The last few months have certainly changed a few things (okay, maybe a lot of things) about how we work. Many of us are continuing to work remotely or even thinking about moving and working in a new city altogether.
The pandemic and economic climate may have even affected your professional life – perhaps you’re heading into retirement earlier than planned because of changing career prospects, an early retirement package you couldn’t turn down, or simply because you’re ready to move on to your next chapter, recession or not.
Whatever your reason for retiring earlier may be, you might have a few loose ends to tie up, especially if your second act is coming sooner than you thought. If that’s the case, let’s go over three aspects of retirement that you’ll want to assess before officially “signing off.” Doing so may help you feel more secure about this next life change ahead.
Regardless of why you’re heading into retirement now, it’s a good idea to review how you’ll fund it. If you’re retiring earlier than you’d originally planned on, your nest egg may require a little reassessment. Or maybe you’ve already hit your nest egg goal, and want to figure out how to make your retirement money last longer.
Retiring during a recession can bring its own questions and challenges, so you may want to consider if any income streams have changed in the last few months. Running through these numbers can help you see if your nest egg can still support the retirement lifestyle and financial goals you had in mind.
In addition to going over your potential retirement funds, early-bird retirees might want to consider the following ways their money may be impacted in this next chapter:
If you’re retiring earlier than expected and your nest egg isn’t quite where you’d want it to be, you might be able to take advantage of some changes made to retirement plans in 2020.
The first change came through the SECURE Act, which raised the age for required minimum distributions (RMDs) from 70 ½ to 72 for those who turn 70 ½ in 2020 or later. (If you turn 70 ½ before December 31, 2019, you still need to take your RMDs in 2021.) This tweak may be especially helpful if you still want to build up retirement funds: if you can hold out on taking RMDs for longer, that’s more time your money (in certain retirement accounts) can potentially grow.
Another piece of legislation that could benefit your retirement plans is the CARES Act, which includes a provision that waives all RMDs for 2020 for IRAs and certain defined contribution plans (like 401(k) plans). Again, this can be helpful because if you’re not required to withdraw that money, you can let it sit a little longer so that it can potentially keep earning for you.
RMDs can get tricky, so it’s a good idea to check in with a tax professional to see how taking (or not taking) them could impact your individual tax and money picture.
If you or your spouse have been diagnosed with Covid-19 or you can prove you experienced significant financial hardship as a result of Covid-19, you may be able to make early withdrawals from certain retirement accounts without extra fees. Previously, any such withdrawal made before the age of 59 ½ would’ve been subject to a 10% tax, but that’s been waived for now (although the withdrawal can still be subject to regular tax). Qualified individuals can withdraw up to $100,000 from eligible retirement plans between January 1 to December 30, 2020.
Making substantial withdrawals from retirement accounts could be helpful for retirees that jumped into retirement sooner than expected. But even without the additional 10% tax, taking money out of accounts might not be a good strategy for everyone, especially if you want that nest egg to grow. Again, consider checking in with a tax professional or financial advisor to see what would make sense for your personal money situation.
If you’re retiring earlier than planned, there’s a chance your Social Security benefits might look a little different than if you had waited. One of the most important things to be aware of is that “retiring early” means something specific to the government. The Social Security Administration considers “early retirement” to begin when you’re 62 years old, which is the earliest you can claim any Social Security benefits.
Keep in mind, you won’t be able to claim your full benefit amount unless you’re at the full retirement age, which is 66 to 67 years old, depending on the year you were born. If you retire at 62 in 2020, your benefit amount will be about 30% lower than if you held off until your full retirement age.
On the other hand, if you wait to claim any Social Security payments until after your full retirement age, your benefit checks could actually be bigger. This can happen in two ways: 1. Every year you work past your full retirement age is another year of earnings towards your Social Security record and 2. Your benefit amount increases by a certain percentage every year from the time you reach full retirement age until you start claiming benefits or until you reach 70 years old (the exact percentage varies based on your birth year). Check out the Social Security Administration’s benefit calculator to estimate your individual amounts.
As you transition into this next chapter, healthcare expenses and insurance may be top of mind. And if you’re retiring ahead of schedule, it’s a good idea to run the numbers on these costs. The price of healthcare in the US is anticipated to keep going up by an average of 5.5% per year over the next 10 years, so be sure to leave some cushion in your financial plan for any price hikes.
Here are some other healthcare-specific considerations to be aware of:
If you are one of the lucky individuals whose employer-provided healthcare plans extends into your retirement, you may already have a good understanding of what your costs and coverage will look like. Of course, it’s a good idea to double check the details, like how long you get to use your employer-provided healthcare plan for and if there’ll be any changes to what they’ll cover; call your plan provider to find out.
