Retiring in 2019? Things to Consider
Written by Thomas M. Geier, CPA, CFP ®, PFS
Retirement is a double-edged sword. The prospect of getting out of bed anytime you wish and trading the things you “have to do” for the things you “want to do,” is very enticing. However, those heading into these golden years must do so with proper planning and a healthy dose of caution, if they want to avoid the financial pitfalls that can threaten a retiree’s happily ever after. So, if you are planning to retire in 2019, or in the near future, take a moment to review the topics that should be on every retiree’s or pre-retiree’s mind.
Did you know the average amount a retiring 65-year old will pay out of pocket over the course of retirement is $280,000? The U.S. Centers for Medicare and Medicaid services project health care spending will rise 5.5% annually from now until 2026. And according to a report from the U.S. Senate, the cost of senior’s most commonly used brand-name drugs is increasing at 10 times the rate of inflation! None of this bodes well for seniors on a limited budget. So, what can you do?
- Stay fit and active and lead a healthy lifestyle to stave off or at least decrease your chances of getting certain diseases and conditions.
- Become familiar with Medicare. Be sure to sign up around age 65 (socialsecurity.gov), or you may face penalties associated with late enrollment. Keep in mind, Medicare doesn’t cover everything. Dental, vision, and long-term care are not included. How much you pay will depend on your income (higher earners pay more), the timing of enrollment, and whether you opt for additional coverages.
- Consider a health savings account (HSA). An HSA lets you save pre-tax money in an account and spend them tax-free on medical expenses, vision, dental care, and prescription medications. FSA’s (flexible spending accounts) also do this. However, with an HSA, if you leave your job the money goes with you, and there is no “use it and lose it” rule like there is with FSA’s. If you switch to a new HDHP or keep your existing one via COBRA, you can continue to put money into your HSA. The contribution limit for 2019 is $3,500 for single and $7,000 for family.
- If you have an FSA at the time of retirement, remember your ability to use your FSA is linked to your job. However, if you are eligible for COBRA continuation coverage of your FSA, you may be able to keep using your FSA even after you leave your job. If not eligible, any money unused in your FSA goes to your employer. If this is the case, you’ll want to try to use up your money before leaving your job. The contribution limit for 2019 is $2,700
Too many make the mistake of thinking relying on social security as the primary source of income is sufficient to carry them through retirement. The average social security benefit is $1,420 per month and the max monthly benefit for those retiring at full retirement age is $2,861 in 2019. To qualify, you need 40 credits. Each credit representing earnings of at least $1,360 in 2019. You can earn up to four credits per year. Benefits are determined based on your earnings in the 35 years you earned the most.
Many people will work a few more years to ensure they have at least 35 years of income on record. Your benefit will increase by 6% – 8% yearly until age 70 if you can hold off. If you start taking social security before full retirement age, there is a limit to how much you can earn from working without your benefits being affected. In 2019, the cap is $17,640. If you earn above that, benefits will be reduced by $1 for every $2 you earn over that amount. Then when you reach full retirement age, you will see that money reflected in a higher monthly paycheck.
There are several strategies that can be used to maximize benefits. See our recent blog, “Is There a Magic Age for Claiming Social Security and Maximizing Benefits?” to learn more.
Just because you may not be having taxes withheld as reflected on a W-2 anymore in retirement, doesn’t mean you won’t have to worry about taxes.
- Tax-advantaged retirement accounts such as traditional IRAs, 401(k)s, 403(b)s, 457s, and thrift savings plans are taxed as ordinary income. Rates range from 10% to 37%.
- Investment income is taxed. Long-term capital gains (investments held for over a year) are taxed at 0% or 15%. Short-term capital gains (investments held for a year or less) are taxed as ordinary income, at rates ranging from 10% to 37%. Dividends from most stocks (held for more than 60 days) are taxed at 0% or 15%.
