Planning, Protecting and Enjoying Your Retirement
Retirement means different things to different people. Some look forward to pursuing new interests, while others just want time to relax. Whatever the future holds, one thing is certain - a secure retirement requires careful planning. Taking time to envision how you would like to spend your time during retirement will help assure that you will enjoy your later years. After you have established your general retirement goals, determining how your financial resources will be invested and later used can help ensure a comfortable retirement.
Everyone knows that financial security is a key component of a happy retirement. How you choose to spend your time in retirement is critical as well. You may find that as you enter this new phase of life you will want to focus your attention on the precious resource of time, and how to make the most of it without the daily structure and demands of a full time job, and with many years ahead, you may be considering several new options and choices.
Choices for a Satisfying Retirement
As you begin to transition to retirement, you may find a number of questions begin to bubble to the surface, such as “What issues, interests, causes am I passionate about? Where do I want to contribute? What will be my legacy?” Retirement planning can be a time to discover new and creative outlets and passions, and do the things you never had time to do while you were working. On the other hand, you may choose to work either full-time, part- time, as a consultant, or on a volunteer basis. Many people work in retirement to keep their benefits, maintain a stream of income, or because they enjoy working. Whether you choose to work or not, you may find that retirement is a time for considering the options that will bring you fulfillment.
It used to be that we went to school and then to work, and life followed a linear pattern. Retirement in this century is more often described as cyclical. For example, many newly retired embrace the opportunity to return to the classroom, to find new skills or discover new talents. After a time of learning and exploration, some people experience a renewed desire to work and pursue new opportunities and challenges. Some start their own business; others take on an “encore career.” An encore career is one that makes good use of your well-developed skills and talents, and provides you with the opportunity to apply them in a new setting that has a social impact, or makes a difference. If, for example, you worked in the corporate world, you may want to use your skills in the non-profit world. There is no one way to live in retirement. Your community college may offer resources to help you navigate the new retirement choices. Some community colleges offer a career changer package. These often include standardized tests and a session with a career counselor. On the other hand, you may choose to enjoy a learning experience combined with the adventure of travel. One very popular option, Elderhostel ®, offers learning adventures that combine travel with an educational experience for older adults.
When you leave the world of work and turn your attention to spending time with family, friends, and hobbies, you may find that the desire to contribute in a meaningful way becomes a priority. Volunteering is a great way for you to stay involved and make a contribution. The right volunteer experience can provide you with an opportunity to make new friends, gain recognition for your contributions, and it adds the important element of structure to your days. For additional resources on volunteering, see “For More Information” below.
Retirement as a new phase of life can be seen as an adventure and a time to reinvent yourself. This process can take time, and involves testing out different pastimes, jobs, and projects. Getting support from the people in your life will take on a special significance, as you begin to sort out all the choices. The shift to retirement can be a welcome change of pace and yet it can be challenging to create enough structure to find a sense of satisfaction. A new field called “life coaching” has sprung up to meet the needs of retirees who are uncertain of the way to proceed. The International Coach Federation is one resource that contains a member directory where you can find a listing of coaches in your state. You will want to find one who specializes in retirement transition issues. See the “For More Information” below.
As part of your personal retirement vision you may also want to consider the various housing options available to you. If you own a home, think about the size of the house and property and the amount of money required for its upkeep. Look ahead and determine how well it will meet your future needs. For example, if you have a two-story home, climbing the stairs could potentially become difficult in later years. You may want to think about how you will accommodate your changing needs down the road. There are several retirement housing options to consider.
To Move or Not to Move?
When you think about life in early retirement, you may hope and plan to move — to a better climate, or to be closer to your children or other family members. But before planning to head off to a new location, consider the impact on your finances. For example, some states have high taxes that can put a significant dent in a fixed income. If you decide a move is appropriate, you’ll want to check the availability and eligibility requirements for various services you might need. Other factors to consider include the cost of living, transportation, availability of good medical care, and safety factors. Make sure you know the area well and become familiar with the different seasons. Consider spending time there initially on a trial basis. Always consider the distance from friends and family. Wherever you choose to live in retirement, most retirement experts advise staying close to loved ones. Retirement brings changes, so it is important to maintain your relationships and support systems.
Housing Options
In the new retirement, you will find housing options that were not available to your parents’ generation. However, the increase in options requires careful evaluation and planning.
Active Adult Communities
If you would like to be surrounded by people your age, you may enjoy the lifestyle offered by active adult retirement communities. Active adult communities offer older adults, usually age 55+, a maintenance-free independent lifestyle, close to many amenities like tennis and golf, and may provide a centralized clubhouse for organized social events. Some people find this setting to be too limiting, and miss being around people of all ages. Additionally, some communities may have restrictions on guests and pets.
