You may have a long list of questions about your retirement and how to fund it. It's not always easy to find information, so here are answers to seven of the most commonly asked retirement questions.
- It’s not always easy to find answers to your retirement questions, as everyone’s financial needs and goals vary.
- Consider questions like when to take Social Security holistically as part of your larger retirement planning.
- To make a retirement budget, examine your current spending, and then estimate which items may increase or decrease.
- Medicare health care coverage begins at age 65 but will only cover about 50% of your total health care expenses, so plan for supplemental insurance.
1. When Should I Begin Taking Social Security?
The question of when to take Social Security is at the top of the list, because it's a decision that nearly every American must make. You get less monthly income if you begin benefits early, and more monthly income if you delay benefits.
Too many people assume that this is a simple decision, and they take the option that puts money in their pockets early on. A choice like this could cost a family thousands (in some cases, even hundreds of thousands) in missed benefits.
Rather than deciding on Social Security independently of the rest of your situation, look at how it fits in holistically with all aspects of your retirement income plan. Consider factors like inflation, longevity, the need for guaranteed income, the amount of financial assets you have, whether you plan to work part-time in retirement, and your tax situation. Other variables, such as your spouse's or ex-spouse's income, may play into this decision as well.
2. How Long Will My Money Last?
This is a common retirement question, and unfortunately, it is one of the most difficult ones to answer. To answer it, you must estimate things like:
- How long you will live
- How much you will spend
- What rate of return you will earn on savings and investments
- What types of medical expenses you will incur
- What your tax rate will be
Once you have projected these items, you can estimate how long your money will last in retirement. However, rather than settling on a number, it's best to develop a few scenarios that show you how much you would need if your returns were lower or if you were to spend more. This type of planning will give you a range of savings needed, which is a better and more conservative approach than targeting a single number.
3. How Much Money Do I Need to Retire?
Like the retirement question above, the answer to this question depends on a lot of variables, despite what some of the overly simplistic online calculators might reveal. Some folks spend very little, worked at the same job their whole life, and will retire with a sizeable monthly pension or income from a retirement account. They may need very little money beyond that pension to support a comfortable lifestyle. Other folks are used to spending a lot and don’t have a pension or retirement account. They will need either a large amount of savings to support their lifestyle or a way to be able to live on less. If you want to come up with an estimate of your own needs for retirement money, here are four steps you can use to estimate how much you’ll need to retire.
Now that company- and government-funded pensions are considered a thing of the past, many Americans are retiring with less money than they need, and retirement planning is becoming more of an individual responsibility and less of a corporate or governmental obligation. Budget on the conservative side while you're making your plans to help ensure your savings, retirement accounts, and social security income can support your retirement plans.
4. Should I Buy an Annuity?
An annuity is an insurance product that insures your income for life. If you have other sources of guaranteed income, such as Social Security and a pension, and those sources cover most of your living expenses in retirement, then you probably don’t have a need to insure additional income. However, if you don’t have much guaranteed income, then it may make sense to buy an annuity that will insure a minimum amount of future income.
This decision, like most financial decisions, is one best made as part of holistic financial plan. As with anything, there are pros and cons with annuities--notably, the high cost (relative to the expected payout) of most annuity options. It is prudent to weigh the cost with the expected benefit when making the decision of whether or not to purchase an annuity.
5. How Much Will I Spend?
Some people spend more once retired. They travel or engage more in hobbies such as golf, skiing, or boating. Others find that they spend less as they are no longer commuting, paying for dry cleaning, or eating out as much.
To determine how much you might spend in retirement, sit down and examine your current spending. Then, estimate which items may increase or decrease, to come up with a retirement budget. If your employer doesn’t offer a healthcare plan for retirees, make sure you factor in the premiums that you will need to pay out of pocket, especially if you're retiring before you're eligible for Medicare.
6. How Will I Pay for Medical Expenses in Retirement?
Medicare health care coverage begins at age 65, but, on average, it will only cover about 50% of your total health care expenses in retirement. You will have out-of-pocket expenses for eye care, dental, hearing, co-pays, Medicare Part B premiums, and premiums for other supplemental insurance policies you may purchase, such as a Medigap policy or long-term care insurance.
Medical expenses can vary widely by geographic location, but on average, expect to spend about $5,000 to $10,000 per year per person. Fidelity projects that an average couple age 65 retiring in 2020 will need $295,000 to cover their retirement healthcare expenses.
7. Should I Take My Pension as a Lump Sum?
Many pensions offer a lump sum option or an annuity option that pays monthly income for life. Many people take the lump sum option without carefully analyzing the outcomes of their potential choices. When looked at over life expectancy, the annuity option may be a much better option than the lump sum. Be sure to examine your pension choices thoughtfully in light of your entire financial picture before you make a decision.