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Ahh, retirement. Enjoying financial security without having to work is something many of us look forward to. Before a global pandemic and a recession hit, maybe you were thinking of ditching the winters to relax under a Florida palm or alternatively, drawing up plans for a mountain-side retreat to embrace the snow.
Now, perhaps you’re re-evaluating your retirement plans: travel limitations could have you second guessing a move that these days, feels too far from family, or maybe you’ve decided to put in one more year of work to build up that nest egg.
If your plans have gone through some small (or big) revisions, the good news is that you can still set yourself up for an enjoyable and fulfilling retirement. Here are five things to consider as you think about what may help you feel happy and secure in this new chapter.
Recent economic changes may have shaken up your plans or accounts, but that doesn’t necessarily mean you won’t be able to move forward with your retirement vision. Before you leap, though, it’s a good idea to survey a few areas of your financial picture.
Doing so can help you see if you’re on track for the retirement lifestyle and goals you had in mind, or if you’ll have to make any adjustments. Even if you think not much has changed for you financially in these last few months, a periodic review of your retirement assets, timeline, and goals can help confirm that everything still checks out.
Start by taking stock of where your money will be coming from when you retire and estimating how much you’ll get from each source. Some of these estimates you’ll have to do on your own (or with the help of a financial advisor) whereas others have online resources that can guide you.
You might also assess whether each potential income stream has been affected by Covid-19 or recent economic changes. The ups and downs of the stock market may have dinged some parts of portfolios but might have provided some opportunities as well.
Some common sources of potential retirement income may include:
Keep in mind, withdrawals from certain retirement accounts may be taxable, so you’ll want to consider how that could impact your monthly or annual “paycheck” as you take out those funds.
It’s also a good idea to figure out when you’ll tap into certain income streams – perhaps you’re planning on withdrawing from your IRA at age 62 but won’t access income from a rental property until the following year. Of course, this all could change, but having an idea of what you’ll need or want to access (and when) can help you come up with an accurate monthly or annual income estimate.
Getting a read on your finances can help you get a clearer sense of whether you’ll need to tweak your retirement plan.
Is your retirement date still the same? If that’s the case, that’s great. However, if you’re now considering postponing your retirement, know that you're not alone. 40% of investors 50 to 64 years old are either very or somewhat likely to work longer than they planned as a result of the market downturn, according to a June 2020 survey from Wells Fargo.
Although working longer may not be what you originally had in mind, there are two benefits to consider: Since you’re working, you can continue to fund your retirement accounts. And because you’re earning an income, you can potentially delay dipping into those accounts.
It’s also a good idea to run through any other financial goals you wanted to tackle in retirement, like buying a second home or helping a loved one with college tuition. If the recession and pandemic impacted your potential income or other logistics (like where you’ll live) in any way, it can make sense to revisit your goals to see if you need to make any adjustments.
Say you’ve decided to stay close to friends and family in your current home and won’t be buying that beach house you’d been saving up for. The down payment funds could be shifted to another goal: perhaps you can actually retire earlier using that money as income or use the cash to renovate your current home, potentially increasing its resale value.
You probably know that money in certain retirement accounts can’t just sit around – you’ll eventually have to withdraw it. The IRS requires you to take out a certain amount of money each year by a certain age, something called a required minimum distribution (RMD). But two recent legislative changes have impacted RMD requirements, and could be helpful during these times of economic uncertainty.
In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act to support individuals and businesses impacted by the coronavirus. The law temporarily waives RMD requirements for people who are normally expected to take them in 2020.
Another change: Congress passed the SECURE Act in December 2019, raising the age at which you must start taking RMDs from 70 ½ to 72. This update went into effect on Jan 1, 2020. (If you turned 70 ½ in 2019, you are still subject to the old RMD age rule.)
Why do these changes matter? If you’re able to let the money sit in your accounts, then the funds can remain invested longer and you may be able to recoup some of the losses you might have experienced when the economy was shakier.
Of course, it’s always a good idea to check in with a tax professional who can provide you with specific tax advice and recommendations for your situation.
