Table of Contents

Introduction

Retirement in the United States

Retirement is a cultural phenomenon in most industrialized countries that occurs when a person:

  • Chooses to leave the workforce
  • Qualifies for or starts receiving benefits provided by the government and/or past employers

Americans who retire today hope to have enough assets built up to afford retirement living without re-entering the workforce. These assets include:

  • Retirement savings and IRAs
  • Pensions
  •  401(k) and other corporate retirement plans
  • Social Security payments

Retirement as we know it is a fairly new concept, and one that grew out of necessity as people began to live longer. Today, the average life expectancy is about 78 years; in 1900, it was just 49.

The idea of pensions, a regular payment made to a retiree out of a fund the retiree and/or employer contributed to during his or her working life, has been around since the 13th century BC, when Roman soldiers were paid a pension for their service. Modern pension plans have only existed since 1875 in the United States, when the American Express Company began offering workers an employer-provided pension plan. Social Security is less than a century old, having been enacted in 1935.

Both corporate pensions and Social Security, whose benefits start at age 65, were created with the expectation that workers would live a decade or so in retirement.

Retirement Today

While an exact number of retirees in the United States is difficult to determine, there are some 42 million people age 65 or older currently receiving Social Security benefits, a good indication of the number of retirement-age people in the U.S.

However, not all of these retirement-age people are able to retire. 7.2 million Americans age 65 and older are working – double the number from 15 years ago. Why are so many more Americans choosing not to retire, or are re-entering the workforce?

It is essential that Americans plan for their retirement and understand what they will need to retire, and the resources available to help plan for and fund retirement. In this Guide to Retirement we will cover:

  • How to plan for retirement
  • Understanding how much you will need, and when to retire
  • An overview of the different retirement options available
  • How to live in retirement
  • Estate planning

Retirement Planning

When to Start Saving

The old saying that “it’s never too early to start saving for retirement” is completely true. The sooner you can start saving for retirement, the better, and if starting early enough, it only takes a small percentage out of every paycheck to make retirement possible.

Ideally, the average worker would start saving for retirement as soon as they started earning paychecks because of compound interest. Savings funds that earn interest continue to grow more and more over time, even if you stop contributing to the fund.

Take this example from CNN Money.

–       Say a worker starts saving for retirement at age 25

  • The worker contributes $3,000 a year for 10 years to a retirement fund
  • After 10 years, the workers stop contributing
    • So the worker has contributed $30,000 to the fund
  • If the fund grows by 8% annually
    • By the time the worker has turned 65, there will be $472,000 in the fund

–       Say a worker starts saving for retirement at age 35

  • The worker contributes $3,000 a year until reaching retirement at age 65, so for 30 years
    • The worker will have contributed $90,000 to the fund
  • If the fund grows by 8% annually
    • By the time the worker has turned 65, there will be only $367,000 in the fund

Though the worker has saved $60,000 more for the fund, in the end, the fund is worth over $100,000 less. That 10-year head start pays huge dividends.

Of course, not everyone starts saving for retirement at 25. If you’re playing catch up on retirement saving, read our advice on what to do if you’re starting the process late.

Resources:

How Much to Save

You already know that the earlier you start saving, the better. But how much should you be saving?

In general, it is suggested that workers save 10-15% of net income for retirement.

Additionally, there are several schools of thought concerning the ideal amount of savings for retirement:

  • Salary Milestones: By age 35, you should have saved 1 times your annual salary; by 45, 3 times; by 55, 5 times; and by 65, 8 times your ending annual salary. This rule sets milestones and creates the potential for interest to compound
  •  The 8X Rule: Rather than looking at regular milestones, simply have saved 8 times your ending annual salary
  •  The Multiply by 25 Rule: Estimate your anticipated annual expenses during retirement, subtract expected Social Security and pension benefits, and then multiply by 25
  • The Rule of 300: Estimate your monthly expenses, subtract that total from your anticipated net Social Security payment and any other monthly pensions, and then multiply the remainder by 300

 

Resources:

–       In addition to the above rules of thumb, use a retirement calculator to determine how much you will need for retirement:

