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Why We Believe Social Security Will Endure

In planning for retirement, one topic is often top of mind: whether or not Social Security will still be around when we retire.

As we covered in a related post, When Should You Take Your Social Security, most of us have been paying into the program our entire working life. We’re counting on receiving some of that money back in retirement. 

But then there are those headlines, warning us that the Social Security trust fund is set to run dry around 2034. 

Does this mean you should grab what you can, as soon as you’re able? Let’s explain why we agree with Social Security specialist Mary Beth Franklin, who suggests the following: 

“While there may be good reasons to file for reduced Social Security benefits early, claiming Social Security prematurely out of fear is a bit like selling stocks in a down market: All you’ve guaranteed is that you’ve locked in a loss. And if future benefit cuts did materialize, the benefits of those who claimed as soon as possible would be reduced even further.” 

— Mary Beth Franklin, InvestmentNews

Still, Social Security Will Likely Change 

While we don’t expect Social Security to go bust, we do expect it will need to change in the years ahead. As its trustees have reported:

“Social Security is not sustainable over the long term at current benefit and tax rates … [and] trust fund reserves will be depleted by 2034.”

But let’s unpack this statement. First, “depleted” does not mean the Social Security Administration is going to turn out the lights and go home. It means it could run out of trust fund reserves by then, which are used to top off the total amount spent on Social Security benefits. There are still payroll taxes and other sources to cover more than 77% of the program’s payouts. So, worst case, if we did nothing but wait for the reserves to run out, we’d be forced to make hard choices about an approximate 23% shortfall starting around 2034.  

Admittedly, Social Security is between a rock and a hard place. Nobody wants to lose benefits they’ve been counting on or spend significantly more to maintain the status quo. But if we don’t do something to shore up the program’s reserves, our options will likely only worsen. 

In this context, the political will to reform Social Security seems strong, and bipartisan. As Buckingham Strategic Partners retirement planning specialist Jeffrey Levine has observed

“My gut sense is that practically no politician in America would ultimately be happy having to explain to voters why they let Social Security collapse on their watch … That’s not a great message to have to bring to voters, especially older voters who show up at the polls in the greatest numbers.”

As members of Congress wrangle over the “best” (or least abhorrent) solutions for their constituents, they have been submitting proposals behind the scenes, and the Social Security Administration has been weighing in on the estimated effect for each. 

Time will tell which proposals become legislated action, but the range of possibilities essentially falls into two broad categories: We can pay more in, or we can take less out. Most likely, we’ll need to do a bit of both. 

Possible Ways to Pay More In

To name a few ways to replenish Social Security’s reserves, Congress could: 

  1. Raise the cap on wages subject to Social Security tax: As of 2023, earnings beyond $160,200 per year are not subject to Social Security tax. There’s been talk of increasing this cap, eliminating it entirely, or reinstating it for income beyond certain high-water marks.
  1. Increase the Social Security tax rate for some or all workers: Currently, employers and employees each pay in 6.2% of their wages, for a total 12.4% up to the aforementioned wage cap. (This does not include an additional Medicare tax, which is not subject to the wage cap.) As cited in a September 2022 University of Maryland School of Public Policy report, “73% (Republicans 70%, Democrats 78%) favored increasing the payroll tax from 6.2 to 6.5%.” 
  1. Increase the tax on Social Security payouts, and direct those funds back into the program: Currently, if your “combined income” exceeds $44,000 on a joint return ($34,000 on an individual return), up to 85% of your Social Security benefit is taxable, as described here. Anything is possible, but taxing retirees more heavily seems less politically palatable than some of the other options. 
  1. Identify new funding sources: For example, one recent bipartisan proposal would establish a dedicated “sovereign-wealth fund,” seeded with government loans. Presumably, it would be structured like an endowment fund, with an investment time horizon of forever. In theory, its returns could augment more conservatively invested Social Security trust fund reserves. Other proposals have explored a range of potential new taxes aimed at filling the gap. 

