In your early 60s, during your mid-year review with your financial adviser, you should discuss your Social Security strategy. While you can apply for benefits early at age 62, your benefits will be reduced by 25 percent. The early benefit reduction decreases as you get closer to your full retirement age. For every year after full retirement age you delay collecting Social Security, your benefits increase by 8 percent. If you are able to delay receiving benefits until age 70, you could increase your monthly benefit by 32 percent.
One of the most overlooked strategies is optimizing the spousal benefit, which allows you the option to claim a benefit based on your spouse’s earnings. You may be eligible to receive up to 50 percent of your spouse’s benefit, which may be enough to allow you to go from working full time to part time. This in turn may make working beyond full retirement age less daunting — and remember, every year you delay Social Security you get an increase in your benefit amount. Working longer may pay off in the long run.
You will also want to file for Medicare at age 65; however, you may want to wait to enroll in Medicare Part B if you have not retired and are still covered by a group plan at work. Your financial adviser should be able to help you review your benefits.
In your 60s, when you transition from working to retirement, you should also frequently review your withdrawal strategy with your adviser. Some advisers suggest that you can spend an inflation-adjusted 4 percent of your retirement assets each year, but do not confuse this with how you would pull your money out. If you have $1 million in retirement assets, using the 4 percent spending guideline would mean you can spend $40,000 a year. Let’s assume you planned for 10 years of liquidity, meaning $400,000 is in fixed income investments, with the remaining $600,000 remaining in growth investments.
Assuming relatively conservative numbers, let’s say you could earn 2 percent in interest a year on your fixed investments and about 8 percent on your growth — 5 percent coming from capital gains and 3 percent from dividends. With these rates, you would be earning $18,000 a year in dividends and $8,000 on your fixed income investments. That is $26,000 before taxes. Now, assuming a 33 percent tax rate, you are earning just under $17,500 a year. If your spending goal is $40,000 in your first year of retirement, then your portfolio is earning you 43 percent of the amount you need. Of course this does not include your Social Security benefits or a pension.
By earning about $17,500 on your portfolio, you should only have to draw the difference of $22,500 from your fixed income investments — 2.5 percent of your total portfolio. By continually work with your financial adviser through retirement, you will know if you have to adjust your withdrawal rate to account for market performance and can avoid spending too much too quickly.
Even in retirement, your portfolio and financial plan needs monitoring, and a mid-year financial checkup can help keep you on track.
William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.