Adapting to the Financial Changes of Retirement

Retirement is a time to live life to the fullest. It’s a chance to reward yourself for a successful career. It’s an opportunity to live the good life. That said, retirement is not without unique set of obstacles. If ignored, these obstacles can have serious consequences. In order to maximize retirement and truly live life to the fullest, retirees must adapt to changes in healthcare coverage and utilize new sources of income.

 Changes in Healthcare Coverage  The moment you leave your job, your healthcare coverage will change. How this impacts you depends on a variety of factors, including your age. Those who retire at age 65 or later are eligible for Medicare. Those who retire prior to age 65 are not and should consider purchasing private health insurance. The cost differential between private health insurance and Medicare can be significant.

 Let’s take a look at twin sisters who we will call Allison and Brittany. Despite trying to develop better financial habits throughout her working years, Allison’s proclivity for immediate gratification has remained largely unchanged. Thus, it was no surprise to anyone when she decided to retire at age 60. Because she was not yet Medicare eligible, Allison purchased private health insurance for $14,175 per year.*  Brittany exhibited more patience, delaying retirement until she became Medicare eligible. The cost of Medicare can be less expensive than private health insurance, so Brittany only had to pay $3,704 per year* for healthcare coverage. By waiting to retire until age 65, Brittany minimized her fixed healthcare costs while maximizing her ability to pursue retirement spending goals.

 New Sources of Income  Prior to retirement, most individuals rely primarily on wage income to cover expenses. In retirement, these individuals must rely on new sources of income, such as retirement plan distributions and Social Security retirement benefits. Effectively managing these new sources of income requires a basic understanding of the rules. 

 Retirement Plan Distributions  An individual can generally begin taking penalty-free distributions from a qualified retirement account upon reaching age 59 ?. Distributions from a traditional account are fully taxable. Distributions from a Roth account are generally tax-free.

 There are recent changes to rules regarding Required Minimum Distributions.

 On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancements (SECURE) Act into law. The SECURE Act became effective on January 1, 2020. One of the many changes instituted by the SECURE Act concerns the rules governing required minimum distributions (RMDs). Prior to the passage of the SECURE Act, individuals with traditional qualified retirement accounts had to begin taking RMDs by April 1 of the year after reaching age 70 ?. Under the new law, individuals do not have to begin taking RMDs until April 1 of the year after reaching age 72 beginning in 2020. 

 Social Security Retirement Benefits  Although you can elect to receive your Social Security retirement benefits beginning at age 62, this may not be your best option. If you elect to begin receiving benefits prior to your full retirement age (FRA), your monthly benefit will be less than if you had waited until FRA. If you delay benefits until after FRA, you will earn delayed retirement credits until age 70. These credits will increase the monthly benefit you ultimately receive.

 The age at which one decides to begin receiving Social Security retirement benefits can have a lasting impact. For an example, we turn again to Allison and Brittany. In need of an income stream, Allison elected to receive her Social Security retirement benefits at age 62. Brittany was able to wait until age 70. Although Brittany began receiving Social Security retirement benefits eight years later than Allison, her higher monthly benefit amount could translate to a higher cumulative lifetime benefit depending on how long each person lives.

 *Health care costs are based on estimates provided by MoneyGuidePro (Stifel’s financial planning software).

Disclosure: The names and stories are for education and illustrative purposes only and do not reflect any actual client scenarios or information. Stifel does not provide legal or tax advice. You should consult with your estate planning attorney and tax advisor regarding your particular situation

 Article provided by Bryan A. Ruder, CFP?, AAMS?, AIF?, a Financial Advisor with Stifel, Nicolaus & Company, Incorporated, Member SIPC and New York Stock Exchange, who can be reached by calling the Evansville office at (812) 475-9353 or (855) 62-RUDER.