Options for Taking Less Out

We could also cut back on Social Security spending. Some of the possibilities here include:

  1. Reducing benefits: Payouts could be cut across the board, or current bipartisan conversations seem focused on curtailing wealthier retirees’ benefits. 
  1. Extending the full retirement age: There are proposals to extend the full retirement age for everyone, or at least for younger workers. This would effectively reduce lifetime payouts received, no matter when you start drawing benefits. 
  1. Tinkering with COLAs: There are also bipartisan conversations about replacing the benchmark used to calculate the Cost-of-Living Adjustment (COLA), which might lower these annual adjustments in some years. 

These are just a few of the possibilities. Some would impact everyone. Others are aimed at higher earners and/or more affluent Americans. It’s anybody’s guess which proposals make it through the political gamut, or what form they will take if they do. 

Should You Take Your Social Security Early? 

So, given the uncertainties of the day, should you start drawing benefits sooner than you otherwise would? An objective risk/reward analysis helps guide the way. 

Many investors feel “safer” taking their Social Security as soon as possible, to avoid losing what seems like a bird in the hand. However, the appeal of this approach is often fueled by deep-seated loss aversion. Academic insights suggest we dislike the thought of losing money about twice as much as we enjoy the prospect of receiving more of it. Thus, we tend to cringe more over a potential loss of promised benefits than we factor in the substantial rewards we stand to gain by waiting. Put another way: 

You’re not reducing your financial risks by taking Social Security early. You’re only changing which risks you’re taking. In exchange for an earlier and more assured payout, you’re also accepting a permanent, cumulative cut to your ongoing benefits. 

If this still seems like a fair trade-off, consider that Social Security is one of the few sources of retirement income ideally structured to offset three of retirement’s greatest risks: 

  1. Life expectancy risk: In an annuity-like fashion, Social Security is structured to continue paying out, no matter how long you and your spouse live. 
  2. Inflation risk: The payouts are adjusted annually to keep pace with inflation. 
  3. Market risk: Even in bear markets, Social Security keeps paying, with no drop in benefits.  

In short, if you are willing and able to wait a few extra years to receive a permanently higher payout, you can expect to better manage all three of these very real retirement risks over time. 

This is not to say everyone should wait until their Full Retirement Age or longer to start taking Social Security. When is the best time for you and your spouse to start drawing benefits? Rather than hinging the decision on uncontrollable unknowns, we recommend using your personal circumstances as your greatest guide. Consider the retirement risks that most directly apply to you and yours, and chart your course accordingly. 

But you don’t have to go it alone. Please be in touch if we can assist you with your Social Security planning, or with any other questions you may have as you prepare for your ideal retirement.

Emily Balmages, CFP®

Director of Financial Planning, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

When Should You Take Your Social Security?

Ever since President Franklin D. Roosevelt signed the 1935 Social Security Act, most Americans have pondered this critical question as they approach retirement: 

“When should I (or we) start taking my (or our) Social Security?”

And yet, the “right” answer to this common query remains as elusive as ever. It depends on a wide array of personal variables, including how the unknowable future plays out. 

No wonder many families find themselves in a quandary when it comes to taking their Social Security benefits. Let’s take a closer look at how to find the right balance for you.

Social Security Planning: A Balancing Act

For Social Security planning purposes, you reach full retirement age (FRA) between ages 66–67, depending on the year you were born. However, you can generally begin drawing Social Security benefits as early as age 62 (with the lowest available monthly starting payments) or as late as age 70 (for the highest available monthly starting payments). 

Retirees are often advised to wait at least until their full retirement age, if not until age 70 to begin taking Social Security. In raw dollars, waiting to take your Social Security often works out to be the best deal for many families. Plus, these days, many of us choose to work well into our 60s, 70s, and beyond. Some analyses have even factored in the cost of spending down other assets while you wait, rather than using them for continued investment growth. The conclusion is the same. 

However, you’re not “many families.” You’re your family. Your personal and practical circumstances may mean this general rule of thumb won’t point to your best choice. Following are some of the most common factors that may influence whether to start taking Social Security sooner or later. 

