Preparing For Retirement: 3 Financial Decisions You Need To Make

Presented By: Pennsylvania Capital Management

When preparing for retirement, there are some critical financial decisions everyone looking down the barrel of this transitory time in life must make.

As you work to create your overall financial plan, you have to factor in these decisions and make them a part of the overarching goalposts. A good retirement plan doesn’t only involve how much money you need to maintain your lifestyle but should also have guidelines for approaching Social Security, Medicare, and your retirement accounts. In fact, these are the top three areas to consider as you move forward. By focusing on them now, you’ll save yourself a lot of headaches once you retire. 

1. Social Security Decisions

By the time you’re 62, you better be thinking about social security because a decision must be made. When do you want to take it? Currently, the level of income you’re going to get goes up 7-8% a year for each year you wait. I think that’s a very important consideration to make. 

For some, the temptation is to take it at 62. By doing this, you’ll take less – and not a little less, a lot less than if you wait until your normal retirement year designation, which is 66 and a half years or thereabouts, and you optimize. If you can wait, try to wait beyond age 70 or 70 and a half. 

Now, these age requirements may change, but right now, they’re important to consider, and you have to look at them within your cash flow and your family means. 

2. Medicare Decisions

Are you going to sign up for Medicare? You can sign up for this program–and related programs, like supplement and Advantage plans–at age 65. If not Medicare, are you going to keep your independent insurance, such as Blue Cross Blue Shield, Aetna, or other providers, that you had for many, many years? Regardless of the choice, it’s essential to make a decision and get some help. Work with professionals to see what would benefit you the most. Your healthcare coverage as you age is going to become increasingly important. You can’t let your coverage lapse, even if you don’t plan to formally or traditionally retire. 

Social Security & Medicare Have Nothing To Do With Retirement

The buzz that I hear is always about Social Security and Medicare: Once you get to that age (65), you’re in retirement. That’s ridiculous. 

Yes, those are trigger points that you need to think about and prepare to address. Absolutely. However, they have nothing to do with retirement. If you want to work beyond age 65 and stay vital, active, and involved in your life, why would you say, “Well, I’m going to go on Social Security and call it a day.” Next thing you know, you’re counting pennies and running short. By doing this, you may not have enough to live or enough of what you need to be able to go after your goals and dreams or be able to spend time going to visit your kids. 

Right now, I think spending time with family–especially long-distance family–is a priority for a lot of seniors. As clients approach those Golden Years, I hear them saying that they want to go to LA to visit this child or Detroit to visit that child. Or, they want to go down to Raleigh to spend some time with their daughter who just had a baby. In my view, these are very important priorities. 

Social Security won’t pay for these types of expenses. It doesn’t work that way. In my experience, retirement is a much, much bigger conversation–and that’s the way you want to look at it when preparing for retirement. 

• Retirement conversations must be centered around what your bigger future looks like and how you can make it everything you want it to be.

The next step, of course, is making sure you’re eating healthy, working out properly, getting the exercise you need, and getting the right amount of sleep (that is typically eight hours from 10:00 PM to 6:00 AM or longer) so you feel good and are taking good care of your body. However, for you to have the money required to go do the other things you hope to achieve, you’ve got to think far beyond Social Security and Medicare. 

3. How to Handle Your Retirement Accounts 

Also, as you take a look at Roth IRAs and 401ks, there are choices to make and benefits from waiting until after you’re 59 and ½  to start taking out of your traditional pretax pension plans. This isn’t a problem–but don’t ignore it. Bring this important retirement decision into your overall analysis and see what impact that has on you. 

If you don’t need the money and you’re healthy, consider postponing your Social Security. Meet with your fiduciary financial advisor and run the numbers to see what it means to you and where you can optimize it. If you’re married, then you have two Social Securities to deal with; you might take one and let the other one roll. 

There are lots of good choices in terms of evaluating your Medicare Part B coverage as well as other choices that are worthy of conversations and visits to evaluate what’s in your best interest and how you maximize the benefits you have.

