Contemplation of retirement can be both exciting and intimidating. Obviously, planning for the beginning of retirement should start early. I recommend that you start to analyze and prepare for the transition between six months to a year before a potential retirement date.
First, determine your healthcare needs. At age 65, most people are eligible for Medicare, which primarily provides prescription drug coverage. There are various “Parts” of Medicare (identified by letters) that are optional “add-ons” to expand Medicare’s coverage into something similar to traditional health insurance. Medicare is not directly charged to participants, but the Parts in which Medicare participants can decide to participate do require out-of-pocket money from participants.
Second, prepare a budget and cash-flow plan that reflects your current cash-flow situation and your expected cashflow upon retirement. Income during retirement usually comes from part-time employment, Social Security, distributions from retirement plans (such as IRAs and 401ks), earnings from investments or return of investments themselves.
As you approach retirement age, you can secure an anticipated budget of what payments you may receive from the Social Security Administration by making a request by telephone, U.S. mail or the internet. The unsolicited, paper brochure “estimates” of what benefits you may receive are literally only estimates and should not be relied upon in budgeting finances during retirement.
Social Security payments are based upon the number of years and the amount of money to which the participant contributed during his or her lifetime. Many people think that Social Security is a government-managed retirement system, where there is a correlation with the amount paid into Social Security and amount received from Social Security. However, Social Security’s process of determining benefit amounts is simply a formula. The system is necessarily “behind,” because the first people to receive Social Security benefits around the time of the Great Depression never paid anything in. Therefore, Social Security is a tax and redistribution system that only uses years of service and amounts of contributions to help organize the formula of redistribution.
Based upon each person’s birthdate, Social Security calculates a certain age when the person can receive the program’s “maximum” monthly payment. Receiving payments before that date will make the monthly amount less during the recipient’s lifetime. Delaying receipt of payments can increase the monthly payment.
Retirement accounts such as 401ks and IRAs allow for withdrawal without penalty after reaching age 59½. Of course, unless the retirement account is a Roth IRA, taxes will be owed on the amount withdrawn. At age 70½, people are required to withdraw a certain amount from IRAs and 401ks each year, which required amount is typically called the Required Minimum Distribution (or RMD).
Third, it is important to contemplate the prospect of needing long-term care (including nursing home or in-home care). This usually includes planning to someday become eligible for Medicaid. The beginning of retirement is often a good time to start to discuss that process with your attorney, even if your circumstances do not justify any immediate preparatory actions.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.