  • Alternative Income Sources: First, and perhaps most obviously, if you have few or no alternative income sources once your paychecks stop, you may not have the luxury of waiting. You may need to start taking Social Security as soon as possible. 
  • Life Expectancy: If you’re considering the benefits of waiting until age 70 to take Social Security, remember that this strategy assumes you live to at least the average age someone your age and gender is likely to reach. Even if you can afford to wait, you’ll want to factor in whether your health, lifestyle, and family history justify doing so. 
  • Estate Planning: Have you placed a high or low priority on leaving as much as possible to your heirs and/or favorite charities after you pass? Your preferences here may influence how, and from where you’ll spend down your inheritable estate, which in turn may influence the timing of your Social Security enrollment. 
  • Employment: How likely is it you’ll keep working until your FRA? Once you reach it, you can collect full Social Security benefits, even if you’re still working. But until then, your earnings may reduce your Social Security benefits.
  • Marital Status: If you’re married, one of you has probably paid in more to Social Security. One is likely to live longer. You may retire at different times, and your ages probably differ. All these factors can complicate the equation. You’ll want to consider the timing, rules, and outcomes under various scenarios—such as when and whether to take Social Security as an earner, the spouse of an earner, the widow or widower of an earner, or an ex-spouse of an earner—while also factoring in whether you and/or your spouse are still working prior to your FRAs, as described above. Ideal start dates for one scenario may not be ideal for another. 
  • Other Circumstances: Beyond your marital status, there are other factors that may influence your timing decisions if they apply to you—such as if you’re a business owner, you live abroad, you qualify for Social Security Disability, or your children qualify for Social Security benefits under your account. 
  • Income Taxes: We find many pre-retirees don’t realize that up to 85% of their Social Security income may be taxable. Your annual Social Security income also figures into your modified adjusted gross income (MAGI), which can push you past thresholds for incurring Medicare surcharges (beginning at age 65, based on your MAGI from two years prior). Bottom line, broad tax planning may influence your timing as well. 

Degrees of Control 

Clearly, there’s a lot to think about when deciding when to start taking Social Security. Whether you’re going it alone or with a financial planner, here’s one piece of advice that should help: 

Control what you can. Let go of what you can’t.

What do we mean by that? There are many known factors you can include in your Social Security planning. You know your marital status. You can access your Social Security account and/or use a calculator to estimate your benefits. You can make educated guesses about your life expectancy, how long you’ll work, and so on. Also, if you’ve delayed taking Social Security past your FRA, you may be able to change your mind … to a point. You can file to collect up to six months of retroactive benefits if you end up needing the income sooner than planned. 

You can use all of this planning information and more to make reasonable assumptions and timely decisions about when to take your Social Security. 

After that, we recommend going easy on yourself if (or more realistically, when) some of your plans don’t go as planned. Come what may, you’ve done your best. Instead of channeling energy into regretting good decisions, use it to make judicious adjustments whenever new assumptions arise. By consistently focusing on what we know rather than what we hope or fear, we remain best positioned to shift course as warranted in the face of adversity. 

Whether you’re planning to file for Social Security or you’re already drawing it, we appreciate the opportunity to help you and your family make good choices about when, and how to manage your available options. We hope you’ll contact us today to learn more.

Cary Facer

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Social Security Gets Its Biggest Boost in Years

Social Security Gets Its Biggest Boost in Years

Seniors will see their retirement benefits increase by an average of 2.8% in 2019.

