Planning ahead is one of the best ways to prepare for a comfortable retirement. From keeping track of your savings to adopting strategies for generating income, a thoughtful approach can help you sustain your lifestyle as you move into the next phase of your life.
Below, we break down four key factors to consider—and how to develop a retirement plan that works for you.
1. Generate Income in Retirement
For most retirees, a reliable income is the most important need once regular paychecks stop. As you near retirement, taking a close look at your sources of income is a helpful way to ensure that you have enough to cover your expenses. You should also consider the type of lifestyle you want to live and any potential health issues to help determine how much you should save.
Below are common sources of income in retirement
- Workplace retirement plans: Retirement savings plans such as 401(k)s and IRAs are often the largest source of income for many retirees. An advisor can help you determine the most tax efficient strategy for distributing your retirement savings and how to invest so that you benefit from potential growth but don’t incur more risk than you’re comfortable with.
- Social Security: Backed by the federal government and adjusted for inflation, Social Security provides a consistent source of income throughout retirement. Depending on your circumstances, you may decide to start collecting benefits as soon as you’re eligible or to delay collecting them until you reach the maximum benefit amount. Keep in mind that your monthly benefit amount will be less if you start collecting early so it’s important to consider if your sources of income will cover your essential expenses before you reach full retirement age.
- Pension plans: Though less common than retirement savings plans, pensions can provide a steady stream of income to help you meet expenses and keep up with lifestyle needs.
2. Address Health Care Costs
Another big challenge retirees face are medical expenses. While an increase in medical expenses is common as you age, it can feel overwhelming as it happens. In addition to medical bills, consider your family history to get a sense of life expectancy and potential health issues. Fortunately, there are a few ways to cover those expenses.
- Health Savings Accounts: Also known as HSAs, health savings accounts are tax-advantaged accounts that are available only with a qualified high deductible health plan and allow you to accrue savings during your working years and apply those savings to your medical expenses after you retire. HSAs also have some unique tax benefits including tax-free access to funds if the funds are used to pay for qualified medical expenses.
- Long-term care: Hybrid policies combine life insurance with long-term care benefits that may help you pay for the costs of in-home care, assisted living, a nursing home or other related expenses that Medicare may not cover. Long-term or chronic care riders, available at an additional cost, may also be added to life insurance policies, allowing you to access a portion of your policy’s benefit early for care expenses.
- Medicare: Medicare is a federal health insurance program that provides coverage for people age 65 and older, and for some disabled people under age 65. The program consists of four parts, each of which covers different health-related expenses. Exploring your Medicare options is a great first step when it comes to covering routine costs. These include Part A (hospital insurance), Part B (medical insurance) and Part D (prescriptions). Medicare Part C, or Medicare Advantage, is the equivalent of Parts A and B coverage combined, along with some preventative services such as vision and dental. It is delivered through private insurance companies. This infographic can help you learn more about Medicare eligibility requirements, enrollment periods, and costs.
3. Understand Tax Implications
As your income situation changes, your tax situation is likely to change too. To help reduce your tax impacts, it’s important to have a clear sense of which sources of income are considered taxable and which of them are tax-free. Social Security benefits, pension payments, and withdrawals of earnings from 401(k)s and IRAs are generally taxable, while certain types of withdrawals from Roth IRAs and Roth 403(b)s are typically exempt.
4. Establish an Estate Plan
Establishing a comprehensive estate plan is another important part of the pre-retirement planning process. Your estate plan should take into account your existing assets and how you want them distributed in the event of your death. Although this may be difficult to think about, estate planning has some significant benefits including protecting your assets and ensuring that your wishes are fulfilled. If you currently have dependents, it can also provide certain protections for them. Once you retire, it’s a good idea to revisit your estate plan and make any adjustments as needed.
Charitable giving can also be an important part of the estate planning process and it offers benefits of its own. In addition to helping you build a lasting legacy, a charitable giving strategy can carry certain tax advantages.