- Social Security benefits may be taxed. Rates range from 0% to 85%. Taxation depends on the amount of taxable income from other sources. According to the IRS, the quick way to see if you will pay taxes on your Social Security income is to take one-half of your Social Security benefits and add that amount to all your other income, including tax-exempt interest. This is known as your combined income. If your combined income is above a certain limit, you will be required to pay some tax:
- $25,000 if you are a single filer, head of household, or qualifying widow or widower with a dependent child
- $32,000 for joint filers
- If you are married filing jointly and you lived with your spouse for any part of the tax year, all your Social Security income is taxable
Remember to withdraw only what you need from your investment accounts during retirement to keep you in a lower tax bracket. By minimizing your adjusted gross income (AGI), you can lower your Medicare premiums later down the road, as well as your overall tax bill.
Like hard water eating away at your pipes over time, inflation gradually eats your nest egg leaving you with substantially less than what you started with. For example, if you are averaging 7% annual growth on your investments, it may be more like 4% once inflation is factored in (based on the assumption that inflation is about 3%). You are probably wondering, “What can I do to battle inflation?” Some common strategies used by many are:
- Keeping at least some portion of retirement funds in stocks or stock mutual funds since the price of stocks tends to keep up with inflation.
- Dividend-paying stocks. They have the potential to rise in value over time while paying cash every month or quarter. You can reinvest the cash into additional shares of stock that can grow in value. You can use the cash as income in retirement to spend on living expenses. Dividends have a tendency to increase over time and tend to at least keep pace with inflation.
- Treasury inflation-protected securities (TIPS). Their principal is tied to inflation. However, they are vulnerable to rising rates so choosing a short-term TIPS fund with less interest rate sensitivity has been a tactic some advisors have used.
- Another area that has been known to rise along with inflation is real estate.
- Commodities such as gold and oil have historically outperformed during inflationary periods.
Nothing is guaranteed. However, one thing is for sure. Keeping your money under a mattress has never been a strong adversary against inflation.
While you were working, you hopefully had a budget that you stuck to. One where you tracked what was coming in and what was going out. Just because you are retiring, doesn’t mean the practice of monitoring your cash flow should. Here are some things to consider:
- Your lifestyle, bills, and spending habits could have some palpable changes. Make note of these changes. Know your mandatory vs. discretionary expenses and create a retirement budget. Don’t forget to factor in medical and/or caregiver expenses, which usually increase as you get older. Review your last 12 months of expenses to get a realistic idea of your spending. The U.S. Dept. of Labor recommends in retirement, you spend no more than 34% on housing (including utilities, maintenance, and insurance), 16% on transportation and 14% on healthcare.
- Consider paying off a large portion of your debt, if not all of it prior to retirement (credit cards, auto loans, private loans, etc.).
- Determine your income. Calculate how much income your retirement savings can generate. Log in to “my social security account” to determine your monthly benefit. Then combine the two.
- If eligible for a pension, review your options for taking a monthly payout vs. a lump sum payment.
- Enlist the help of a registered financial advisor.
There are more ingredients to good retirement other than money. Transitioning from a busy, set schedule with defined tasks, tangible earnings associated with your daily efforts, and workplace comradery can be difficult. Many retirees cite feelings of depression. Many have worked in the same field their whole lives, weaving their jobs into part of their identity. This can be difficult to let go. Finding hobbies, being social, traveling, volunteering, or even taking on a part-time job are all good exercises to employ. This is a time to enjoy! With proper planning and a positive mindset, these truly could be “the golden years.”
Sources: Kiplinger/ Motley Fool/ CNBC/ AARP
© Geier Asset Management, Inc. March 2019. Thomas M. Geier, CPA, CFP ®, PFA is a Vice President of Geier Asset Management, Inc., a Registered Investment Advisor. The articles & opinions expressed in this material were gathered from a variety of sources, but are reviewed by Geier Asset Management, Inc. prior to its dissemination. All sources are believed to be reliable but do not constitute specific investment advice. The views expressed are those of the firm as of March 2019 and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of results, or investment advice. Any advice given is general in nature and investors must consider their own individual circumstances. In all cases, please contact your investment professional before making any investment choices. Geier Asset Management, Inc. is not responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.