most people are required to enroll in Medicare. If they miss that opportunity, they will likely incur late enrollment penalties or be required to pay higher premiums.7 Work with your clients to develop a strategy for covering healthcare costs in retirement, and discuss the financial implications of overlooking enrollment periods.
5. When to Take on Market Risk
Many investors become more cautious as they approach retirement and want to minimize risks, especially in light of recent market volatility and geopolitical uncertainties. Some receive a greater level of comfort by keeping more cash on hand while others simply decide to “wait things out.” Those who put off planning, however, can eventually feel a sense of urgency to make up for lost time and take on unnecessary risks.
As an advisor, you can help provide a balanced approach to risk control. Transferring a portion of accumulated wealth over to annuities with growth potential and downside protection may help ease your clients’ anxieties over market volatility by providing a guaranteed income stream in retirement.
Helping your clients find their personal risk/reward balance through customized investment options with upside potential can help them feel more confident even when markets experience ups and down. Learn additional strategies for easing client anxieties in the Step by Step Guide to Helping Your Clients Achieve Financial Security and Satisfaction in Retirement. Click the button below to access your copy now.