3 Financial Decisions to Make About Retiring

As tax advisors, we regularly consult with clients about financial issues that affect retirement. Whether retirement is five years or 25 years in the future, it’s helpful to understand and set financial goals. De-mystifying three confusing topics is a good place to start:

  1. Understand how income is affected by collecting Social Security and working at the same time. Many people enjoy working and want to continue some form of work, even into their 70s. But they’re concerned about Social Security benefits reducing when collecting other forms of income. Weigh these facts when determining the Social Security/continue working balance:
  • If a person collects Social Security retirement benefits before full retirement age, then benefits reduce $1 for every $2 over the limit.
  • The 2015 and 2016 annual limit on work-related earnings without affecting Social Security benefits is $15,720 for the year or $1,310 monthly.
  • During the year of a person’s full retirement age, the limit increases to $41,880/year, or $3,490/month. During that time, benefits reduce $1 for every $3 over the limit.
  • Benefits do not reduce after full retirement (age 67), starting in your birthday month.
  • Your benefits are not really ‘lost.’ Benefits increase at full retirement age to account for benefits that were withheld because of earlier earnings.
  1. Plan for Medicare to NOT cover all medical costs during retirement. Retirees need to supplement with other insurance coverage or funds to cover deductibles and other shared-costs in Medicare. Estimates for medical costs after age 65 range for a total of $68,000 to $124,000 for men, and $89,000 to $140,000 for women. The range is based on covering 50 to 90% of medical costs, and the fact that women typically have a longer life expectancy. These amounts don’t include the cost for long-term care.
  1. Consider what percentage you want to withdraw annually from a retirement plan. The 4% rule is a starting point, and may be adequate based on the value of your plan. However, medical costs, taxes on withdrawals (if not a Roth IRA), and longevity may create the need to withdraw more heavily. Don’t bet on investment gains making up the difference. If you need your retirement plan to last for several decades, consider a lower percentage withdrawal per year if you are able. Start as conservatively as possible.

You’re not alone if you don’t think about or understand the rules of Social Security and putting together the puzzle of retirement saving.  A Salmon Sims Thomas tax advisor is happy to answer questions related to your specific situation.