Take a moment to think about what an ideal retirement looks like. Does it mean spending more time with loved ones or enjoying your passions? Are you interested in a second career? Do you want to travel?
Everyone’s retirement dream is different and an important part of developing a retirement strategy is thinking about how you want to spend your time. Today’s retirees can expect to live long, active lives, making retirement more like the beginning of a new chapter of life rather than its sunset.
Increasing numbers of energetic Americans are redefining retirement for themselves in new and interesting ways. Attached to this guide is a Retirement Dreamcasting Worksheet designed to get you thinking about how you want to spend your retirement years. We recommend sitting down with your spouse and loved ones and completing the worksheet together.
How will I pay for healthcare in retirement?
Healthcare expenses are a major concern for today’s retirees and those who aren’t thinking ahead may find themselves in trouble down the road. Life expectancy is rising, and many retirees can expect to live well into their 80s. Medical advances are expensive and healthcare costs can go up fast during a serious illness.
Healthcare costs have risen an average of 4.5% per year since 1965. Source: Trends In Health Care Cost Growth, 2013
A 2014 AARP survey found that though the majority (62 percent) of Americans over 50 have set aside money for their out-of-pocket medical expenses, more than half are worried about their ability to afford healthcare. 2 This is concerning because healthcare will very likely become a significant part of your expenditures when retired. Research shows that Medicare covers only about 60 percent of healthcare costs for those over 65. 3
In terms of dollars and cents, estimates vary. One study found that a 65-year-old couple would need an average of $220,000 to cover total healthcare expenses in retirement. 4 Another report put that number as high as $360,000. 5 Those who retire earlier may spend even more on healthcare before they are eligible for Medicare; a couple retiring at 62 could be adding an additional $17,000 to their annual budget in insurance and other expenses. 6
Everyone’s healthcare needs are different, which is why it’s important to consider how factors like your age, health, and family medical history affect your potential expenses. Fortunately, there are strategies that you can use to help tame healthcare costs in retirement. Determine whether you are eligible for any employer-sponsored healthcare benefits once you retire. Any assistance you receive could reduce your out-of-pocket costs and thus, the amount you need to save for medical expenses.
Retirement healthcare plan accounts like a Retiree Health Savings Plan may be available through your employer and can help provide a tax-advantaged way to save for future healthcare expenses. A financial professional can help you determine whether this option is available to you and show you how it may fit into your overall retirement strategies.
For most retirees, Medicare will form the backbone of their healthcare plan. Medicare has gone through some significant changes due to the Affordable Care Act (ACA) and there’s no way to predict how it may change in the future. Talk to your financial professional about things like eligibility, coverage, deductibles, and benefits to make sure that you understand all of your options.
It’s also important to think about how you will pay for services to help you remain independent if you need assistance with daily living later in life. An annual study of healthcare costs found that a part-time home health aide cost a median of $20/hour in 2014 while the median annual cost of a nursing home ranged from about $77,000 to over $87,000. 8 Generally, Medicare and employer-sponsored insurance don’t cover long-term care, which is why it’s important to think ahead about how you will cover costs.
A financial professional can help you consider your current health, family medical history, and other factors and evaluate your options for funding your long-term care needs.
What are my retirement plan options?
As a government employee, you may have multiple retirement plan types and distribution options available to you. While the best way for us to answer your specific questions is to meet with you personally, we’ve developed a list of common retirement plan types and discussed some special concerns you may want to think about.
Defined Benefit (DB) Plans 9 provide guaranteed retirement benefits to participants based on factors like age, years of employment, and salary. If you are enrolled in a DB plan, your employer takes care of investing all contributions to the pension fund and your retirement benefits do not depend on investment performance.
Participants in DB plans have some special financial issues to consider. Federal statutes like the Windfall Elimination Provision (WEP) mean that your Social Security benefits may be affected by your pension income, depending on certain regulations. Because of budgetary issues, some employers have sought to reduce or modify their responsibilities to pensioners. If you are concerned about possible reductions in your benefits, you should speak with a financial professional about strategies to help mitigate your risk.
Defined Contribution (DC) Plans 10 are the most common type of employer-sponsored retirement plans available today. The most common types are 401(k)s, 403(b)s, 457s, and Thrift Savings Plans (TSP). Many employers offer DC plans in addition to a defined benefit pension plan.
As a plan participant, you decide how much to contribute from each paycheck, allocate your money between the available investment choices, and assume all investment risk.
Oftentimes, your employer will match some of your contributions. Your money grows tax deferred since contributions are made with pre-tax income. Once you retire, you retain control over your assets and can choose to roll them over into an Individual Retirement Account (IRA) or another type of account.
Hybrid Retirement Plans 11 combine features of both defined benefit and defined contribution plans. For example, your employer may offer a cash balance plan in which employers contribute to the plan as though it were a defined benefit plan but give employees the option of receiving either a stream of payments or lump-sum distribution at retirement. Lump sums are popular because they can be rolled over into an IRA or new retirement plan, allowing your retirement savings to potentially continue growing; however, by receiving a lump sum, you will be taking on all the risk associated with investing it for the future.
Supplemental Retirement Plans may be provided by your employer to allow you to save more for retirement beyond what’s contributed to your primary retirement plan. These plans may have higher contribution limits than IRAs though tax deferral provisions vary according to your personal situation.
Contribution limits, early withdrawal penalties, and other details can vary a great deal by retirement system, and it’s a good idea to review your options with a qualified financial professional to help ensure that you are making the most of these very valuable retirement resources.
If you participate in a Defined Benefit Pension Plan, you may be able to choose among different retirement payout options and schedules.
As you near retirement, you will want to consider questions like the following:
• How much income do you need in retirement? What other sources of income do you have?
• What retirement payout options are available?
• If a Deferred Retirement Option Program (DROP) is available to you, is it worth continuing to work while your retirement benefits accumulate?
• Do you need survivor benefit options for your spouse or a child? For how long?
• Who is eligible to be named as your survivor?
• Do you expect to work after retiring?
• How great is the age difference between you and your spouse?
• What are your healthcare insurance options?
• Do you have life insurance?
5 Questions You Should Ask Your Retirement Plan Sponsor:
• What are the age and service requirements for full retirement?
• What are my distribution and payout options?
• Who can I name as a survivor or beneficiary?
• Do I have any healthcare benefits?
• Are Social Security benefits affected by my retirement plan?
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