A lot of people are thinking about retiring soon — and living the good life. But noted financial expert David Giertz says that you should hold off on this. At least until you can answer some important questions.
Giertz has more than 30 years experience in the financial services industry. He has worked for the such industry titans as Citigroup and Nationwide Financial Distributors. At the latter, Giertz rose all the way to Vice President. He also helped grow the company by nearly $7 billion in annual revenue during his time at the helm. All of which helped by David’s Executive MBA from the University of Miami. Giertz also sits on the board of directors of many organizations.
Here are the questions Giertz says that everyone should ask themselves before deciding to retire in 2018:
Can You Pay for Health Care?
David Giertz says that the answer to this question depends a lot on your age.
If you are under 65, you will not be eligible for Medicare. So you need to know how you are going to pay for medical insurance. If you are currently employed, you may be able to continue receiving medical insurance under your employer’s policy. Just by using what is called COBRA. But you should understand that the prices of these premiums will likely be significantly higher.
You can also enroll in what is commonly known as Obamacare insurance. The good news is that you cannot be turned down for coverage. But the bad news is that the premiums for this insurance can be high as well. If you do not qualify for subsidies based on your income anyway. Congress is expected to repeal the individual mandate that required every American to have medical insurance. Which means premiums are expected to rise in the coming years, perhaps significantly.
If you are older than 65, you probably will be able to enroll in Medicare. But Giertz says that you cannot expect Medicare to cover all your medical expenses. There many types of health care expenses that Medicare does not cover. This includes vision and hearing aid costs. Not to mention the costs of spending time in a nursing home. Also, you should be aware that you will still need to pay for Medicare premiums and that Medicare requires coinsurance payments.
The Employee Benefit Research Institute recently completely a study, in which they found that a couple over 65 — even with both Medicare and Medigap — would probably require savings of at least $370,000 if they wanted to be able to meet even 90% of expected health care costs during their lifetime.
Regardless of your age, Giertz believes that if do not have some kind of health care savings account, you probably should not retire until you do.
Will You Enroll in Social Security?
David Giertz points out that, just because you are planning on retiring this year, it does not mean that you have to enroll in Social Security this year. He says that determining whether you should or should not enroll in Social Security right away depends on your full retirement age (FRA).
Your FRA depends on the year you were born. For example, it is 66 years of age if you were born within the years of 1943 and 1954, and it moves up incrementally until 1960, with those born in that year or later having a FRA of 67. Your FRA is important because — if you retire before you reach this age — your Social Security Benefits will get lowered. If you retire within 36 months of your FRA, your benefits will get lowered 5/9 of 1% for each month early, and — if you retire more than 36 months earlier — your Social Security benefits are further reduced another 5/12 of 1% for each month greater than 36 months before your FRA.
This means that, if you enroll for Social Security benefits at 62 and your FRA is 66, your benefits will get reduced as follows: (36 months * ((5/9) * 1%)) + (12 months * (5/12) * 1%)) = 25%
Giertz suggests that — if possible — you should wait until you are 70 years old before enrolling in Social Security. He says that, by doing this, you will get the maximum amount of benefits, as benefits will increase from your FRA until you are 70 if you have not yet enrolled. Remember, once you enroll in the Social Security, you will receive the same benefit for the rest of your life.
Do You Have Enough Savings?
David Giertz says that a very important consideration you have to make before deciding to retire is whether you have sufficient savings to do so. He says that most working Americans do not have nearly enough savings to retire, especially when you take into account that life expectancies in this country are soaring.
In order to determine if you have enough savings to retire, you must determine how much money your savings will produce in the future, and whether this amount is sufficient for your needs. Giertz says that there are 3 ways that you can do this.
A common way of determining if you have sufficient savings is by purchasing an annuity. Annuities often have high fees associated with them, but, they not only provide income in retirement, this income is guaranteed. So, check right now — from a reputable carrier — how much income your current level of savings will buy you when you retire. You typically want to look at what is called a deferred fixed annuity, which will pay you in the future a set amount of money regularly, usually once a month.
Another way you can determine if you have enough savings to retire is for you to use what is called the 4% rule. This rule states that, if you do not want to run out of money in retirement, you cannot spend more than 4% of your savings during the first year you are retired. Then, in subsequent years, you cannot spend more than this same amount, adjusted for the cost of inflation.
The problem with using this method, according to Giertz, is that — because we are living in times of historically low interest rates — this rule no longer applies. In fact, a recent study discovered that you have a 57% of running out of money if you follow this rule. Giertz says that if you want to use this rule in today’s world, you need to spend no more than 2-3% of your savings in the first year, as well as the same amount in subsequent years, adjusted for inflation. If 2-3% of your savings is sufficient for you live on every year, then you have sufficient savings to retire.
A third way you can determine if you have sufficient savings to retire is by using the Required Minimum Distribution (RMD) tables from the IRS. These tables show just how much money people are required to withdraw from what are called tax-advantaged retirement accounts beginning at the age of 70.5. These tables are based on mean life expectancy, and they can be used as guidelines for your own savings withdrawing. The tables begin at the age of 70, but the Center for Retirement Research (CRR) provides similar tables on their website that begin at the age of 65. The CRR believes that using these tables are better than using the 4% (or 2-3%) rule. They say that because they think that the tables more accurately reflect market fluctuations.
Giertz says that you should try each method and compare the income obtained. That’s along with any Social Security benefits and other pension income you will have. But weigh against the budget with which you plan to live on in retirement. This budget, he says, must take into account all your expenses. This includes health care, housing, food, travel, utilities, gifts and anything else. You can use your current expenses as a guideline for creating this budget. Then make any adjustments that you plan to put into play in retirement.
Giertz says 50% of retirees spend more money in the first few years of retirement than they were spending pre-retirement. He adds that about a third of retirees are spending more even 6 years post retirement. Therefore David suggests potential retirees try to live off their retirement budget for a few months beforehand. Just to make sure that their budget is realistic.
How Much Will You Have To Pay in Taxes?
David Giertz says that retirement does not mean that you will necessarily be free from paying taxes. He notes that your retirement accounts will be taxed as if they were ordinary income. Unless they are either in the form of a Roth IRA or a Roth 401(k).
Giertz says that it is important for potential retirees to calculate what effect taxes will have on their budget. Also whether they can still afford to retire, after taking them into account. He notes that people need to pay attention to the tax reform that was passed by Congress in 2018. Both tax rates and deductions have seen significant changes.
Giertz also points out that your Social Security benefits could be taxed if your incomes passes a certain threshold Federal taxes alone could range anywhere from 50% to 85%. Individual states may tax your benefits as well.
What Will You Do in Retirement?
Giertz says that you should also come up with a plan for what you will be doing in retirement. He says that it is important to remain connected to your community in retirement. Losing connections to them could negatively affect your health.
I just published “How to Make the Most Out of Social Security” https://t.co/ZNofHMvadW
— David Giertz (@david_giertz) December 14, 2017
So, Can You Retire in 2018?
Now, that you have asked yourself all the important questions about retirement, you can make an informed decision. Ensure you have sufficient income to pay for both ordinary expenses and health care costs and taxes. Comparing personal savings added in with your Social Security benefits and other pension income. If that’s the case this year can be the year you retire. Just keep making good investment decisions into the future so that you do not run out of money.
If, however, you determine that you do not currently have the means to retire this year, all is not lost. There are many ways to increase the amount of your retirement savings and ways as well to reduce retirement expenses. Now is the time to start planning for both.