Welcome back to Part 2 of our 3-part series on navigating Medicare after 65. We previously discussed securing healthcare coverage at this crucial milestone. Now, let’s shift our focus to your financial future.
Securing the best healthcare coverage at the best price and planning for your future care needs are crucial to securing your financial future. According to the Fidelity Retiree Health Care Cost Estimate, an average married couple that retired in 2023 at age 65 needs to have saved approximately $315,000 just to cover their healthcare expenses in retirement.
We know there’s so much more you want to do in retirement besides pay for healthcare! Let’s look at some practical tips to help ensure your financial well-being throughout your retirement, so you can be confident you have the funds for your golden years.
Maximize Your Social Security Benefits
With optional 401(k) plans susceptible to stock market fluctuations and company pension plans virtually non-existent today, Social Security is one of the few sources of income that retirees can count on for the rest of their lives. Therefore, you want to be sure you maximize your Social Security benefits to get every penny you’ve earned.
Here’s how to make the most of your benefits:
Wait until Full Retirement Age (FRA) to claim your benefits. Your FRA is the age at which you’re entitled to receive full Social Security benefits (between age 66 and 67, depending on birth year). You can start receiving your Social Security retirement benefits as early as age 62, but If you claim benefits before your full retirement age, your benefit will be reduced by as much as 30%!
Delay claiming your benefits. For each year you delay claiming Social Security beyond your FRA up until age 70, you earn delayed retirement credits increasing your benefits rate up to 8% per year. So, if your FRA is 66, delaying claiming Social Security until age 70 will result in a 32% increase in your benefits.
Know your income and how it affects your benefits. Your Social Security payout is based on your 35 highest years of income. The more you earn (and pay in Social Security taxes) while working, the higher your benefits will be. So, ensure your earnings history is accurate when filing for Social Security. You also want to consider your current income. If you’re still working and choose to receive benefits before your FRA, you’re subject to an earnings restriction (or cap) that reduces your Social Security payout until you reach FRA.
Compare your benefits to spousal and/or survivor benefits. If you’re married, divorced, or widowed, you may be eligible for spousal benefits based on your spouse’s work record. Depending on how long you worked and paid into Social Security, it may be better to claim spousal benefits instead of your own. If your spouse passes away, you may be eligible for survivor benefits based on their work record, which could be higher than your own benefits.
Know how your benefits will affect your income taxes. You will have to pay federal income tax on your Social Security benefits if your combined annual income (50% of your Social Security benefit amount plus any other earned income) exceeds $25,000 as an individual or $32,000 as a couple. At $34,000 individual/$44,000 joint income, you’re looking at 85% of your Social Security benefits being taxed. Assessing your current income can help you decide which benefits to claim and when, and take steps to reduce your overall tax burden.
If you’re unsure how to claim your Social Security benefits and the best strategy for maximizing them, the Wandacare Team is here to help, guiding you through the process of filing for your benefits and enrolling for Medicare with the Social Security Administration.
Diversify Your Retirement Investments and Income
Being financially secure in retirement means making sure your income lasts as long as you do. There are several investment options you can consider to help grow your income so you have more than enough funds during your retirement years.
Here are some common retirement investment options to consider and how to maximize your returns:
Employer-Sponsored Retirement Plans: Whether a 401(k) (private employers), 403(b) (non-profit employer), or a 457 Plan (government employers), these plans help you save and invest a portion of your salary pre-taxes toward your retirement. Ensure more money for retirement by contributing the highest percentage/maximum amount you can from your paycheck now. If your employer offers matching contributions, know your vesting schedule and any contribution requirements to get all that you can.
Individual Retirement Accounts: Even if you have an employer-sponsored retirement plan, you can still open an Individual Retirement Account (IRA). The best IRA for you depends on your income and tax situation. A traditional IRA is tax-deductible, and your investments grow tax-deferred—you pay no taxes on the money contributed until you withdraw it as retirement income. A Roth IRA is the opposite—your contributions are made with after-tax dollars and your withdrawals and earnings in retirement are tax-free. The Roth IRA is the better choice if you expect to be in a higher tax bracket with your retirement income than you were while working.
Annuities are “financial insurance,” in which you make payments (either as a monthly premium or a lump-sum) to the holding institution that then issues return payments at a fixed or variable rate over a specified period of time. Fixed annuities have a set guaranteed rate for a predictable return and income. Variable annuities fluctuate based on market performance. Immediate annuities provide regular income payments immediately based on a lump-sum investment. You can choose the rate, timeframe, and payment duration based on your financial needs to ensure you have a source of income for the remainder of your life.