Roth IRAs bring a whole new set of challenges because once you’ve funded them, you already paid the taxes. 

• Do you let the money continue to grow? 

• Do you begin to take out a set amount after so many years? 

• Is it going to supplement your income? 

These are all good questions to consider as you start preparing for retirement. Granted, it’s not a simple decision–but my point here is that it’s worth taking the time to analyze it, get good advice, and put it to use. 

So, as you are preparing for retirement, plan how you want to execute your goals and dreams and who you want to involve in them. For example, are you involving kids beyond yourself or yourself and your spouse? All of these factors take effort and review. Don’t shortchange yourself; be thorough and don’t cut corners. 

Consequences of Not Making the Right Financial Decisions

The consequences of making the incorrect retirement decisions are significant. 

For example, if you need the money and want to get your Social Security the instant you possibly can, you will collect an amount each month, but the consequences are irreversible. If you could have taken your spouse’s social security–which would’ve filled the gap of what you needed–and you’re the older person, you’re going to get to the maximum payouts higher, which could have been higher for the rest of your life.

On the other hand, if your health isn’t so good and you waited until you were 70 ½ to take Social Security, theoretically, you’d make more money. However, if you only live to 72, that was a huge blunder. 

In this example, you want to take the money as quickly as you can because your longevity doesn’t look so good. Or, if you’ve established from your parents or your siblings or your lineage you may experience an early demise, then you want the maximum amount of money you can get at the earliest possible age. 

• When preparing for retirement, consider what hereditary issues you may deal with down the road and your financial needs. 

Another example would be if you did all of your pre-tax savings in traditional IRAs, which might apply very well to someone who’s near retirement and wants to use these benefits sooner.

Then again, if you desire to save money for your kids and don’t need the IRA money at all, you can use these accounts to grow money over time. If your CPA feels that’s an appropriate tax move, then you can let the money grow and grow through your lifetime–and into your children’s. On the flip side, perhaps you had a tough year and your income was low, so you did your IRA conversion to a Roth if it’s available to you. 

These are very important considerations you should make–and make early–particularly when it comes to different forms of pre-tax and post-tax savings plans.

Ultimately, avoiding the consequences that can spring up from not preparing for retirement thoroughly can be mitigated by working with the proper team of experts, who can lay all your options out on the table so you don’t run into any missteps. Sometimes, it’s too late to reverse your decisions, so don’t be hasty and always aim to be informed. 

Social Security May Not Make or Break You… But It’s Still Useful

When you think about Social Security, it may feel like it’s unimportant. You’re already a success. You’ve built up a lot of assets in your private business or you’ve developed an excellent income over the years working for your company. In that regard, the few thousand dollars a month coming in from Social Security may seem like it doesn’t impact your life.

Here’s what I’d like to propose: Since retirement–or continuing into your next chapter–is so incredibly important, you should figure it into your bigger picture. 

Look, it may be $2,000-4,000 (or more) a month. Remember, my mandate is not to look at retirement as shrinking your world down to somewhere you can relax. It’s a time to reinvent yourself, expand your horizons, and do a lot of those things you’ve dreamed of but didn’t have the time to achieve. 

When you prepare for retirement, expand what you want to accomplish. As I mentioned earlier, you might want to be a consultant with the company you worked for. You may want to become an independent contractor, or you may want to start a business with one of your kids.

As you expand your horizons and challenge yourself mentally in doing new things, take Social Security into account. When preparing for retirement, consider your pension. 

Maybe it makes sense to do a lump sum distribution out of your corporate pension plan because there are certain things you’ll want to do with that money, like starting an ice cream shop with your child or co-investing in another enterprise. If you have a child in the real estate business or legal business and they come up with some good ideas, encourage them by becoming their partner. Help stretch their limits as you co-partner with your kids or a very close friend who you’ve wanted to work alongside. 

Social Security and pensions give you a great cushion to chase your dreams. Here’s a good opportunity to do it. Make it count.