October 6, 2016
Retirement – Event or Process? Part II
Stage II- “Early Retirement” (62 to 70)
Some of the biggest changes in your budget will occur when you first retire. You’ll no longer have a steady paycheck from your employer, unless you get a pension. You’ll need a plan for managing your income during retirement, and you’ll need to decide when to start claiming Social Security benefits. You’ll also no longer have employer-sponsored health insurance. Make sure to plan for how your spouse and any dependents will get health insurance if they are on your health plan. If you or your spouse won’t be old enough to enroll in Medicare yet, you’ll need to see if you qualify for Medicaid or sign up for a marketplace plan.
You may be tempted to go on a spending spree at this early stage of retirement: you’ll have lots of free time and you’ll likely still be healthy and energetic. In this honeymoon phase, you might want to buy that sports car you’ve always imagined yourself driving, take an extended European vacation, take up sailing, or join the country club. With more freedom to travel, you may want to buy a vacation property in your favorite destination or a second home in a sunny locale to escape to during harsh winters. But be careful: you can quickly blow through your savings if you treat entering retirement like winning the lottery.
One way to manage these new expenses is to take a part-time or seasonal job, start a business that gives you flexibility in your hours and location, or let yourself indulge for a while before jumping into a new career – the one you could never get into before because it didn’t pay enough. Earning $35,000 a year doesn’t cut it when you need $70,000; but once you’ve retired, it looks better than earning nothing, and at this point it’s more about personal satisfaction, anyway. You can also balance the expensive activities you want to spend time on with inexpensive or free ones: volunteer to read to kids, teach a photography class at your local community center, or lead biking excursions.
Stage III- “Middle Retirement” (ages 70 to 80)
By middle retirement, you’ll be receiving Social Security benefits (the longest you can hold off from claiming benefits – and get increased payments – is age 70). At age 70.5, you’ll have to start taking required minimum distributions from certain types of retirement accounts: profit-sharing, 401(k), 403(b), 457(b) and Roth 401(k) plans, as well as traditional, SEP and SIMPLE IRAs (but not Roth IRAs). Now is a good time to reassess your asset allocation if you aren’t in an investment that does this for you, such as a target date fund.
In addition to receiving more income in this stage, you might be tired of some of the travel and new activities you pursued during early retirement, leading to lower expenses. Instead, travel might begin to center around inexpensive trips to visit your grandchildren instead. With luck, your kids are established enough in their careers that they no longer turn to the Bank of Dear Old Dad (and Mom).
You may have created a will or estate plan when your children were young because you wanted to make sure they’d be taken care of if you and your spouse died simultaneously in a car accident. Have you updated these documents since then? While you’re still healthy and mentally capable, make sure your estate plan is in order so your money and assets are distributed the way you want after you pass away. Everyone has an estate plan – it is either yours or the state’s (in our experience it is better to manage and control it yourself). You should also give someone financial power of attorney and healthcare power of attorney that will kick in if you become become unable to manage your money or make medical decisions. These may sound tedious, but are all very crucial steps to take in order to enjoy your middle retirement years.
Check back next week for the final installment of our retirement talk — detailing the fourth (and final) stage of retirement: “Late Retirement”.
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