With all of the uncertainty facing today’s retirees, several issues stand out now more than ever and give credence to having a plan and adjusting it as needed. Today’s retirees, made up of the first of the Baby Boom generation, are struggling with many issues as they transfer from the workforce to retirement.
With our last recession being as severe as it was, many of the Baby Boomers have been downsized from high paying corporate positions to the unemployed or taking jobs that pay much less than their skills should dictate. This has presented them with challenges such as drawing Social Security benefits earlier than desired, paying their own health insurance, and drawing down from their retirement assets much earlier than anticipated.
The ramifications of these decisions can have long lasting effects, not only on the person drawing the benefits, but also on spouses who can have significantly less income if the spouse were to pass away sooner than expected.
Social Security benefits can be taken as early as 62 for workers that are eligible to receive it. For many of the Baby Boomers, their full retirement age is 66. By electing to take Social Security at age 62 your income is as much as 25 percent less than taking it at your full retirement age. This can be significant when you pass away and your spouse begins drawing your benefit if it is greater than what they currently receive. They then lose their benefit when they pick up their spouse’s.
It is true that Social Security has a cost of living adjustment that is factored in for the millions of recipients. Whether or not the cost of living adjustment actually equals the true inflation rate is subject to debate. Deciding when to take Social Security takes careful analysis, as waiting a year to draw it increases the benefit by 8 percent. There are many other important factors to consider before deciding to begin receiving Social Security benefits as well.
If you’re fortunate enough to have a pension, your spouse may have a smaller survivor income depending on how you selected your payment structure when you retired. Many pensions do not have cost-of-living increases and inflation can erode the purchasing power of a fixed amount of income over time.
Many of the companies that offered Defined Benefits (pensions) have elected to suspend contributions or have dropped them altogether. This is another huge challenge for the Baby Boomer generation. They now have to rely on their retirement savings – 401Ks, IRAs and other investments to fill the income gap required to meet their living expenses. Should they be invested in the stock market and have a portion of their nest egg lost to stock market volatility while drawing income off of their savings, they run the risk of outliving their money.
There are many “rules of thumb” for drawing income off your investments. One of the most common is a 4 percent withdrawal percentage; let’s say you have saved $200,000 in an IRA or similar vehicle – 4 percent of $200,000 is an $8,000 withdrawal. Suppose you have $20,000 in Social Security income and $8,000 of investment income. Can you live off of that for all the years in retirement? Couple that with the extremely low interest rate environment we are in and try to find 4.0 percent in a safe and secure investment is a challenge itself.
Medicare begins as the primary health insurance for Americans beginning at age 65. Many workers choose to stay employed until they reach the age of 65 when they can receive Medicare benefits and avoid paying for costly private health insurance if their employers do not provide it once they retire. This is one of the most important issues regarding when people retire. What health insurance will look like 10 years from now could be a lot different than what we have now, as the government may take a more active role in administering health care benefits for Americans.
I have just outlined three challenges for all retirees to consider carefully:
1. When to take Social Security benefits?
2. How much to draw off your nest egg?
3. What are the impacts of health care costs prior to 65?
These are three of the many challenges to constructing an overall retirement plan. You will need an investment plan, an income plan, a health care plan, and an estate plan for any remaining assets to be distributed efficiently.
Chris McIntire is president of McIntire Retirement Services in Perrysburg.