What to Do If You’re Starting to Save Late

– Figure out how much you can save now: Track expenses and create a budget to cut out unnecessary expenses and create savings goals

–  Pay down debt: By paying off credit card and other high interest debt, you can eventually use money that would go toward debt payments for retirement savings

– Consider Downsizing to Save: If making expensive mortgage or auto payments, consider downsizing to achieve a lower cost of living and greater retirement savings. Having a less expensive lifestyle will also lower the amount you need to save for retirement

– Contribute to Your 401(k):  If your employer matches 401(k) contributions to a certain amount, that is free money toward your retirement. Be sure to contribute to your 401(k) at the amount needed for the employer match, and contribute the maximum if you can

–  Put Money in an IRA: Even if saving 10 or 20 years before retirement, that money can still compound for a big return. Put money in a tax-deductible or tax-free IRA, and contribute the annual maximum if you can. Additionally, the annual maximum contribution increases when you turn 50, allowing you to catch up

Resources:

When to Retire

Are you ready to retire? Make sure you’ve asked yourself these questions when deciding when to retire:

  •  Have you saved enough?
  • When will your pension or other retirement plans begin paying out?
  • When will you be eligible for Social Security benefits?
    • When will you reach full retirement age?
  • When will you be eligible for Medicare and/or Medicaid?
  • Do you know where you’d like to live when you retire?
  • Have you planned your estate?

Resources:
– See the Department of Labor’s Top 10 Ways to Prepare for Retirement
Read the DOL’s Savings Fitness: A Guide to Your Money and Your Financial Future. The guide includes worksheets and other resources for retirement planning

Investing for Retirement

Investment Strategies

In general, the closer a person is to retirement, the less risky they will want their investment portfolios to be. Conversely, the farther from retirement an investor is, the more risk they should consider, as there is greater chance for growth over time. Determine your own risk tolerance before planning your retirement investment strategy.

–       Age 20-40: An investor may want to consider a risky portfolio that is

  • Heavier on stocks
  • Fewer bonds and other fixed income securities
  • Smaller percentage of cash savings

A risky portfolio

  • Has the potential for greater returns
  • Over the long-term, is better able to withstand market fluctuations as the market corrects after down periods

–      Age 35-55: An investor may want to consider a moderately risky portfolio that is

  • About half stocks and other equities
  • 35-40% bonds and other fixed income securities
  • A small percentage devoted to cash savings

A moderate portfolio

  • Has some chance to grow
  • Is better protected than a risky portfolio to withstand market fluctuations in the short-term

– Age 50-65 and on: An investor may want to consider a conservative portfolio that is

  • Heavily invested in fixed income securities including
    • Bonds
    • Certificates of Deposit
    • Money Market Accounts
    • Annuities
  • A small percentage of stocks and equities
  • A percentage of cash savings about equal to that of stocks and equities

A conservative portfolio

  • Maintains wealth with a small growth rate
  • Is largely unaffected by market fluctuations

One common retirement investing principle is the Rule of 100.

– To determine what percentage of your portfolio should be in equities (such as stocks) and what percentage should be in fixed income securities (bonds), subtract your age from 100.

  • For example, if you’re 30, 70% of your portfolio should be in stocks
  • If you’re 70, only 30% of your portfolio should be in stocks
  • Depending on your risk tolerance, health, and how far you are from retirement, you may want to subtract your age from 110 or 120 for extra growth opportunity

Resources:

IRAs

An Individual Retirement Account (also known as an Individual Retirement Arrangement), or IRA, is a savings account for retirement.

