Retirement and preparing for it happens in phases. They evolve with life as circumstances change. Pre-retirees and retirees should be aware of the opportunities and obligations that arise during each stage. Breaking down this complex topic into four categories and highlighting the key points, can make it easier to digest and less overwhelming. They appear below in order of occurrence.
Phase 1: Pre-retirement (Approximately Ages 50-62)
Investors should take stock of what they have saved between the ages of 50 and 62 during pre-retirement. This is a time to review the full financial picture, identify areas of opportunity, and conduct a risk assessment. It may be prudent to shift toward a more conservative portfolio to protect accumulated wealth. Because retirement is on the horizon, it’s easier to predict what expenses might look like at that time and estimate monthly income needs. Understanding income sources will also help investors determine when they should begin collecting their Social Security benefits.
Pre-retirement is the prime time for making catch-up contributions, which have tax benefits and allow savers to reduce gaps in their retirement savings. According to the Internal Revenue Service (IRS), participants in 401(k), 403(b), and most 457 plans can contribute $7,500 beyond the $23,000 standard for a total of $30,500 in 2024. For individual retirement accounts (IRA) in 2024, the catch-up contribution is $1,000 more than the standard contribution of $7,000 for a total of $8,000. [1]
A few other milestones occur during the 10-12 years of pre-retirement. Eligibility for an AARP membership and its discounts, programs, and services begins at age 50. For those who retire early or leave their job during or after the year they turn 55, the IRS rule of 55 permits penalty-free withdrawals from 401(k) and 403 (b) accounts. At age 59 1/2, all investors can withdraw money from their retirement savings without incurring the 10% penalty. They can also roll old 401(k) funds into a traditional or Roth IRA.
Age 62 is the earliest an individual can begin collecting Social Security benefits however, the payouts are reduced for life compared to those that wait until full retirement age, between 65 and 67. These individuals should also prioritize healthcare coverage during the gap years between 62 and 65 when Medicare eligibility begins.
Phase 2: Early Retirement (Approximately Ages 62-70)
Once in retirement, individuals field test their planning and assess which parts work and which need adjustment. They shift from earning wages from a job to a fixed income. They receive distributions from accounts and may earn passive income on investments. Retirees tend to spend the most during this period, kicking off their post-career journey with a burst of activity, and forming the first peak in David Blanchett’s ‘Retirement Spending Smile’. Retirees become eligible for Medicare three months before their 65th birthday. Enrolling as soon as possible will avoid the 10% premium increase for each 12 months of eligibility without enrollment. All retirees will begin collecting Social Security during this time, whether they retire early or wait until full retirement age.
Phase 3: Middle Retirement (Approximately Ages 70-80)
By middle retirement, discretionary spending wanes, and priorities shift. Retirees will have reached their maximum benefit age for Social Security.[2] Required Minimum Distributions (RMDs) which force retirees to make withdrawals go into effect for many accounts. Healthcare moves to the forefront, as the medical needs of someone in middle retirement usually differ from those in the early and pre-retirement phases. Out-of-pocket medical expenses and other medical costs increase in this period, so having adequate medical care and the money to cover it is critical, as it can cancel the savings from reduced spending in other areas.
Phase 4: Late Retirement (Ages 80+)
Long-term care strategies can become necessary during the final phase of retirement, whether for assisted living or end-of-life care. While many individuals have already created a will and done some estate planning by this point, this is a time to review and finalize the plan for settling affairs and asset distribution.
Each phase of retirement budget strategy planning and maintenance requires different skills and strategies. SHP Financial can help no matter what stage you are in. Click here to reach one of our advisors today for a complimentary review of your finances and to plan for the future.
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