Retirement is a major life transition. If you’re reaching retirement age within the next few years, it’s time to start making some important financial decisions.
Here are several of the most critical issues you should be addressing in the coming months:
Reduce risk
Now is the time to begin reducing your stock market exposure. While stocks have been a great long-term investment, they are notoriously volatile. There have been many times in history where stocks have plummeted by 30, 40 or even 50% before recovering. Retirees can’t afford to wait years for the market to recover. If you are relying on your portfolio for current income, it makes sense to protect it from large shocks. Consider moving investments to safer harbors.
Lock in guaranteed income
These days, Americans are living longer. Retirement portfolios have to last longer, too, and Social Security by itself isn’t enough for most. Take steps to ensure a guaranteed lifetime income that will still keep coming even if you live much longer than you may expect. If you don’t have a workplace pension, this step is even more important.
Roll over your 401(k)
Consider rolling over your 401(k) into an IRA or Roth IRA. In most circumstances, IRAs offer more investment options. There are also tax benefits to heirs who inherit an IRA rather than a 401(k). Choosing a Roth also allows you to avoid required minimum distributions (RMDs) on that money, and allows for tax-free growth of assets held within the Roth for five years or more. Consolidating several different 401(k) balances into a single IRA can also save fees and simplify your planning process.
Decide when to start taking Social Security benefits
Most Americans can begin taking reduced Social Security at age 62. You can increase your monthly benefit by waiting longer to take your benefit. Those born in 1943 or later are eligible for full Social Security benefits at age 66 or 67, depending on your birth year. Again, you may be able to increase your monthly benefit for every year you defer taking the full amount.
Plan your RMDs
If you have tax-deferred retirement plans, such as 401(k)s, SEPs, traditional IRAs or SIMPLE IRA balances, you must ensure you take your RMDs. You must begin taking RMDs by April 1 of the year after the year in which you turn age 70½. Subsequent RMDs must be taken by December 31. Failure to take RMDs may result in serious tax penalties.
Don’t miss Medicare open enrollment
Your optimal enrollment window is within three months before and after the month in which you have your 65th birthday. If you delay, you may have to pay higher premiums in the future when you do enroll.
Note: Even if you are putting off taking Social Security benefits, you should still enroll in Medicare Part A and B, and often Part D, during your initial open enrollment period in order to avoid penalties.
Consider Medicare Advantage or Medigap
Medicare isn’t a free ride: There are still substantial copays and deductibles that can cause big shocks to your budget if you have a medical event, even with Medicare Part A and Part B. Owning a Medicare Advantage plan or Medicare supplement (Medigap) plan can help absorb unexpected medical costs. If you are retiring soon, now’s a great time to meet with your financial professional. The decisions you make now may be some of the most critical financial decisions you’ll make in your lifetime.
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