July 15, 2024


Future Depends on What You Do

Social security, Medicare: What to consider before retirement

Social security, Medicare: What to consider before retirement

The pandemic caused tectonic shifts in the job market as workers young and old quit and searched for something better — in their work or in their life. According to the Pew Research Center, a little more than half of adults ages 55 and older had ditched the grind by late 2021, compared with 48% in the months before the first case of COVID-19 was recorded.

If you’ve spent the better part of your earthly existence punching a clock, you may be sorely tempted to join the throng of cool kids on the sidelines. And if you’ve been working for a company with 50 or more workers, chances are good that you’ve accumulated some retirement savings through a pension or retirement plan — especially if you’ve not spent your career in a service industry.

Experts caution, however, that the transition from a life of work to a life of leisure isn’t simple, and that it’s crucial to have a plan. David John, senior policy advisor for AARP’s Public Policy Institute, said researchers have found that “people who do the planning and do budgeting end up with a much better retirement outcome than people who just wing it or use a rule of thumb.”

The souring stock market and the rekindling of long-dormant inflation also throw cold water on the idea of retiring now. “If you ask any financial planner, they’re going to tell you, just sit this one out,” said Mo Wang, a retirement scholar who directs the Human Resource Research Center at the University of Florida.

But here’s the thing. It’s misleading to think of retirement as life without work. For many Californians, it’s a life with less work.

“Call it semi-retired: You work doing what you have to do for 40 years, then you work doing what you want to do for the next 10 to 15,” said John Pilkington, a wealth advisor executive at Vanguard Personal Advisor Services.

That’s why some version of “retirement” may be available to you even if you haven’t socked away much for your dotage. Many of us haven’t — according to the Federal Reserve, in 2019 half of Americans ages 55 to 64 had $134,000 or less in retirement savings. That’s not exactly Lotto riches.

The Times consulted two dozen researchers, financial planners and counselors about how to tell when you’re ready for retirement. Here are their tips and insights.

When are you financially ready to retire?

If you haven’t started planning yet, then the answer is probably “no time soon.” That’s because retiring successfully is, in part, a number-crunching exercise to make sure you can sustain the life you want to live on the income you’ll be collecting.

“Expense control is critical,” Mark Berg, a certified financial planner in Wheaton, Ill., said in an email. In fact, he wrote, you should start preparing to moderate your lifestyle five to eight years before retiring.

That may be too long a runway for people eager to retire. Still, John Pilkington, a wealth advisor executive at Vanguard Personal Advisor Services, said it’s important to review your investments at least three years ahead of retirement to start “dialing down the risk exposure.” He added, “You don’t want to find yourself overallocated to risky assets.”

With the Nasdaq composite down 30% from its peak in November, his point shouldn’t be lost on anyone.

Reality check. The first step, David John said, is figuring out whether you’ll have enough regular income in retirement to at least cover your basic needs, such as housing and healthcare. Vida Jatulis, a certified financial planner in Oak Park, Calif., put it this way: “It’s like solving a mathematical problem. ‘This is what I have coming in; what can go out?’ It’s a finite resource.”

Unfortunately, solving that problem requires a degree of realism that eludes many of us, said Rashida Lilani, a certified financial planner in Roseville, Calif. “We tend to underestimate how much we spend and overestimate how much we make,” she said.

That’s why everyone should have a budget, Lilani said, to show them how much they are actually spending and what they’re spending it on. Having a budget doesn’t have to feel like dieting; think of it more like putting a meter on your spending so you can be more deliberate about it.

Plenty of tools online can help, and some are free. These include free apps from companies such as Mint and paid services from the likes of You Need a Budget and EveryDollar that can automatically track your credit and debit card usage.

The Social Security calculation. The vast majority of American retirees are eligible for Social Security, but those benefits fall well below what most Californians spend every month — on average, they amount to only 37% of a person’s earnings. Yet the most popular age to start collecting those benefits is 62, when they first become available — at a level 25% to 30% below what they would be at full retirement age (66 to 67 for anyone born after 1943).

Experts say that if you’re in good health, you shouldn’t claim your benefits until you’re 70, when they will be more than 25% higher than they would be at full retirement age. But that’s not an option if you don’t have other reliable sources of post-retirement income.

And even the reliability of Social Security is subject to some debate. According to the trustees overseeing the program, Social Security isn’t collecting as much money in taxes as it needs to pay full benefits to all eligible Americans after 2034. Unless the federal government does something to boost the program’s revenue before then, benefits will have to be cut 23%, the trustees reported.

Jatulis said there are retirees who manage to live off of their Social Security benefits alone. But it’s still a good idea to have some savings to meet the unexpected expenses that inevitably arise, she said, even if that means scaling back your spending for a few years before retiring so you can sock away some dough.

Obtaining expert guidance. “It really does help to get professional advice,” John of AARP said. “And professional advice doesn’t necessarily include your brother-in-law. … Let’s just say relatives’ goals and aspirations don’t necessarily keep your best interest at heart.”

An advisor can not only help you come up with a plan but also stick with it when the economy sours and the markets go sideways.

“My role as an advisor is bad-decision insurance,” said Neela Bushnell Hummel, a certified financial planner in Santa Monica. “When things get hard, I’m on the phone with my clients to keep them in their seats” instead of panic-selling.