Assisted-Living Communities
If health considerations are a big factor in your retirement planning, you might consider assisted-living communities. With this style of housing you could have private living quarters and get assistance as you need it. Assisted-living communities combine independent accommodations with support services such as dining, wellness, social activities, personal care, medication management, and more. They are also referred to as residential care communities, retirement homes for adults or other names, depending on the state.
Continuing Care Communities
Continuing care communities offer the full range of housing options — from independent living to assisted living to nursing home care — on one campus. It is a long-term arrangement that provides housing, services, and nursing care. Usually, there is an initial entrance fee and additional monthly fees. If this option is right for you, you will want to evaluate all the different service agreements or contracts that are involved.
Whether you are considering popular retirement spots, assisted- living communities, or continuing care retirement communities, you will want to visit several communities, ask lots of questions, and get a feel for whether or not it is a comfortable, well- managed place. Always investigate choices thoroughly before committing any money. Additional resources are available at the back of this guide.
While you’re thinking about your new lifestyle, allow time to monitor your health. Exercise is important for maintaining good health, so consider how you will get the needed exercise. Perhaps, after you retire, you will have the time to join that gym you have been thinking about or maybe you can begin those yoga classes you have been promising yourself. Retirement also offers an opportunity to fine-tune your diet; you will no longer need to buy a hamburger for lunch at work, or drink that daily 20-ounce cup of coffee every morning. Without the demands of a busy work schedule, you may find it is easier to include the recommended daily allowance of fruits, vegetables, and grains in your diet.
Talk to your doctor about your family’s health history and the likelihood that you could develop a problem. After you retire, schedule regular preventive health visits, particularly for blood pressure and cholesterol level checks.
Assuming for a moment that you would like to maintain your current lifestyle in retirement, your question now is likely, “How much will I need?” To answer that question, you can begin by preparing an estimate of your current annual expenses.
Some financial planners estimate that during retirement, you will need at least 80 to 100 percent of your current income to maintain the same standard of living. The exact amount will depend on your lifestyle choices. If you want to move closer to your children, for example, and real estate is very expensive in that area, your living costs could be substantially higher. Often, people underestimate how much they will need to cover future health care and long-term care costs. If you are younger than the traditional retirement age — 65 — these estimates may not be reliable.
Once you have envisioned your retirement, and thought about how you would like to live in retirement, you will want to review your savings strategies to help you get there. When it comes to savings, time can be an asset in helping money grow. For example, if you estimate that you will need $500,000 in retirement savings (to supplement the income from your Social Security and work pension), the following chart shows how much you would have to save and invest, assuming an 8 percent tax-deferred annual rate of return.
Years to Retirement | Monthly Savings Required | Annual Savings Required |
---|---|---|
40 | $143.23 | $1,718.76 |
30 | $335.49 | $4,025.88 |
20 | $848.87 | $10,186.44 |
10 | $2,733.05 | $32,796.60 |
Source: http://www.bankrate.com/
Note that this chart does not reflect the effect of taxes. It is for illustrative purposes only and does not reflect returns on any specific product.
When saving for retirement, you’ll want to consider your retirement goals, the number of years until you retire, your tolerance for risk, and the tax implications of your investments.
There are four new challenges you should consider when creating a retirement savings strategy:
Inflation. During years of employment, periodic pay increases usually offset the impact of inflation. When you retire, however, the rising costs of necessities may have a significant impact on your expected standard of living. Consider this: If you needed $3,000 a month for expenses in 1980, you would need $$8,202.47 a month in 2012 dollars. (Source: Department of Labor, Bureau of Labor Statistics.)
If your investments and savings do not beat inflation, you will have less buying power than when you started. You can lower inflation risk by keeping a portion of retirement savings in growth-oriented investments. While higher returning investments generally have more risk, potentially higher returns can offset your risks from inflation.
Market Volatility While Taking Withdrawals. Certain investments, such as stocks, fluctuate with the market. If you will be retiring many years from now, the peaks and valleys of the financial markets are less likely to alter your basic retirement savings strategy. A longtime horizon will allow your portfolio to smooth out the ups and downs in the market. Once you retire, and begin withdrawing money, short-term market losses can cause your balance to decrease at an accelerated rate.
Diversifying your portfolio and employing a moderate allocation that includes a variety of stocks, bonds, and cash equivalents may help offset the effect of market volatility, but keep in mind that there is no certainty or assurance that a diversified portfolio will enhance overall return or outperform one that is not diversified.