Brokerage Accounts are how you buy and invest in various securities, including stocks, mutual funds, bonds, and exchange-traded funds. Stocks provide the greatest long-term growth potential but at a higher risk, while fixed-income bonds are considered safer, providing regular interest payments and return of principal at maturity. You can have a more balanced (and safer) investment through mutual funds and exchange-traded funds, which pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, and other assets. Brokerage accounts offer the most flexibility (there are no limits on how much you can buy, contribute, or withdraw), diverse investment options, and potentially the greatest profits. However, they come with the greatest risks and without any FDIC insurance or tax protections—all interest, dividends, profits, and gains are subject to taxes.
Real Estate Investment: Depending on the market, real estate can be a wise investment. However, it comes with the responsibility of being a landlord on rental properties or the work of renovating and flipping properties to make a profit. Real Estate Investment Trusts (REITs) can be a smart alternative. REITs are companies that own, operate, or finance income-generating real estate, giving you the financial returns of real estate investment without the hassle of direct property ownership.
Cash Accounts: While giving you a lower return, these accounts keep your money safe and accessible. Savings accounts provide for easy access to cash you’ve squirreled away. Certificates of Deposit (CDs) lock in your money to earn a fixed interest rate for a specified term, with your investment insured by the FDIC up to certain limits. You will pay taxes on the interest earned.
When exploring the various retirement investment options available, it’s important to factor in your risk tolerance, investment objectives, retirement timetable, and overall financial situation. A diversity of assets, accounts, and income streams is the best way to mitigate risks and achieve your financial goal—adequately funding the rest of your life.
Create a Sustainable Budget for Retirement Living
Making sure you don’t outlive your retirement savings means living within your means. You may have lived on a budget your whole life, so you could achieve freedom in retirement. But if you want freedom and security, creating a sustainable budget that prioritizes your lifestyle preferences, housing location, healthcare needs, and other personal goals ensures you can keep living your golden age dreams.
Here are some key areas to allot for in your retirement budget:
Housing Costs: Do you plan to stay in your current home, downsize, or finally buy that dream home? Factor in expenses such as mortgage or rent, property taxes (which can change with your age and/or relocation), insurance, and maintenance.
Healthcare Costs: Your healthcare needs and expenses will increase as you age, so it’s essential to budget for your future medical care. Start by looking at what Medicare covers in retirement and then budget for what you’ll have to pay out of pocket toward healthcare—premiums, deductibles, copayments, and long-term care (not covered by Medicare).
Cost of Living Expenses: Beyond the big-ticket items of housing and healthcare, you want to budget for the daily staples—food, clothing, transportation, utilities. Calculate your current expenses and consider how they might change in retirement.
Inflation: One of the biggest impacts to cost-of-living expenses is inflation. While down from its post-pandemic peak in 2022, inflation remains stubbornly high at over 3% and above the Federal Reserve target of 2%. Depending on how close you are to retirement, this could greatly impact your budget, as higher prices and higher interest rates will take more out of your retirement income.
Taxes: Look at the amount and sources of your retirement income—Social Security benefits, pensions, withdrawals from retirement accounts, and investment income. Will it put you into a higher tax bracket? What sources are tax free? Which are taxable upon withdrawal or face penalties for early withdrawals? Understand how your different sources of income are taxed to plan for your tax burden in retirement.
Retirement Lifestyle: This is your time to finally take that trip to Europe, hit the road in an RV, become a full-time artist, or whatever enjoyable activities and hobbies you’ve been dreaming of. Budget for those recreational pursuits.
Emergency Funds: From roaring hurricanes to declining stock prices, the unexpected happens. Make an emergency fund with enough cash reserves (money you can access without penalties) to cover living expenses for three to six months.
Ultimately, a sustainable retirement budget is one that allows you to maintain your desired standard of living throughout your retirement years without depleting your savings too quickly. What you prioritize in your budget is up to you.
With Wandacare, you can ensure your healthcare is covered and your finances are secure – a crucial foundation for a fulfilling next chapter. Join us for Part 3 of this series where we’ll explore strategies for embracing life transitions and maximizing your golden years. In the meantime, contact Wandacare today to discuss your individual needs and start planning your happiest and healthiest future.
