By Henry Zupko, MBA, CFP®
Retirement marks a major milestone in your life, bringing a mix of excitement and concern for many approaching this stage. In fact, a recent survey shows that 66% of Baby Boomers believe they’re not fully prepared for retirement.
The key to easing those worries? Thoughtful retirement planning. As you get closer to or step into retirement, be sure to consider these 5 essential pre-retirement planning questions.
1. How Can I Maintain a Consistent Cash Flow in Retirement?
On average, Social Security covers roughly 39% of one’s income in retirement. So, where might the other 63% come from? It’s essential to have a proper cash flow plan for retirement so you can maintain a consistent income. There are a few potential sources of retirement income, including retirement accounts, pensions, savings, other investments, and even working part-time. Looking at all these income sources, you’ll want to determine if they’ll cover your needs.
If your projected expenses don’t match your income and savings, you’ll either need to reconsider your expenses or increase your retirement income. Consider working part-time, contributing more to your retirement accounts, and developing a strategy to generate more income from your retirement portfolio. This can be done by ensuring your asset allocation still meets your risk tolerance and time horizon, and investing in assets that should diversify your income stream.
2. How Might My Investments Hold Up in Various Market Conditions?
Market volatility can mean the difference between living comfortably in retirement or just scraping by. Facing a decline in the early years of retirement can be disastrous. Considering that those who retire during or near a bear market are more likely to run out of money, it is crucial to understand how your investments may react during an economic downturn.
It’s important to regularly analyze your portfolio to ensure that it aligns with your risk tolerance and that you’re not overly dependent on any single asset. For instance, many employees accumulate a significant portion of their wealth in company stock through mechanisms like stock options, 401(k) contributions, or RSUs. While this may initially seem advantageous, too much concentration in one stock—especially your employer’s—can expose you to unnecessary risk. If your employer’s stock takes a hit due to market fluctuations or internal challenges, it could drastically impact your portfolio and potentially disrupt your retirement plans.
Diversification is essential to mitigate this risk. If you have a substantial amount of company stock, work with your financial advisor to reassess your portfolio and consider rebalancing. By spreading your investments across various sectors and asset classes, you can reduce your exposure to any one company.
3. When Should I Claim Social Security Benefits?
Social Security benefits can be claimed between the ages of 62 and 70; however, the timing of benefits might impact the total amount received.
Early Retirement
You can start receiving benefits as early as 62, but your monthly benefit may be lower than if you waited longer. Your basic benefit is reduced by a fraction of a percent for each month you begin receiving benefits prior to full retirement age. Retiring early can permanently reduce your benefit by up to 30%.
Full Retirement Age
Your full retirement age (FRA) changes based on the year you were born. FRA is 66 for those born between 1943 and 1954 and increases by two months for every year after that you were born until it settles at age 67 for those born in 1960 or later. If you wait until you reach full retirement age to begin collecting your Social Security benefits, you may receive your full benefit amount.
Delayed Benefits
If you’re still working or don’t need the money immediately, you can delay receiving your benefits. Your benefit will increase by 8% for each year that you delay past your FRA. You cannot delay and increase your benefit indefinitely, though. Once you reach age 70, the amount of benefits you receive may not increase any further.
Be sure to reference your Social Security statement in the years leading up to retirement. This important document tells you a lot about your expected benefits, so it can help you in your decision-making process.
In general, the best time for you to claim your benefits depends on your personal situation and health. If you expect to live longer than average, your overall lifetime benefit will be greater if you delay claiming your benefits to increase your benefit amount. If the opposite is true and you see little chance of making it into your mid-80s, you would likely receive a greater lifetime benefit by taking it sooner, even though it would be a smaller monthly payment.
4. Am I Properly Utilizing Tax-Reduction Strategies?
As the saying goes: “It’s not how much you make, but how much you get to keep that matters.” This is especially true as you approach retirement. Once your income sources become fixed, managing and minimizing your taxes should be your top priority. If you haven’t already, consider working with a financial advisor to review your potential options, including:
- Roth conversions
- Health savings accounts
- Charitable donations
- Qualified charitable distributions
- Qualified Longevity Annuity Contracts (QLAC)
- Creative use of permanent life insurance
- Tax-loss harvesting
- Unused 529 Plan funds, under specific conditions
Your income plan during retirement may also play a major role in how long your money might last and how much may be lost to taxes.
Each retirement asset has different tax characteristics, whether it be a 401(k), a Roth IRA, or some form of equity compensation, and understanding the timing of distributions from each source is a significant part of managing your overall tax bill in retirement.
5. How Much Can I Expect to Spend on Healthcare?
Choosing the appropriate insurance coverage is the first step to take when planning for unexpected healthcare costs in retirement. According to a Fidelity Retiree Health Care Cost Estimate, the amount needed at 65 to cover healthcare costs for a couple is roughly $330,000 after tax. For those who had employer healthcare coverage, retirement may mean paying more for medical insurance (Medicare Parts B and D and Medicare Supplement policies). Even with insurance, some expenses might be paid out of pocket.
Planning for unexpected healthcare costs begins with choosing appropriate insurance. For those aged 65 and above who are eligible for Medicare, it means understanding options under Medicare and choosing insurance to supplement Medicare. Take a look at your eligibility and premium estimates to get an idea of what to expect. Thorough research of your supplemental coverage options can help ensure your healthcare costs won’t eat into your retirement savings.
At Tranquility Path Investment Advisors, we assist our clients in exploring various Medicare coverage options, including Medigap (Medicare Supplement Insurance). Medigap plans can help cover out-of-pocket costs that aren’t included in Original Medicare, offering you additional protection and peace of mind.
Ready to Tackle Your Pre-Retirement Planning Questions?
The truth is, you don’t have to figure out retirement planning by yourself. At Tranquility Path Investment Advisors, we’re here to make the transition smoother, with the tools, experience, and guidance to help you feel prepared every step of the way.
If you’re starting to think through these pre-retirement planning questions, I’d love to connect. Let’s talk about how I can support your goals in a no-pressure, get-to-know-you meeting. Schedule a no-obligation conversation or reach us at (908) 759-6322.
About Henry
Henry Zupko is founder and president at Tranquility Path Investment Advisors, LLC, an independent Registered Investment Advisor firm dedicated to putting their clients first, always. With over 30 years of experience, Henry sets the direction of the firm, manages, and in many cases personally interacts with clients to help develop financial strategies that set them on a tranquil retirement path. He is passionate about being a trusted partner to his clients, developing long-lasting relationships so he can guide them through life’s milestones, twists, and turns. In all he does, Henry strives to make a positive impact on others and help change their lives for the better.
Henry is a CERTIFIED FINANCIAL PLANNER® professional and holds an MBA from the University of Massachusetts and a bachelor’s degree in electrical engineering from the New Jersey Institute of Technology. Henry is a proud Eagle Scout who loves traveling the world and spoiling his grandchildren. To learn more about Henry, connect with him on LinkedIn.