Longevity. With healthier lifestyle choices and continued advances in medical science, people are living longer. A thoughtful retirement plan should assume that savings will need to last for at least the number of years you can expect to live after you retire. In the coming years, it may be quite common for people to remain active well into their 80s and 90s.
Conservative and careful planning can help alleviate the risk of running out of savings while you are alive. Similarly, an Immediate Annuity (also known as an Income Annuity (see page 14)) is a type of financial contract with an insurance company that can guarantee income for life.*
Unexpected Expenses. The longer you live, the greater the chance you will face a large medical expense at some point. There are other unexpected expenses that can affect your plan as well, from an unexpected home repair to a last-minute decision to help fund a grandchild’s education. Making the most of all the benefits you have, and putting a plan in place that takes unexpected events into consideration is the first step in ensuring against them.
* Guarantees are based on the claims-paying ability of the issuing insurance company.
Retirement income can come from a variety of sources — Social Security, employer pensions, and IRAs. Annuities can be another source of retirement income, providing guaranteed income payments for life.* See Annuities: A Steady Stream of Retirement Income below. Figuring out what you need, and how to get it, is not simple. A qualified financial professional can help you evaluate all the factors that will influence your retirement income.
Retirement Savings Choices
Financial experts are pretty much in agreement: Save for retirement sooner rather than later. It is never too early or too late to begin saving for retirement. If you do not already have one, consider establishing a tax-favored retirement savings account. Note that these plans, overviewed below, may be complex. You should consult with a financial advisor or tax professional to determine which plans are best for you.
401(k) Plans (named after a section of the federal tax code) is an employer-established plan. If your employer has a 401(k), it may be one of the best retirement savings vehicles available to you, particularly if your employer matches all or a portion of your contribution to the plan. With a 401(k) plan, you may contribute up to a certain percentage of your gross income (i.e., total income before taxes). The amount you contribute will be excluded from income for the year in which you make the contribution. Typically, 401(k) plans offer many investment choices, including a variety of mutual funds (e.g., stocks, bonds, or money market). Some plans may allow investments in company stock and U.S. Series EE Savings Bonds as well. You choose how to invest your savings, and you will have the option to change investments at specified times (e.g., quarterly). Usually, you may stop contributions at any time. Earnings in a 401(k) grow tax-deferred until the money is withdrawn — usually after retirement. If you withdraw money before you turn age 59½, however, you may be subject to a 10 percent IRS penalty. While early withdrawals are generally not permitted without penalty, some 401(k) plans permit various exceptions including “hardship” reasons, such as medical emergencies. You do pay income tax on the amount withdrawn, and a 20 percent mandatory federal withholding generally is required from the distribution. Some 401(k) plans may also permit loans against your savings.
403(b) Plans are also known as Tax Sheltered Annuities, or TSAs. They are retirement plans for non-profit organizations that are similar to 401(k) plans. Investment options in 403(b) plans include annuities and mutual funds.
Individual Retirement Arrangements (IRAs) are sometimes called “traditional IRAs.” They were established by Congress to encourage people to save for retirement by providing tax advantages. If you participate in an IRA, you may select from a wide variety of investment options and contribute up to $6,000 annually. You are permitted to make catch-up contributions to your IRA of up to $1,000 annually if you are age 50 or over.
Tax benefits vary depending on your income and whether you contribute to other tax-advantaged savings plans (e.g., a 401(k) plan). Earnings in an IRA grow tax-deferred until withdrawals begin. Funds in an IRA are considered long-term savings and, as with 401(k) plans, you may be subject to a 10 percent IRS penalty as well as to tax liability for premature withdrawals— generally before the age of 59½.
Roth Contributions limits for 2020 are $6,000 and a $1,000 catch-up contribution for those 50 and older. As with traditional IRA investments, Roth IRAs grow tax-free. But, unlike traditional IRAs, Roth IRA contributions are made with after-tax dollars. Qualified distributions are tax-free. Qualified distributions from Roth IRAs will be allowed only in cases of death, disability or attainment of age 59½ and as long as it has been at least five years since the initial Roth contribution was made. Non-qualified withdrawals will be subject to ordinary income tax and may be subject to tax penalties.
* Guarantees are based on the claims-paying ability of the issuing insurance company.
For most people, a Social Security check will be part of their retirement income — providing a guaranteed stream of income for their lifetime. The age at which you will receive full retirement benefits (called “full retirement age”) is shown in the table below.
