Take a look at how your retirement benefits can replace your workplace paycheck.
Retirement may evoke thoughts of long, relaxing days and free afternoons with your grandchildren. But while this period of unstructured time can be sweet and easy, it also requires doing your due diligence to prepare for a myriad of more practical changes. While you’re planning your retirement, you’ll need to address how your retirement benefits will compensate for your workplace ones. Doing so could help preserve your retirement fund and offer you something more precious than money: security and comfort.
By collaborating with your financial advisor, you can establish strategies to pay for essentials such as healthcare as well as determine income-generating methods to cover your paycheck in retirement. Here are a few topics you’ll want to cover.
First, let’s start with the streams of reliable retirement income that will serve as your main source of cash flow. This could include any one or a combination of: Social Security, pension payments, employment income or annuity payouts. The key is identifying the sources of consistent and reliable income that you can use to cover your necessary expenses.
For example, Social Security, which generally includes a cost of living increase each year, should hold steady in a variety of economic environments. Its resilience is one reason why it pays to maximize this income stream if you can. Depending on your specific circumstances, it may make sense to hold off on taking benefits, since they grow at about 8% per year until age 70. Deciding when to claim your benefits can be difficult. Your financial advisor can help you make the decision that best fits your financial picture.
If your needs aren’t quite covered by your main sources of retirement income, you may have to turn to other income streams to fill the gaps. These are the assets you specifically set aside to fund your retirement and supplement your reliable income. Funds from your employer-sponsored 401(k), IRAs, checking and savings accounts, and CDs, as well as dividends and interest from your investment accounts, can be diverted to pay for the essentials. Additionally, you may opt for a deferred compensation plan before retiring so that your income is paid out at a later date than it was earned. If your employer offers it, an employee stock ownership plan (ESOP) could also boost your supplemental income.
You may have a clear vision of your ideal retirement, but that dream could fade if unexpected healthcare costs start to eat away at your hard-earned retirement savings. The fact is, even with Medicare, quality healthcare can come with a hefty price tag. There are still premiums, copayments, deductibles and other out-of-pocket expenses that must be accounted for.
For instance, Medicare doesn’t cover routine dental care, hearing, vision or long-term care. If you want to keep your healthcare costs in retirement as low as possible while enjoying the best coverage, it’s imperative to seek professional counsel. Asking your financial advisor to help connect you with a healthcare planning professional can allow you to answer questions such as: How do I decide between traditional Medicare and Medicare Advantage plans? How do I select the right Part D plan, or Medigap plan, or Medicare Advantage plan?
When it comes to covering your bases for healthcare costs, budgeting may become indispensable. A broad approach could consist of allocating a lump sum of money to cover the average lifetime healthcare costs. If you aren’t able to set aside large sums of money, you can opt for the more practical approach of estimating your and your spouse’s projected health needs based on family history and current state of health. There’s also the hybrid approach of estimating costs, buying enough insurance to cover most of your anticipated needs and then setting aside a smaller cash reserve for the unexpected. Yet another option includes taking advantage of health savings accounts (HSAs). While you can no longer contribute to an HSA once you’re enrolled in Medicare (even if you’re still working), you can use any preexisting HSA funds and roll over unused amounts.
If you retire before being eligible for Medicare (the usual age of eligibility is 65), you may want to look into the Consolidated Omnibus Budget Reconciliation Act (COBRA), a health insurance program that allows retirees and other qualifying individuals to receive health insurance coverage at group rates. Although COBRA plans can be costlier than employer-sponsored healthcare, they are usually less expensive than individual health insurance plans and can provide identical coverage to the one offered by your former employer. Considering the complex nature of these alternative programs, it pays to discuss your options with your financial advisor.
Sources: cbo.gov, investopedia.com, medicare.gov, Raymond James research