Social Security will soon give seniors their largest “raise” since 2012. In view of inflation, the Social Security Administration has authorized a 2.8% increase for retirement benefits in 2019. (1)

This is especially welcome, as annual Social Security cost-of-living adjustments, or COLAs, have been irregular in recent years. There were no COLAs at all in 2010, 2011, and 2016, and the 2017 COLA was 0.3%. This marks the second year in a row in which the COLA has been at least 2%. (2)

Not every retiree will see their benefits grow 2.8% next year. While affluent seniors will probably get the full COLA, more than 5 million comparatively poorer seniors may not, according to the Senior Citizens League, a lobbying group active in the nation’s capital. (1)

Why, exactly? It has to do with Medicare’s “hold harmless” provision, which held down the cost of Part B premiums for select Medicare recipients earlier in this decade. That rule prevents Medicare Part B premiums, which are automatically deducted from monthly Social Security benefits, from increasing more than a Social Security COLA in a given year. (Without this provision in place, some retirees might see their Social Security benefits effectively shrink from one year to the next.) (1)

After years of Part B premium inflation being held in check, the “hold harmless” provision is likely fading for the above-mentioned 5+ million Social Security recipients. They may not see much of the 2019 COLA at all. (1)

Even so, the average Social Security beneficiary will see a difference. The increase will take the average individual monthly Social Security payment from $1,422 to $1,461, meaning $468 more in retirement benefits for the year. An average couple receiving Social Security is projected to receive $2,448 per month, which will give them $804 more for 2019 than they would get without the COLA. How about a widower living alone? The average monthly benefit is set to rise $38 per month to $1,386, which implies an improvement of $456 in total benefits for 2019. (1)

Lastly, it should be noted that some disabled workers also receive Social Security benefits. Payments to their households will also grow larger next year. Right now, the average disabled worker enrolled in Social Security gets $1,200 per month in benefits. That will rise to $1,234 per month in 2019. The increase for the year will be $408. (1)


Justin D. Rucci, CFP®
Wealth Advisor
Warren Street Wealth Advisors

Justin is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of the content, those securities held may change over time and trades may be contrary to outdated posts.

 

Citations
1 – fool.com/retirement/2018/10/26/heres-what-the-average-social-security-beneficiary.aspx [10/26/18]
2 – tinyurl.com/y9spspqe [8/31/18]

Case Study: Minimizing Taxes, Maximizing Social Security

Case Study – Minimizing Taxes, Maximizing Social Security

Learn how we helped an individual client get their desired income level in retirement all while minimizing their tax liability and maximizing their Social Security.

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Download Case Study: Minimizing Taxes, Maximizing Social Security

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Contact Us with Your Case


Blake StreetBlake Street CFA, CFP®
Founding Partner
Chief Investment Officer
Warren Street Wealth Advisors

 

 

Blake Street is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. Information contained herein does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented.

Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results.Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

 

Case Studies: An Introduction

Case Studies

With each case study, we hope to show the value we deliver to clients through comprehensive financial planning and keeping the client first, always.

People ask us: “what makes Warren Street different?”

We like to mention that we are a true ensemble practice. That means you don’t just get one advisor, you get a team of advisors that each work on their core competency to deliver the best possible client experience.

With the team approach, we can collaborate to deliver the best possible set of answers for our clients when it comes to their financial planning or investment needs.

Every Friday, the team gets together to discuss recent client questions or planning issues, and we present the client, their goal, and the current hurdles in the way, then we discuss them at length to then produce the best possible course of action.

The most important rule of Case Studies is that everything must be in the best interest of the client when it comes to all facets of the financial planning or investment process. From tax implications all the way to behavioral finance, we want to make sure that everything is done with the client’s best interest at the center of it all.

With that, we wanted to start sharing some of our most interesting and technical cases to display what we bring to the table for our clients.

Stay tuned for our first case in the coming week where we tackle maximizing income, Social Security, and managing tax liability for a retired client.

Contact Us with Your Case


Blake StreetBlake Street CFA, CFP®
Founding Partner
Chief Investment Officer
Warren Street Wealth Advisors

 

 

Blake Street is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. Information contained herein does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented.

Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results.Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

 

The Value of Double-Checking Your Retirement Strategy

the value of double checking your retirement strategyAs you approach your “third act,” does it need to be adjusted?

Provided by: Warren Street Wealth Advisors

 

Motivational speaker Denis Waitley once remarked, “You must stick to your conviction, but be ready to abandon your assumptions.” That statement certainly applies to retirement planning. Your effort must not waver, yet you must also examine it from time to time.1

 

For example, the level of risk you chose to tolerate at 35 or 40 may not be worth tolerating at 55 or 60. Additionally, you may realize that you will need more retirement income than previously assumed. With those factors and others in mind, here are some signs that you may need to double-check your retirement strategy.