– IRAs can be opened by most anyone, including

  • Self-employed workers
  • Small business owners, including owners of non-employer businesses

– Within an IRA, workers saving for retirement can have

  • Cash savings
  • Investments including
    • Stocks
    • Bonds
    • Mutual funds
  • Other assets

– Some common characteristics of IRAs are that they may have

  • Tax benefits, such as yearly deductions for contributions or tax breaks upon withdrawal
  • Caps on the amount that can contributed annually
  • Certain restrictions based on employment status or income level

The Four Types of IRAs

Traditional:

–       Contributions made to a Traditional IRA may be fully or partially deducted on your taxes, depending on your

  • Employment
  • Income
  • Whether you are enrolled in a 401(k), and whether that 401(k) is employer matched

– Taxes are paid on any earnings and gains in a Traditional IRA upon distribution (when funds are withdrawn for retirement)

– Maximum annual contribution of $5,500 ($6,500 if you’re 50 or older)

– You cannot continue to make contributions to a Traditional IRA after age 70 ½

– You must start withdrawing money from a Traditional IRA at age 70 ½ (these withdrawals are known as required minimum distributions)

Resources: Read all about the rules and workings of a Traditional IRA

Roth:

–       Contributions made to a Roth IRA are not tax deductible

–       However, qualified distributions are tax-free – meaning, if withdrawals meet certain requirements (such as being withdrawn after age 59 ½), there is no tax on any

  • Earnings
  • Gains

–       Maximum annual contribution of $5,500 ($6,500 if you’re 50 or older)

–       You can continue making contributions to a Roth IRA after age 70 ½

–       There is no required minimum distribution requirement

  • Money and assets can remain in a Roth IRA as long as you live

Resources:
–     See the IRS’s comparison chart to understand the difference between Traditional and Roth IRAs
–     Read more about Roth IRAs, including opening a Roth IRA, making contributions, and distributions

SEP (Simplified Employee Pension Plan):

–       A SEP is a Traditional IRA set up by an employer for employees which the employer contributes to

  • A business of any size can establish and contribute to a SEP, including
    • Non-employer businesses
    • Self-employed/freelancers
  • Employees cannot contribute to a SEP IRA

–     Contributions are tax deductible for the contributor (the business)

–       Money put into a SEP is not taxable until it is distributed (withdrawn), just like in a Traditional IRA

–       As of 2014, employers can contribute the lesser of

  • 25% of the employee’s compensation, or
  • $52,000
  • For self-employed individuals making high wages or who wish to contribute more to retirement, this allows for higher annual contributions than to a Traditional or Roth IRA

Resources:

–       Learn about the benefits of establishing SEP Retirement Plans for Small Businesses

–       Read in greater depth about the ins and outs of setting up, contributing to, and withdrawing from a SEP

SIMPLE IRA Plan:

–       A Savings Incentive Match Plan for Employees (SIMPLE) M, or SIMPLE IRA Plan, is an easy retirement plan businesses of any size can set up for employees

–       A SIMPLE IRA Plan is a Traditional IRA that both employers and employees can contribute to

–       The employer is required to make a contribution on the employee’s behalf, regardless of whether the employee contributes to the account. The employer must contribute either

  • A matching contribution up to 3% of employee’s compensation, or
  • A contribution equal to 2% of employee’s annual compensation (with annual compensation being $255,000 or less)
  • Employee contributions are capped at $12,000 a year

Resources:

– See some examples of how a SIMPLE IRA Plan can work

– Get the full scoop on SIMPLE IRA Plans

There are some exceptions, called qualified distributions, where you will not be penalized for withdrawing before reaching age 59 ½. Some of these exceptions include:

Taking Money Out of an IRA

You can take money out of an IRA at any time, even if you have not reached the age 59-½ threshold.

You may want to withdraw early from your IRA to pay for

  • A house
  • Starting a new business
  • Child’s college education
  • Medical bills
  • Debt
  • Emergency funds

However, there may be a penalty for withdrawing early from an IRA.

–       If you are 59 ½ or older, there is no penalty for withdrawing early from an IRA.

