If you are like me, you are not ready to consider yourself “old,” but there’s no denying that retirement is approaching. You may have given some thought to “your number” – the total nest egg you need to cover expenses for the rest of your life – and that is a great start. Here are some things you may not have considered:
#1: Future tax rates
Many folks think of their nest egg as whole dollars available for spending and fail to evaluate the effect of future taxes. If your retirement savings are in a tax-advantaged plan (e.g., 401k, pension, IRA), you will owe taxes upon withdrawal. With a burgeoning federal deficit, will tax rates really be lower in the future? It is important to take the time to make realistic projections of after-tax income and spending in retirement. Do-it-yourself models are widely available on the internet. However, given the stakes involved, if you do not feel comfortable in this area, you should seek out a Certified Financial Planner or CPA to help you.
#2: Your retirement age
Full retirement age may be later than you think. Many people think of age 65 as retirement age. While Medicare starts at age 65, for those born after 1959, the full retirement age for social security is age 67. Therefore, although you can start social security benefits as early as age 62, it will be reduced as much as 30%-35%.
#3: The timing of your social security benefits
Maybe you should wait. In contrast to starting social security benefits early, each year you wait beyond normal retirement age (67 for current retirees), your social security benefit increases by 8%. The latest you can start is age 70, which increases your benefit by 24%. So, there’s a tradeoff: Should you start receiving social security early with reduced benefits or start later with higher benefits? No one knows for sure, but if your ancestors have a history of longevity, the odds may be in favor of waiting.
#4: Medicare coverage is not free
Most folks think Medicare coverage is free. For hospital coverage (Part A), they are generally correct. However, premiums for medical (Part B for physicians and outpatient services) coverage can range from $1,300 to $5,200 per person, depending upon the retiree’s income, so Medicare does not cover everything. Here are some examples of services that standard Medicare does not cover:
• Part A coinsurance: Beneficiary pays about $1,300 for the first 60 days of coverage. If your stay in the hospital exceeds 60 days, you pay a per diem of almost $325; after 90 days, the per diem will cost you nearly $650. After 150 days, you are responsible for all costs.
• Part B coinsurance: Beneficiaries must pay an annual deductible, 20% coinsurance above the deductible, and, in some cases, co-pays.
• Foreign travel emergency: Medicare does not cover healthcare costs abroad.
• Nursing homes: Medicare covers the first 20 days of skilled nursing care. After 20 days, the beneficiary must pay about $160 per day. Medicare does not cover stays over 100 days and, similarly, does not cover custodial care.
#5: Additional medical costs
Studies estimate that an average couple will need to have saved an extra $280,000 to cover additional medical expenses during their retirement. Retirees can purchase “Medigap” or supplemental policies for items not covered by Medicare. Note, however, that these policies do not cover some costs, most notably long-term care (such as care in a nursing home or custodial home health). Therefore, you should consider purchasing long-term care policies when you reach age 50.
So, all is not lost. Some of the above may seem like bad news, but it is better to know now rather than after your retirement has begun. There are many tools on the internet to help with retirement planning. Better yet, it may be worth consulting with a Certified Financial Planner who is experienced with anticipating the “gotchas” of retirement. Now, go sharpen up your golf game!
Shawn Hardister is a Tax and Financial Planning Partner at Moore Colson. He regularly assists closely-held companies and their owners realize financial success. He specializes in financial planning for high-net-worth individuals and tax planning for professional services firms, particularly law firms and physician practices..