 

Your portfolio lacks significant diversification. Many baby boomers are approaching retirement with portfolios heavily weighted in equities. As many of them will have long retirements and a sustained need for growth investing, you could argue that this is entirely appropriate. If your retirement is near at hand, however, you might want to consider the length of this bull market and the possibility of irrational exuberance.

 

The current bull has lasted about twice as long as the average one and brought appreciation in excess of 200%. It could rise higher: as InvesTech Research notes, two-thirds of the bull markets since 1955 have gained 20% or more in their final phase. Few analysts think a “megabear” will follow this historic rally, but even a typical bear market brings a reality check. The lesser bear markets since 1929 have brought an average 27.5% reversal for the S&P 500 and lasted an average of 12 months.2

 

A poor quarter makes you anxious. You start watching the market like a hawk and check up on your investments more frequently than you once did. Some of this vigilance is only natural as you near retirement; after all, you have far more at stake than a millennial investor. Even so, this is a sign that you may be uncomfortable with the amount of risk in your portfolio. A portfolio review with a financial professional could be in order. A semi-annual or annual review is reasonable. One bad quarter should not tempt you to abandon a strategy that has worked for years, only to examine it in the face of sudden headwinds.

 

You find yourself listening to friends & pundits. Your tennis partner has an opinion about when you should claim Social Security. So does your dentist. So does a noted radio personality or columnist. Their viewpoints may be well-informed, but they are likely expressing what they would do as they share what they feel you should do. If you seem increasingly interested in the financial opinions of friends, acquaintances and even total strangers, or the latest “hot tip” on the market, this hints at anxiety or restlessness about your financial strategy. Perhaps it is warranted, perhaps not. It may be time to reexamine some assumptions.

 

You wonder about the demands your lifestyle may make on your finances. You want to travel, golf, and have fun when you retire, and those potential lifestyle expenses now seem larger than they once were. Here is another instance where you may want to double-check your retirement savings and income strategy.

 

You see what were once “what-ifs” becoming probabilities. You sense that you or your spouse might face a serious health issue in the not-so-distant future. It looks as if you may end up raising one of your grandchildren. It seems likely that you will provide eldercare for a sibling who may move in with you. These life events (and others) may prompt a new look at your financial assumptions.

 

You think you will retire to another state. Say you retire to Florida. There is no state income tax in Florida. So your retirement tax burden may decrease with such a move (though some states have higher property taxes to offset the lack of state taxes). To what degree will geographic considerations affect your retirement income, or need for income? Such geographic factors are worth considering.3

 

You wonder how deeply inflation will impact your retirement income. A recent Morningstar analysis of retiree spending data compiled by the federal government noticed something interesting: for the typical retiree, spending declines in inflation-adjusted terms between age 65 and age 90. So the assumption that retirees increase household spending over time in light of inflation may be flawed. Of course, inflation has been mild for the past several years. If inflation spikes, however, that assumption might prove wholly valid.3

 

Looking at your retirement strategy anew has merit. As the years go by, priorities change and needs arise. New questions call for appraisals of old assumptions. Reviewing your approach to investing and saving at mid-life is only rational, for your retirement strategy must suit the objectives you now have before you rather than those you set in your past.

 

Warren Street Wealth Advisors

190 S. Glassell St., Suite 209

Orange, CA 92866

714-876-6200 – office

714-876-6202 – fax

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Citations.

1 – quotes.lifehack.org/quote/denis-waitley/you-must-stick-to-your-conviction-but/ [4/16/15]

2 – fortune.com/2015/04/16/taming-the-bear-market/ [4/16/15]

3 – tinyurl.com/odyle9s [12/25/13]

Rehearsing for Retirement

Try living as a “retiree” for a month or two before you commit to leaving your career.