Good to know: Private sector employers are not required to promise any health benefits to retirees in perpetuity, since there’s nothing in federal law that prevents them from reducing or eliminating those benefits down the line. It might be wise to at least consider some backup options in case your coverage changes.
If you have an HSA account, you can potentially leverage it during your retirement. Unlike 401(k)s and IRAs, there is no minimum age at which you have to start taking the money out, so your account can continue growing as long as you wish. Your HSA funds can be used for qualified medical expenses (check with your insurer about what those are), so you probably won’t have to tap other income streams to pay for all or parts of certain health bills.
Another advantage to an HSA account is that your balance can carry over from year-to-year, which is different from an FSA (flexible spending account) where you typically lose any remaining balance at the end of each year. That means that even into your retirement, you can still use the funds in your HSA account to pay for qualified medical expenses. Note that you won’t be able to make any more contributions to your HSA once you turn 65 and are eligible for Medicare.
The CARES Act made some changes to HSAs; check out our article here to learn more.
COBRA requires employers with at least 20 employees that offer healthcare benefits to also include an option for employees to continue their healthcare coverage, even if they’ve left the company. As a retiree, COBRA is relevant because it means you might have the option to continue your employer-sponsored healthcare plan for up to 18 months after you’ve left.
This benefit can certainly be helpful for retirees, but know this: If you decide to use COBRA, you’re responsible for the entire premium cost. That means you pay your portion and the portion previously covered by your employer. On top of that, the insurance company can also tack on another 2% in costs to cover any administrative fees. This insurance option could get expensive very quickly, so you’ll just want to be sure you factor in all the costs before you sign up.
Even if you’ve raced into your second act, you might already be familiar with Medicare, but let’s go over some key points:
You’re officially eligible for Medicare when you reach 65 and you can enroll through the Social Security Administration
Medicare has three main components:
You have two main ways to get your Medicare coverage:
Now that we’ve got all of the financial and health logistics out of the way, let’s get to the fun part. If you already have your retirement life-plan mapped out, go forth! But if you’re jumping into retirement earlier than planned, you might not have thought about how you’ll fill your time. Not to mention, many of the fun activities you had on the agenda might now look a bit different, or even be unavailable (at least for the time being).
Many retirees volunteer as a way of staying active and giving back, and the benefits to volunteering are significant. A study of Americans age 60 and older conducted by the Corporation for National and Community Service found that those who volunteered had lower instances of disability and reported higher levels of overall well-being when compared to those who didn’t volunteer.
But volunteering may look different right now and in the near future, so it’s a good idea to revisit your plans. Understandably, you might have health concerns about in-person volunteering, but there are still plenty of ways to give back to your community. Some projects are still able to move ahead, some might have moved online, and others may be on hold for now. Check in with your local community groups or non-profits to see what’s available and what you’re comfortable with.
Another drastic change due to Covid-19 has occurred in the world of traveling. If you’d hoped to spend your retirement circling the globe or visiting family members, you might be revising some of your travel plans now. If your original plans have to be sidelined for now, there are still ways to get around. One way you could satisfy your travel bug is by taking a road trip and/or renting a recreational vehicle (RV). These days, many folks have opted for traveling by RV as an alternative to flying that still allows them to get to see new places.
Of course, the money you set aside to travel can also be shifted to other goals. The average retiree spends $11,077 a year on travel, so you can add any travel funds to your retirement income, stash that money away into savings or use it toward another retirement goal, like renovating your home.
If you’ve catapulted into retirement earlier than you thought, you may feel like your leisure-time options are limited by Covid-19. One thing you can take advantage of right now is online learning – universities and educational institutions are rolling out online offerings in the wake of Covid-19, which means you could learn new skills or get a degree from the comfort of your own home.
Earlier we talked about how the SECURE Act made changes to retirement plans for 2020. Well, this legislation also broadens how you can use 529 education savings plans. You might’ve set up one of these plans for your children or grandchildren to help pay for their college experience – now you might be able to take advantage of the funds, too.
Here’s how it works: If there are still funds remaining in a 529 plan that you got for someone else, you can change the beneficiary to yourself and use that money to fund your own education. This way you may be able to take advantage of online learning without having to significantly reshuffle your expenses and financial goals.
Regardless of what has brought you to early retirement, now is the time to embrace it! While you might be faced with some unique challenges if you’re entering this chapter earlier than planned – and may be a little overwhelmed if you have to make decisions seemingly on the fly – you can still take some steps to ensure as smooth a transition as possible.
This article is for informational purposes only and is not a substitute for individualized professional advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA is not providing any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.
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