Year of Birth | Full Retirement Age |
---|---|
1937 and earlier | 65 |
1938 | 65 and 2 months |
1939 | 65 and 4 months |
1940 | 65 and 6 months |
1941 | 65 and 8 months |
1942 | 65 and 10 months |
1943 – 1954 | 66 |
1955 | 66 and 2 months |
1956 | 66 and 4 months |
1957 | 66 and 6 months |
1958 | 66 and 8 months |
1959 | 66 and 10 months |
1960 and later | 67 |
*Source: http://www.socialsecurity.gov/retire2/retirechart.htm
If you choose, you can begin taking your Social Security benefits anytime after age 62. Since you will be getting benefits for a longer period, you will receive a lower monthly payment.
Taxes on Your Social Security. If you have income in addition to your Social Security income, you may owe tax on at least a portion of the Social Security benefit. Currently, assuming your filing status is single, if your yearly “provisional income” (your modified adjusted gross income plus non-taxable interest plus one-half of your annual Social Security benefits) exceeds $25,000, you could owe income tax on a portion of your Social Security receipts. The Social Security laws and limits change frequently; you can get information at www.irs.gov and/or www.socialsecurity.gov, or you can check with a financial advisor and a tax and legal professional to determine how the IRS rules apply to your situation.
Like Social Security, the goal of an annuity is to provide you with a steady stream of income for the rest of your life. Contributions to annuities are made on an after-tax basis (assuming the annuity is not part of a qualified retirement plan), so they will not reduce your current taxable income. Annuity earnings, however, are tax-deferred for individuals. Annuities are financial contracts often made with an insurance company. An annuity may be deferred or immediate. With a Deferred Annuity, you put money in and over time it accrues income and earnings; the payout occurs at some later date, when you may receive a steady stream of payments to supplement your income. Early withdrawals, typically prior to 59½, may be subject to a 10 percent penalty. Upon annuitization, part of each payment is deemed a non-taxable return of principal and part is deemed taxable earnings. Taxes on lump-sum distributions are taxed differently; typically gain is taxed and deemed distributed first at ordinary income rates. Annuities can be set up to include post- death benefits, such as a benefit to a surviving spouse.
When you near retirement, you may elect to purchase an Immediate Annuity (sometimes known as an Income Annuity). Purchasers make one lump sum payment and then begin getting income within a short period, less than one year from date of purchase. You can receive payments from an Immediate Annuity on a regular basis (e.g., monthly), giving you needed income. Also, you could choose from a number of other payment options including having the payouts guaranteed by the issuer for as long as you live.* Immediate income annuities with certain guarantees may help to better secure your income in retirement.
It is important to understand the features and benefits of annuities, including the various riders, guarantees, surrender charges and terms for keeping them in force. Discuss them with your qualified financial advisor, tax and legal advisors to make sure you understand all the options.
* Guarantees are based on the claims-paying ability of the issuing insurance company.
Medicare, the government-run health insurance program, kicks in when you turn age 65. If you retire before you are age 65, you will need to decide how to handle your healthcare expenses. You may have alternatives to enrolling in a new health insurance plan. For example, if your spouse is working and has an employer-sponsored plan, you may be able to enroll in that plan. Or, you may elect to continue purchasing your health insurance through your old employer. Before you retire, you will need to check on your Medicare eligibility. Medicare does not happen automatically; you must enroll. If you do not sign up for Medicare when you are first eligible — at age 65 — you may have to pay a higher premium for a portion of your coverage. Check with your local Social Security office for more information. Additional resources are provided at the back of this guide. As you approach age 65, you will have to decide whether you need supplemental insurance beyond the coverage offered in Parts A and B, and you will have to decide regarding prescription drug coverage under Part D. Choosing a supplemental health policy can be complicated. Do your homework, shop around, and do not allow yourself to be pressured into a quick decision. Most states have a counseling program on senior health insurance issues with trained volunteers available to help older adults and their families with questions.
If you retire before age 65, you will need to decide how to pay for your health care. Since purchasing medical insurance can be a significant expense, perhaps even approaching or exceeding the total of your Social Security checks, some early retirees take a part-time job that offers medical benefits. If you elect to do this, it could provide you with an opportunity to do something new and different until you reach 65.
Because neither medical insurance nor Medicare is primarily designed to pay for long-term care services, long-term care insurance may provide a way for you to help pay for this care. Long-term care insurance may help you retain more of your assets set aside for retirement and may help you remain independent by providing additional means when deciding how your care will be provided.