Provided by: Warren Street Wealth Advisors

  

Imagine if you could preview your retirement in advance. In a sense, you can. Financially and mentally, you can “rehearse” for the third act of your life while still enjoying the second.

 

Pretend you are retired for a month or two. Take two steps to act out your rehearsal – one having to do with your budget, the other with your expectations.

 

Draw up a retirement budget & live on it for one, two or three months. Make a list of essential expenses (groceries, gas, utilities, mortgage, medicines), and then a list of discretionary expenses (movie tickets, dinners out, spa treatments, what have you). This may reveal that you can live handily on less than what you currently spend each month.1

 

Next, list your income sources for retirement. They might include Social Security benefits (depending on when you want to claim them), IRA Required Minimum Distributions, pension checks, dividends, freelance or consulting payments, or other revenue streams. Investment income is also in the mix here, so check with a financial professional to determine a withdrawal rate off of those accounts that you can safely maintain through your retirement – it might be 3%, 3.5%, or even 4%. When you have your list, stack the projected total income up against your essential expenses and see how much you have left over.2

 

Try living off of that level of monthly income for a month or more while you are still working. If it covers your necessary monthly expenses and not much else, then some adjustments in your retirement strategy might be needed – a housing change, a change in your retirement date.

 

See how it feels to retire. Before you conclude your career, try to arrange some “previews” of your retirement lifestyle. If you want to serve your community, volunteer avidly for a month or two to get a taste of what daily volunteer work is like. If you see yourself traveling enthusiastically at the start of retirement, take a dream vacation or even a couple of consecutive trips (if your schedule allows) to see how they truly fit into your financial picture.

 

Your “rehearsal” need not be last-minute. If you think you will retire at 65, you could try doing this at 63 or 60 (or even before then). The earlier you attempt it, the more time you have to alter your retirement plan if needed.

 

What else should you consider as you rehearse? Besides income, expenses, and the day-to-day retirement experience, there are a few other factors to gauge.

 

How much cash do you have on hand? Starting retirement with a strong cash position provides you with some insulation if you happen to retire during a market downturn. The possibility of a bear market coinciding with your entry into retirement may make you want to revisit your portfolio allocations as well.

 

Take a second look at your projected monthly income. Will it be consistent? If it will vary, you will want to address that. If you are in line for a pension, you will face a major, likely irrevocable financial decision: should it be single life, or joint-and-survivor? The latter option would reduce your pension income in retirement but give your spouse 50% or more of your pension payments after you die. Your employer might also offer you a lump-sum pension buyout; if that turns out to be the case, you will have to decide if the lump sum constitutes the better deal versus a lifelong income stream.3

 

How about your entry into Medicare? You may enroll in it at medicare.gov within a 6-month window of your 65th birthday (that is, beginning three months prior to your birthday month and ending three months after it). If you sign up before your birthday, you will be covered beginning on the first day of your birthday month. Sign up following your 65th birthday, and you may have to wait up to six months for coverage.3

 

If you plan to stay on the job after 65, sign up for Medicare Part A anyway (the part that pays for hospital care) within the usual 6-month window. It will not cost you anything to do so, and sometimes Part A makes up for shortcomings in employer-sponsored health plans. You can enroll in Part B and other Medicare component parts later – within eight months of your retirement, to be precise. You will want to pay attention to that 8-month deadline, as your premiums will jump 10% for every 12-month period afterward that you refrain from enrolling.3

   

Rehearsing for retirement can be very insightful. Some new retirees leave work abruptly only to have their financial and lifestyle assumptions jarred. As you want to make a smooth retirement transition to a future that corresponds to your expectations, test-driving your retirement before it begins is only wise.

 

Warren Street Wealth Advisors

190 S. Glassell St., Suite 209

Orange, CA 92866

714-876-6200 – office

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Citations.

1 – bankrate.com/financing/retirement/take-a-retirement-test-drive/ [12/13/13]

2 – blogs.wsj.com/experts/2014/12/05/how-to-practice-retirement-before-you-retire/ [12/5/14]

3 – time.com/money/3615581/test-drive-retirement/ [2/9/15]