Tackle Key Financial Issues as You Face Retirement

Posted on March 14th, by Hoberman & Lesser in Timely Articles.

The Baby Boomer generation reached its peak in 1957 at an annual birth rate of about 4.3 million people. These Baby Boomers will turn 59 years old in 2016, and they’ll soon be eligible to withdraw funds from their qualified retirement funds without incurring the 10% early withdrawal penalty.

Like many 60-somethings, these Boomers might not be ready—emotionally or financially—for full retirement. Ready or not, there are key financial decisions everyone needs to eventually make and reasons you can’t afford to ignore financial matters as the golden years approach.

Age 59 1/2: Withdraw Retirement Funds without Incurring Penalties

Once you hit age 59 1/2, you can take money out of your IRAs, 401(k) plans, pensions and tax-deferred annuities — for any reason whatsoever—without incurring the 10% early withdrawal tax penalty. Obviously it’s unwise to go on a spending spree at age 59 1/2, because these funds must last for the rest of your life.

Now is the time to budget how much to draw on your retirement savings and when. Also remember that distributions from traditional IRAs, 401(k) plans and other employer-sponsored retirement plans are taxed as ordinary income because original contributions to these accounts were tax deductible.

However, earnings on qualified distributions from Roth IRAs can be taken on a federal income-tax-free basis because contributions to these accounts weren’t originally tax deductible. (A qualified distribution is one made after age 59 1/2 and at least five years after contributions to the Roth IRA began.)

Age 62: Decide When To Receive Social Security Benefits

You qualify to start receiving Social Security benefits at age 62, based on your work history or your spouse’s work history. But if you decide to take benefits before your full retirement age, they’ll be reduced at a rate of 0.5% for each month you begin taking Social Security early. When making this decision, look at your health and family history of longevity.

Your full retirement age depends on when you were born. For example, people born in 1957 will be eligible to receive 100% of their benefits when they reach age 66 1/2 years. Those born in 1960 or later must reach age 67 to be eligible for full benefits.

Alternatively, you may delay receiving benefits until after your full retirement age. In that case, your benefits will increase by 8% annually. Under current law, this increase will be automatically added each month from the moment you reach full retirement age until you start taking benefits or reach age 70.

If you continue to work and start receiving benefits before full retirement age, your benefits will be reduced. Once you have attained full retirement age, you can keep working and your benefits won’t be reduced, regardless of how much you earn.

Full benefits from Social Security typically replace about 40% of an average worker’s income after retiring.

Age 65: Choose Medicare and Medigap Coverage

The Social Security Administration recommends applying for Medicare benefits three months before you reach age 65. If you elect to receive Social Security benefits before your full retirement age, you’ll automatically be enrolled in Medicare Parts A and B without an additional application.

Hospitalization coverage. Medicare Part A covers a portion of your costs for a semi-private room during your stay in a hospital, skilled nursing facility or hospice, after you pay an initial hospital stay deductible. It also covers some home health care. Other rules and restrictions apply.

Medical insurance coverage. Even if you don’t qualify for Medicare Part A coverage, you may be eligible to enroll in Medicare Part B coverage. Part B medical insurance covers doctor bills for treatment in or out of the hospital, as well as the costs of medical equipment, tests and services provided by clinics and laboratories. It doesn’t cover other medical expenses, such as routine physical exams or medications.

Medigap coverage. This fills the gaps that exist in Medicare, such as co-payments and co-insurance. It’s usually a type of private health insurance that’s governed by federal and state laws. In some cases, you might opt for Medicare Part C coverage, which may function like a Medigap policy administered by Medicare.

The optimal time to buy Medigap insurance is within the first six months you’re at least 65 years old and enrolled in Medicare Part B. That way, you won’t need to undergo a medical underwriting. For those with existing health conditions, this enables them to buy a policy at the same price that is charged for people in good health.

Important note. Before you travel outside the United States, find out whether Medicare will cover you while you’re away. Generally, the coverage is limited or nonexistent. If you don’t have coverage when traveling overseas, you can purchase supplemental policies to cover medical expenses incurred outside the United States, including evacuations.

Prescription drug coverage. Medicare Part D covers prescription drugs. The premium you pay today is based on your income as reported on your IRS tax return from the last two years. So if your income from 2014 was above a certain limit, you’d currently pay an income-related monthly adjustment amount in addition to your plan premium.

Important note. You may be charged a late enrollment penalty if you go without credible prescription drug coverage through Medicare Part D or another source for any continuous period of 63 days or more after your initial enrollment period ends (three months after the month you turn 65).

Age 70 1/2: Take Required Minimum Distributions (“RMD”) — or Else

The IRS generally mandates annual distributions from traditional IRAs and qualified retirement plans once you reach age 70 1/2. You also must pay income tax on these required minimum distributions (RMDs). No mandatory distributions are required from Roth IRAs while the original owner of the account is alive.

RMDs are based on your account balance and life expectancy. The penalty for not taking your full RMD on time is severe. You’ll owe 50% of the amount you should have withdrawn but didn’t. RMDs also must be taken from inherited accounts.

Important note. An exception to the RMD rule is permitted for taxpayers who continue working after they reach age 70 1/2 and don’t own more than 5% of the company. These people can postpone taking RMDs from their employer plans until after retirement. However, they must still take RMDs from qualified plans that remain at former employers (that is, the plans that haven’t been rolled over to their current employer’s plan).

Before Your 60th Birthday Hits

Concerns about rising medical costs, longer life expectancies and insufficient retirement savings are forcing many people to stay in the workforce longer than expected. Regardless of whether you continue to work in your 60s and beyond, the government requires you to make important decisions about retirement benefits and health care coverage as you reach certain ages.

Ideally, you should meet with us before you turn age 60 (and beyond) to review your retirement plans. We can help you evaluate your investment portfolio, manage monthly living expenses, understand Medicare and long-term care options, and decide when to take Social Security benefits and withdrawals from retirement accounts and pension plans. Planning ahead can help minimize the stress and maximize the upsides of retirement.