4 Big Considerations Before You Retire

Couple studying their upcoming retirement decisions.

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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 claiming Social Security
  • When to retire from your job
  • What are your pension options
  • How are your retirement funds invested

1. When to Begin Social Security

The single biggest retirement decision 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.

Mistaken Social Security Assumptions

Don't 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.

Even if you do retire from your nine-to-five job, don't think you need to start taking Social Security. Just because you are retired, you don’t have to start Social Security immediately. 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.

Consider Your Particular Situation

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.

The earlier you begin receiving Social Security benefit checks, the lower your checks will be for life. If possible, wait until age 70 to start drawing benefits so you get the highest check you're entitled to.

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)?
  • Do I enjoy my job? Do I want to stop working?
  • Should I consider a phased retirement?

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?
  • Which 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.

The advantage of a 401(k) is that you can manage the account without the help of a financial adviser because the plan offerings are usually quite small. An IRA will need the help of a professional in most cases, especially if you are approaching retirement.

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.

The Takeaway

Decisions like these often require talking to a financial professional. If you make the wrong choices now, it may negatively affect your financial peace of mind in the future. Finding a financial professional you trust may be the best decision you make for your long term financial help.

Article Sources

  1. Social Security Administration. "The Importance of Social Security Benefits to the Income of the Aged Population."

  2. Social Security Administration. "Special Earnings Limit Rule."

  3. Social Security Administration. "Income Taxes And Your Social Security Benefit."

  4. Social Security Administration. "Delayed Retirement Credits."