Planning for retirement is complex and may require considerable time and effort. You will want to evaluate your needs, develop a plan, and consult with professionals you trust, including your financial advisor, independent accountant and attorney. He or she will also be able to help you determine how much you need for your retirement and what steps you can take to meet those goals. The company you work for may provide some counseling, either internally or through another source, to assist you with understanding your retirement funding options.
Taking a realistic look ahead and planning carefully will help further your retirement goals.
Books
Something to Live For: Finding Your Way in the Second Half of Life
Richard Leider and David Shapiro
Publisher: Berrett-Koehler Publishers, July 2008
The Wall Street Journal Complete Retirement Guidebook: How to Plan It, Live It and Enjoy It
Glen Ruffenach and Kelly Greene
Publisher: Three Rivers Press, June 2007
Helpful Websites
http://www.aarp.org
The AARP’s Web site has numerous articles, links, and calculators related to retirement finances, housing, health care, lifestyle, including civic engagement through volunteer opportunities and working in retirement.
www.alfa.org
The Assisted Living Federation of America’s Web site contains a searchable assisted-living facility provider directory, state rules, regulation changes, and new developments in the industry. ALFA also produces a downloadable booklet, Guide to Choosing an Assisted Living Residence.
www.BenefitsCheckUp.org
The National Council on the Aging (NCOA) is a national network of organizations and individuals dedicated to increasing the health and independence of older persons. Their site offers a free Internet service to help older persons learn about benefit programs. The site is especially useful for those with limited means, including persons without Medicare. You may also reach NCOA at www.ncoa.org.
www.choosetosave.org
Choose to Save® is a national public education and outreach program developed by the Employee Benefits Research Institute and its American Savings Education Council. It is dedicated to raising awareness about the need to plan and save for long-term personal financial security. Choose to Save includes free savings tools such as the BallParkE$timate®, a retirement planning worksheet and interactive tool, several online calculators, brochures, tips, and links to related resources.
www.coachfederation.org
Established in 1995, the International Coach Federation is home to 17,000 credentialed coaches around the world. To find a coach, follow the link and search by state.
data.bls.gov/cgi-bin/cpicalc.pl
The Bureau of Labor Statistics has a convenient Inflation calculator at this site.
www.savingmatters.dol.gov
This is the official site of the Employee Benefits Security Administration at the U.S. Department of Labor. Several useful guides that have been developed by the Department of Labor and the Employee Benefits Security Administration are included in their Financial Independence Toolkit at www.dol.gov/ebsa/publications/FIToolkit.html.
www.elderhostel.org
Elderhostel is a not-for-profit organization offering educationally based travel packages specifically designed for people over 55. You may reach ElderHostel by calling 800-454-5768.
www.maturemarketinstitute.com
The Mature Market Institute is MetLife’s research organization and recognized expert on the multi-generational issues of aging and longevity. You will find several valuable publications in the section . To help you with planning your time and finding what matters most, see the workbook, Discovering What Matters: Your Guide to the Good Life. The series addresses the concerns of families dealing with caring for an older adult. For the issues specific to women, see the publication, What Today’s Woman Needs to Know. Also see Retirement Planning: Healthcare Considerations.
www.medicare.gov
This is the official site of Medicare, providing access to information about Medicare, Medicare health plans, prescription drug plans, contact information, and more. Several useful publications can be viewed online or ordered over the phone. Click on “Search Tools” and select “Find a Medicare Publication,” or call the Medicare Hotline at 800-633-4227 to request a complimentary copy. The following publications will get you started: Medicare and You 2009, 2009 Choosing a Medigap Policy: A Guide to Health Insurance for People with Medicare, Your Guide to Medicare Prescription Drug Coverage, Medicare at a Glance.
www.mymoney.gov
This Web site is home to the U.S. Financial Literacy and Education Commission. You will find useful links to resources on retirement planning, online calculators, and related issues such as home ownership and credit.
www.ssa.gov
The Social Security Administration has a wealth of retirement information and can determine what you can expect to receive from Social Security when you retire. You may reach the SSA by calling 800-772-1213.
www.shiptalk.org
The State Health Insurance Assistance Program, or SHIP, is a national program that offers one-on-one counseling and assistance to people with Medicare and their families.
www.sec.gov
The U.S. Securities and Exchange Commission offers online publications including Variable Annuities: What You Should Know. You may reach the SEC by calling 800-638-5433, or follow the links to search their “Online Publications for Investors.”
www.wiserwomen.org
The Women’s Institute for a Secure Retirement (WISER®) is a national non-profit organization dedicated to improving the long-term financial security of all women through education and advocacy.
MetLife, its agents, and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. You should consult with and rely on your own independent legal and tax advisors regarding your particular set of facts and circumstances.