Three Phases of Retirement

Retirement can last 20 to 30 years or more, so it may be helpful to consider it as a series of phases. Here are three phases that you might pass through on your retirement journey, and some questions to ask along the way.

The Transition

Some people leave work one day and begin a well-defined retirement lifestyle the next, but it is more likely that there will be a transition period that could last months or years.

Will you continue some type of work after leaving your regular job? Almost three out of four workers expect to work for pay during retirement, but only 30% of retirees report actually doing so.1 Many part-time jobs are poorly paid, and retirees may take them more to keep busy than for the money. On the other hand, if you can take on higher-paid work in your profession as a consultant, or phase out gradually from your regular job, it could help strengthen your financial position later in retirement.

When will you claim Social Security benefits? Though many people tap into Social Security when they lose a regular paycheck, it may be beneficial to wait, depending on your age and other resources. Claiming before reaching your full Social Security retirement age (66 to 67, depending on birth year) will result in a permanently reduce benefit, while delaying past full retirement age will increase your benefit by 8% per year up to age 70.

How much will you withdraw from your retirement savings? You are not required to make withdrawals from traditional IRAs and employer-sponsored retirement plans until age 72 (70 1/2 if born before July 1,1949), and you are never required to make withdrawals from Roth accounts you own or from taxable accounts. If you or your spouse are still earning incoming, you may not need to make withdrawals (or might make smaller withdrawals) in order to help preserve your savings. On the other hand, this may be the ideal time to spend money on travel and other items on your bucket list.

How will you replace employer-based medical coverage? If you retire before age 65, you may need to purchase medical insurance through the Health Insurance Marketplace. If you are 65 or older, you will be eligible for Medicare, but keep in mind that Medicare has substantial out-of-pocket costs. A 65-year-old couple who retired in 2020 might need $270,000 to pay for medical expenses in retirement, assuming median prescription drug expenses.2 Also consider that a younger spouse who has received insurance through your employer plan may need to purchase private insurance until he or she is eligible for Medicare.

Fully Retired

In this phase, you are no longer working and have more free time than ever before. But you are living on a fixed income.

Where will you live? This might be the time to decide whether to stay in your home and “age in place,” or move in order to downsize, be closer to children or grandchildren, live in a warmer climate, and/or join other seniors in a retirement community. If you own your home outright, staying put could be a solid financial decision, but the other options might offer a more satisfying lifestyle. Buying a less-expensive home could boost your savings.

Do you need to change your spending or withdrawal strategy? By this time, you should have a clearer picture of how much you need to find your retirement lifestyle. If you had income from work during the transition stage, you may have to dip deeper into savings now or cut back on spending. Required minimum distributions, which are fully taxable, combined with Social Security income could result in a higher income tax liability. You may want to make estimated tax payments or have taxes withheld from your Social Security payments and/or retirement plan withdrawals.

The Long Run

In this phase, you may be slowing down and settling into a simpler lifestyle.

Do you have a plan for long-term care? About 70% of retirees will need long-term care services at some point — typically in their later years — and almost half will receive paid care.3 Many will receive unpaid care from family members, which can be stressful for the family. Although it’s not pleasant to imagine needing long-term care, it’s important to prepare for the possibility and have a plan in place.

Do you want to leave a legacy? You should have basic estate planning documents long before you retire, but this might be the time to decide if you want to leave a charitable bequest. You might also consider whether you want to provide gifts from your estate to your children or grandchildren during your lifetime or wait to do so through your will.







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