Regardless of what you have in mind for retirement, you’ll want to be sure there’s enough in your nest egg to cover your health expenses. And if your plans shifted because of the pandemic, it’s a good idea to see if any of the changes affect your insurance or coverage.
If you still plan on retiring before you turn 65 and your employer-based coverage will end, you may want to consider where your insurance will come from until Medicare kicks in. (Most people can sign up for Medicare starting at age 65).
Will you be able to hop on a spouse’s insurance policy? Or will you need to purchase a plan from the Health Insurance Marketplace? Take a beat to confirm that you won’t have any gaps in coverage and go over what your healthcare options are for your particular situation.
Speaking of costs, what is enough? The amount will vary based on a host of factors (like your age, overall health and where you live). Right now, it’s tough to say how the pandemic will impact healthcare costs, like health insurance premiums and co-pays, for next year and beyond.
But there are some estimates that can help give you an idea: an individual retiring in 2019 at the age of 65 could expect to spend an average of $135,000-$150,000 on healthcare expenses throughout retirement. That figure increases to $285,000 for a 65-year old couple.
Covid may have you reconsidering whether you’ll be a city dweller or rural retiree. And the local healthcare options may play a role in your decision – perhaps you’re thinking twice about moving somewhere too far from easily accessible medical care. If you’re concerned about healthcare quality and access, consider an area with a more extensive range of care.
Even within the United States, costs of healthcare can vary widely. For instance, 2017 healthcare prices in San Francisco and Anchorage, Alaska were both 64% higher than the national median, according to the Health Care Cost Institute.
Whereas, cities like Pittsburgh, Baltimore and Littlerock, Arkansas all had healthcare costs that were at least 20% below the national median. If you'll be moving to an area with higher healthcare expenses, knowing that ahead of time can help you factor those costs into your retirement plan and ensure you have enough socked away.
Where you choose to live can have a significant impact on how far your dollar can stretch for everything from housing costs to gas prices. You could end up paying a lot more or less in income or property taxes depending on what state you choose to call home.
Housing can often be one of your biggest expenses, and costs can vary by state. In West Virginia, where home values are the least expensive in the country, the median home price is slightly more than $100,000, whereas in Hawaii, with the costliest home values, median home values are over $600,000. That's quite a difference!
To help make sure that your future funds can encompass your future plans, also consider other location-based costs like transportation. If you’re moving from a city where you mostly used public transportation to a suburb where a car is a must, you’ll want to factor in those car-related expenses into your plan.
There is more than one type of tax to consider when choosing where you want to live, so it’s important to work with your advisor to assess how much you could pay in taxes overall. These are some of the taxes you may want to consider:
Depending on where you live, all or parts of your retirement income may be subject to different tax rates. Some states like Florida and Illinois don’t always tax pension income, whereas states such as North Carolina and Massachusetts do.
Once you’re no longer earning full-time income from an employer, you may find yourself in a lower tax bracket. Sometimes, how you choose to take out RMDs could bump you into a higher tax bracket and could impact how much you owe on Social Security Benefits or even Medicare coverage. Check with a tax professional about how your retirement choices will impact how much you will owe the IRS.
Whether you still have a mortgage on a home or have finished paying it off, you’ll have to pay property taxes on it each year. How much you owe will depend on the property’s assessed value as well as the local tax rate, which can vary widely depending on where you live. The effective real-estate tax rate in New Jersey is 2.47% and 0.53% in Colorado, according to data analyzed by WalletHub.
The median home value in the two states is similar, but what you’ll pay in taxes isn’t: In Colorado, the annual real-estate taxes on a home priced at the state median value of $313,600 would be $1,647. In New Jersey, you’d shell out $8,104 a year for a home that’s valued at $327,900.
Changes stemming from the pandemic may have you reviewing your retirement timeline, funds and goals. And that’s not a bad thing – no matter how close or far away retirement is, it’s smart to go over your financial goals and blueprint once in a while so that you can feel secure in your decisions. After all, you’ve worked hard for your money and you should be able to enjoy as much of it as you can when it’s time to retire.
This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.