You could spend decades in retirement, depending on when you retire and how long you live. How those years go will depend on many factors. However, there are some key choices that will have a profound impact on your retirement.
Here’s a look at some of the decisions that can make or break your golden years.
1. Whether to save in a traditional or Roth account
With pensions a thing of the past for many workers, you’re likely saving for retirement in either an IRA or an employer-sponsored plan such as a 401(k). With either option, you may have the choice of opening a traditional account or a Roth account.
Traditional accounts provide an immediate tax deduction on contributions. Then, withdrawals in retirement are taxed as regular income. At age 72, retirees need to begin required minimum distributions (RMDs), which are withdrawals based on a formula that takes into account a person’s age and account balance.
Roth accounts don’t offer a tax deduction and are funded with after-tax dollars. The money grows tax-free and can be withdrawn tax-free in retirement. There are also no RMDs with Roth accounts.
While everyone’s situation is different, many experts believe Roth accounts offer superior benefits. Not only are investment gains exempt from tax, but Roth accounts don’t have taxable RMDs. With a traditional account, those RMDs can add a significant amount to your taxes later in life.
Consult with a financial adviser to determine which option is right for you.
2. When to start Social Security benefits
Social Security retirement benefits will differ depending on the age at which you first claim them.
If you claim benefits at age 62, the earliest you can begin, your payments will be permanently reduced up to 30% compared with what you’d receive by waiting until your full retirement age. For those born during or after 1960, for example, full retirement age (FRA) is 67.
Retirees also can permanently increase their monthly Social Security benefits by waiting to start payments past their FRA. For every year past FRA that someone delays the start of Social Security, they get a boost of up to 8% in their benefit amount. However, this increase stops at age 70, and there is no benefit to delaying Social Security beyond that age.
Depending on your life expectancy, your total benefits could be the same regardless of when you start receiving Social Security. Early retirees may have a reduced benefit amount, but they receive payments for more years. Waiting to claim benefits results in more money per month, but older retirees could be receiving that cash for a shorter period of time.
Still, your monthly benefit amount can greatly impact your cash flow and, in turn, your quality of life in retirement. Companies such as Social Security Choices can help evaluate your options.
3. When to sign up for Medicare
If you’re already receiving Social Security or Railroad Retirement Board benefits at or before age 65, you’ll automatically be enrolled in Medicare at the appropriate time. If you aren’t, you need to enroll yourself during an initial enrollment period. This period includes the month you turn 65 as well as the three months before and after it.
Failure to enroll during the initial enrollment period could be costly. If you aren’t eligible for premium-free Medicare Part A coverage, your premiums will go up 10% for twice as long as the number of years you delayed enrollment.
Meanwhile, your Part B premium will jump 10% for each 12-month period you delay enrollment, and this increase is permanent. There is also a late enrollment penalty for Medicare Part D, which provides prescription drug coverage.
All these fees can add up and may pull money away from other retirement spending priorities. There are a few exceptions, such as in cases when someone has health insurance through an employer. You can learn more in the government’s Medicare & You handbook.
Your initial enrollment period is also your chance to enroll in a Medigap plan, also known as a supplemental Medicare policy. These plans can cover expenses not covered by original Medicare and are worth a look.
4. How to pay for health care expenses
Those retiring before age 65 need to figure out how to pay for health insurance until they become eligible for Medicare. Using COBRA coverage from a former employer, buying coverage through the government Health Insurance Marketplace or relying on a spouse’s plan are all options.
Plus, you need to determine how you will pay for long-term care if needed. Medicare won’t cover ongoing care in a nursing home or assisted living facility, and these expenses can easily add up to six digits a year in many parts of the country.
Individuals with few assets and limited income may be eligible to use Medicaid to cover these costs, and those with large nest eggs may be able to use their savings. Everyone else should have a plan to ensure they aren’t bankrupted in retirement by long-term care costs.
Long-term care insurance is one option, although as Money Talks News founder Stacy Johnson notes, not everyone needs it. Consider your health, family history and resources when deciding how to prepare for this expense.
5. Where to live in retirement
Where you live can make or break your retirement on many levels.
A region’s cost of living can mean the difference between a comfortable retirement and one in which you need to stretch pennies to make ends meet. Plus, you’ll want to be somewhere that offers enough activities and amenities to ensure you make the most of your retirement years.
Some retirees value being near family members as they get older while others are looking for adventure. Still others want to be near world-class medical facilities in case their health takes a downward turn.
Whatever your priorities, check out these articles for some food-for-thought and inspiration about where to spend your golden years: