5 Smart Steps For Those Retiring in 2015
Think you’ll retire in 2015? A USA TODAY post presents 5 smart steps to help you prepare: http://tinyurl.com/kq95u8k
5 Steps to prepare for a 2015 retirement
If you've spent the past several decades working and are looking forward to retiring in 2015, the last thing you probably want to hear is that there's more work ahead. But a successful transition to a secure retirement is well worth the extra work and preparation.
Here are five steps to prepare for a 2015 retirement:
1. Craft a monthly budget or spending plan
A budget or spending plan helps determine what you expect to receive in retirement income vs. your anticipated living expenses. Open a notebook or a spreadsheet and, in one column, write down your expected monthly income, including Social Security, pension and withdrawals from your retirement funds. In a second column, estimate your average monthly expenses, which gives you a framework of your finances.
"Take a test run first," says Curtis Sheldon, a financial planner based in Alexandria, Va. "If you can, try living on what you expect your retirement living expenses to be. Can you do it?"
You might not be able to increase your income much in retirement, but you can certainly pare down your expenses. Money-saving ideas include downsizing into a smaller home, moving to a city with a lower cost of living, selling a car you might not need and taking fewer vacations.
2. Consider rolling over your 401(k)
If you have a 401(k), you probably will have three options when you retire: Cashing it out, keeping it in your employer's plan or rolling it over into an IRA, or individual retirement account.
Cashing it out is rarely the best option. The proceeds will be taxed as ordinary income and likely subject to withholding. If you are younger than 59½, you also could face a 10% penalty.
If your employer has a good 401(k) plan and allows you to leave the money there, doing so might make sense. But a rollover IRA, available through any brokerage, will generally offer you a far wider selection of investments, including stocks, bonds, mutual funds and certificates of deposit.
Rolling over to an IRA isn't always your best bet. If you are at least 55 but not yet 59½ when you leave your employer, you might want to at least delay the rollover because of the difference in early withdrawal penalties, says Helen Huntley, a certified financial planner in St. Petersburg, Fla.
"In 401(k)s, there is generally no penalty if you are 55 or older when you leave and withdraw, but with IRAs, there is a penalty if you are younger than 59½, except in certain circumstances," Huntley says.
3. Review your investment portfolio
You've lost your biggest source of regular income, so you'll need your investments to replace a large part of it. For retirees, it's generally a good idea to take fewer risks with your money, focusing more on income-producing assets such as bonds instead of riskier assets such as stocks.
Now is the perfect time for you to review and rebalance all assets in taxable brokerage accounts and retirement accounts, making sure your asset allocation matches your risk tolerance and income goals for retirement. You need this money to last at least 20 to 30 years, so the focus should be on preserving as much capital as possible while generating a regular income.
"Having a plan and systematic process in place to handle the withdrawals over time is critical," says Andy Tilp, a financial planner with Trillium Valley Financial Planning LLC. "After the paychecks stop, there are fewer options to correct mistakes."
For more personalized investment advice, it's best to seek professional help from a financial planner or advisor.
4. Decide when to take Social Security
You should generally apply for Social Security benefits three months before you want your benefits to begin, according to the Social Security Administration.
The earliest you can start getting benefits is at age 62. But should you apply for benefits right away or wait a while longer? Benefits are reduced if you take Social Security before you reach your full retirement age, which is age 66 for those born between 1943 and 1954, rising to 67 for those born in 1960 or later. Each year you delay benefits after age 62 increases your monthly benefit by 8%, according to the SSA.
Social Security should be evaluated as a couple if you are married, Huntley says.
"For couples, it is almost always going to be best for the spouse with the higher benefit to wait as long as possible (up to age 70) to start benefits," says Huntley. "When one spouse dies, the surviving spouse will continue to receive the higher of the two benefits."
Of course, there are other issues to consider. Your decision may be affected by your level of savings, your life expectancy and whether either spouse has a pension. If you have a smaller retirement nest egg, higher-than-average health care costs or lower life expectancy, taking Social Security earlier make might more sense.
5. Enroll in Medicare
If you are at least 65 or disabled, you'll want to make sure Medicare covers your health care costs in retirement.
If you start receiving Social Security benefits before 65, you'll be automatically enrolled in Medicare Part A (hospital insurance) and Part B (doctor coverage) when you turn 65. If you haven't started getting Social Security benefits, fill out a Medicare application online. You can apply for Medicare if you are at least 64 years, 9 months old. Failing to sign up for coverage before your 65th birthday can result in a delay of coverage and late penalties, so make sure this happens.
Although Medicare helps cover the cost of your health care, it likely will not cover all of your medical expenses in retirement. Medicare supplemental policies, known as Medigap, are sold by private companies to cover some of these additional costs. You can also get long-term care insurance, which can help cover the cost of care that is generally not covered by Medicare, such as assisted living, hospice care and nursing homes.