What To Know Before You Make These 4 Big Retirement Decisions
The scary thing about many retirement decisions is that they are permanent. Take time to think through choices about your biggest retirement decisions: when to begin Social Security, when to retire, pension options, and how to invest your retirement money.
1. When to Begin Social Security
The single biggest retirement decision most of you will make is when to begin your Social Security benefits. More than 50% of Americans will rely on Social Security for more than 50% of their retirement income.
Like many, you may mistakenly assume two things:
- You think you need to start taking Social Security as early as possible: If you are 62 and still working, your benefits will be subject to the earnings limit. Taking Social Security early may be one of the worst things you can do.
- You think you need to start taking Social Security when you retire: Just because you are retired, you don’t have to start Social Security. When you factor in taxes, sometimes you can get more after-tax income by using your IRA money the first few years of retirement and delaying the start date of your Social Security benefits.
You want to decide when to begin your Social Security benefits based on the strategy that will give you the most expected income over your lifetime. This is determined based on the following factors:
- Are you married or single? Many married couples are unaware of how spousal and survivor benefits work, and so they each claim individually and forego thousands in additional benefits. If you coordinate your decision, you may be able to get more.
- If married, who was the higher earner, and what is the age differential between the two of you?
- Are there health concerns that would lead you to believe you will live a shorter than average life expectancy?
- Are you expected to be in an income tax bracket where you may pay some tax on your Social Security benefits, and do you have other sources of savings in addition to Social Security? If so, there may be ways to arrange your sources of income to reduce your overall tax burden in retirement, which increases your after-tax retirement income.
2. When to Retire
Once retired it can be difficult to get your momentum going and get back into the workforce if you need to. You need to stress test your retirement income plan to make sure it holds up under less than ideal conditions. Some questions to consider:
- If I’m not yet 65, how am I going to pay for health insurance coverage?
- If my savings and investments earn a lower return, can I cut back expenses?
- Am I willing to downsize at some point in the future?
- What will I be doing with my time? Will it be costing me money (travel, hobbies) or saving me money (I can now do my own repairs, cook at home)?
3. How to Take Your Pension
If you work for a company that offers a pension, study your options carefully before you retire. Some questions to consider are:
- If I worked a few more years, would my pension go up substantially?
- Does my company offer a lump sum or annuity option? If they do, which should I take?
- What pension term should I choose? A payout for my life only, or take a slightly lesser amount knowing it would then continue for my spouse’s life too (something called a joint and survivor option)?
4. How to Invest Your Retirement Money
If you have money in a 401(k) plan, you may have to decide whether to leave it there or roll it over to an IRA. Some 401(k) plans offer great investment choices and have up-to-date plan documents that will offer an array of choices to your beneficiary. Other plans are not as well suited for a retiree. Also, your 401(k) plan can change investment providers at any time, so you lose some element of control by leaving your funds in the plan. Retirement money needs to be invested differently so that it is safe and can produce reliable income.
This is not the time to take big risks - a big mistake here, and you could be in trouble.