Retirement Planning FAQ
Planning for retirement is important. But there are crucial details to consider along the way, including investments, health care costs, savings and Social Security benefits. Getting answers to these common questions can help prepare you for a smooth transition when you leave the workforce.
Saving for Retirement FAQs
The answer is different for everyone. You’ll need to consider the age you plan to retire, your post-retirement yearly expenses and your life expectancy.
A general rule of thumb is saving between 70 and 80 percent of your annual pre-retirement income for each year you plan to spend in retirement.
A survey by Merrill Lynch found that the best savers accumulated nearly five times their annual salary by age 50 to 59. But other experts recommend saving 10 to 15 times your current annual salary in order to live comfortably in retirement.
Online retirement planning calculators can help you decide how much money you need to save in order to reach your goals.
Many Americans consider 65 the average retirement age. This is when you become eligible for Medicare. It was also once the full retirement age for Social Security, though that benchmark is now between the ages of 66 and 67 for most people.
A 2019 study by the Society of Actuaries found a difference between when people plan to retire and when they actually do.
According to the study, pre-retirees plan to leave the workforce at a median age of 65, while actual retirees reported leaving at a median age of 60.
The best answer is as soon as possible.
Most financial experts agree that it’s ideal to start investing in your 20s. This gives your money more time to grow and enjoy the effect of compounding interest.
The longer you wait to start saving for retirement, the more money you’ll need to contribute when you’re older in order to catch up.
A 401(k) plan is a tax-advantaged retirement account offered by many employers.
This plan allows you to select certain investments — such as stocks, bonds or mutual funds — within the account. Money grows tax free until you make withdrawals during retirement.
Some employers even match your 401(k) plan contributions up to a certain percentage.
The maximum amount you can contribute to a 401(k) plan in 2020 is $19,500 a year. If you withdraw funds before age 59 and a half, you will face a 10 percent tax penalty from the IRS.
If your employer doesn’t offer a 401(k) plan, you can open a traditional or Roth Individual Retirement Account (IRA) on your own.
The main difference between the two options is when taxes are due.
Traditional IRAs require you to pay taxes when you make withdrawals during retirement, while Roth IRAs are funded with after-tax money so withdrawals are tax-free in retirement.
Another difference is when you’re required to withdraw money. The IRS makes you take required minimum distributions from a Traditional IRA by age 70 and a half. The same rule doesn’t apply to Roth IRAs, so money can remain in your account for as long as you want.
The maximum amount you can contribute to an IRA in 2020 is $6,000, or about $11,500 less than a 401(k) plan.
An annuity is a contract between you and an insurance company. The insurer guarantees to pay you a fixed stream of income, and you fund the annuity with a lump sum of money or a series of premiums.
Annuities are highly customizable. The payouts can last for a specific number of years or the rest of your life. These financial products are often used to guarantee income in retirement, similar to a pension.
Social Security FAQs
Your monthly Social Security benefit is based on several factors, including how much money you paid in taxes during your career. A higher salary equals a bigger benefit.
Another important factor is how old you are when you begin receiving benefits. Age 62 is the soonest you can claim Social Security but doing so will reduce your benefits by as much as 30 percent compared to if you wait until your full retirement age.
Most people reach full retirement age between 66 and 67, and if you wait until age 70, you’ll receive delayed retirement credits — and more money.
According to AARP, the average Social Security retirement benefit in 2020 is $1,503 a month.
Yes, but there may be limits and restrictions.
If you start collecting benefits before your full retirement age (66 to 67 for most people), the yearly earnings limit is $18,240 in 2020. Social Security will deduct $1 from your benefit payments for every $2 you earn above this yearly limit.
But after you reach full retirement age, Social Security will not reduce your benefits no matter how much you earn.
For more information, visit the Social Security website.
Health Care in Retirement
How much you need to save for health care costs depends on where you retire, your age, your health and your life expectancy.
According to the Fidelity Retiree Health Care Cost Estimate Survey, the average retired couple turning 65 in 2020 will need about $295,000 after tax to cover health care costs in retirement.
However, some estimates are even higher. For example, according to HealthView Services — a provider of health care cost projection software — a couple turning 65 in 2019 would need about $387,644 to cover health care for the rest of their lives.
Contrary to popular belief, Medicare doesn’t cover all your health care costs.
Dental, vision and hearing are not covered under Original Medicare. Some Medicare Advantage plans offer this coverage, but it may be limited or cost more.
For this reason, many retirees purchase supplemental health insurance — known as Medigap — to cover some deductibles and coinsurance.
People with low incomes may qualify for special programs that help pay Medicare-related costs.
If you already receive Social Security benefits when you turn 65, you’re automatically enrolled in Medicare Part A and Part B.
Otherwise, There Are Three Ways to Sign Up for Medicare:
- Online at the Social Security Administration website.
- By calling 1-800-772-1213 (TTY 1-800-325-0778) from 7 a.m. to 7 p.m., Monday through Friday.
- By visiting your local Social Security office. You must make an appointment first.
Medicare doesn’t cover extended stays at nursing homes. Custodial care — which includes assistance with daily activities such as bathing, dressing, eating or using the bathroom — is not covered.
However, Original Medicare may cover some limited home health care costs.
Most people must pay for long-term care on their own. You can purchase long-term care insurance before retirement, explore reverse mortgage options or build up substantial savings to cover these costs.
11 Cited Research Articles
- Fidelity. (2020, August 3). How to plan for rising health care costs. Retrieved from https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs
- Social Security Administration. (2020, June 17). What happens if I work and get Social Security retirement benefits? Retrieved from https://faq.ssa.gov/en-US/Topic/article/KA-01921
- Society of Actuaries. (2020, May). 2019 Risk and Process of Retirement Survey. Retrieved from https://www.soa.org/globalassets/assets/files/resources/research-report/2020/2019-risks-process-retirement-survey.pdf
- Merrill Edge. (2020). How much do you really need to save for retirement? Retrieved from https://www.merrilledge.com/article/how-much-do-you-really-need-to-save-for-retirement
- Social Security Administration. (2019, September 30). When can I get Social Security retirement benefits? Retrieved from https://faq.ssa.gov/en-US/Topic/article/KA-01879
- Mercado, D. (2019, July 18). Retiring this year? How much you’ll need for health-care costs. Retrieved from https://www.cnbc.com/2019/07/18/retiring-this-year-how-much-youll-need-for-health-care-costs.html
- AARP. (n.d.). How much Social Security will I get? Retrieved from https://www.aarp.org/retirement/social-security/questions-answers/how-much-social-security-will-i-get/
- CNN Money. (n.d.). When should I start saving for retirement? Retrieved from https://money.cnn.com/retirement/guide/basics_basics.moneymag/index.htm
- Medicare.gov. (n.d.). Get help paying costs. Retrieved from https://www.medicare.gov/your-medicare-costs/get-help-paying-costs
- Social Security Administration. (n.d.). Important Things to Consider When Planning for Retirement. Retrieved from https://www.ssa.gov/benefits/retirement/planner/otherthings.html
- U.S. Department of Labor: Employee Benefits Security Administration. (n.d.). FAQs about Retirement Plans and ERISA. Retrieved from https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/faqs/retirement-plans-and-erisa-for-workers.pdf