–       If you are under 59 ½ years of age, you may face a penalty of

  • Any distributions will be included in taxable income
  • There may be a 10% additional tax
    • The additional tax is 25% if withdrawing early from a SIMPLE IRA Plan

There are some exceptions, called qualified distributions, where you will not be penalized for withdrawing before reaching age 59 ½. Some of these exceptions include:

  • Death of the IRA owner
  • Total and permanent disability of the IRA owner
  • Qualified higher education expenses
  • First-time homebuyer costs up to $10,000
  •  Military reservists called to active duty
  •  Unreimbursed medical bills exceeding 10% of your adjusted gross income
  •  Paying for health insurance premiums while employed
  • Unpaid taxes

Resources:

–       Read the IRS’s IRA FAQs to learn more about qualified distributions from different IRA plans

–       Learn more about 9 cases where you can withdraw penalty-free from your IRA

Pensions and Benefit Plans

Pensions

A pension is a retirement plan set up by employers for employees.

  •  Pensions are usually tax-exempt
  •  The employer makes contributions to a pool of funds
  • The funds are invested by a pension manager to increase in value over time
  •  The funds will be distributed to employees when they retire or otherwise qualify to receive pension benefits (payments)
    • Pay outs are usually decided by factors including
      • Length of time with company
      •  Salary
  • Employees can typically choose when they retire to receive payments as either
    • A lump sum (all at once)
    • A monthly annuity (regular payments)

There are two main kinds of pensions:

  • Defined-benefit plan: the employer guarantees that employees will receive a certain amount upon retirement
    • Not dependent on how well the investments in the pension fund perform
  • Defined-contribution plan: the employer guarantees that they will contribute a certain amount to employees’ pension fund
    • Amount employees receive upon retirement is dependent on how well the investments in the pension fund perform

Resources:

–       Read CNN Money’s complete guide to pensions, including information on what happens to your pension if you leave a company before you retire

–       See the National Institute on Retirement Security’s resources regarding pensions

–       Use this pension calculator to view and compare pension benefits for public sector workers in all 50 states

Cash Balance Plans

A cash balance plan is a kind of pension plan set up by employers for employees.

  • Cash balance plans are defined-benefit plans
    • Employees receive a certain amount of compensation upon retirement regardless of how investments in the fund do
  • Employers contribute a set percentage of an employee’s compensation each year to the employee’s account (usually around 5% of annual wages)
  • Employees also receive a set interest rate on the amount contributed
  • Like a pension, employees do not choose investments made in their funds

Resources:
– Get answer to these cash balance plan FAQS
– Learn more about the differences between a regular pension and a cash balance plan

401(k) and Company Plans

401(k)

What It Is:

  • A 401(k) (named for its tax code section) is an employer-sponsored retirement plan
  • Created in the 1980s as a supplement to pensions
  • Employees control how money is invested in their 401(k)

Who Contributes:

–       Employees contribute a percentage of their paycheck before tax to their 401(k)

  • When receiving a paycheck, 401(k) contributions are taken out first; then, taxes are calculated and withheld

–       Some employers may contribute through an employee matching program

  • These employers will match employee contributions up to a certain percentage, usually around 3%

Rules and Limits:

–       Vesting: employees must wait or work for a certain period of time, called the vesting period, before they can tap into their 401(k) savings

–       Contribution limits: Employees may contribute no more than

  • $17,500 or
  • Employee contributions and employer matching may total no more than
    •  100% of total compensation, or
    • $52,000 total
  • Employees over 50 can contribute an extra $5,500 to their accounts annually

–       Distributions: In general, distributions (withdrawals from the account) cannot be made until:

  • The employee turns age 59 ½
  • Death or disability
  • The plan is terminated by the employer (which can include the employer going out of business)
  • Some qualified distributions for hardships

–       There is an early withdrawal penalty of 10% on top of regular income taxes

–       There are minimum required distributions that must take place when the employee turns 70 ½

–       Taxes: Tax are paid upon contributions and earnings upon withdrawal

Roth 401(k)

A Roth 401(k) shares the same characteristics of a traditional 401(k), but with a couple notable exceptions:

  • Contributions: income taxes are paid up front on paychecks, so making contributions does not reduce your taxable income
  •  Taxes: withdrawals are not taxed, including any earnings or gains on investments
  • Distributions: early withdrawals can be made for any reason after holding the account for 5 years, but may be subject to penalty

Resources:

– Learn more about choosing between a traditional 401(k) and a Roth 401(k)

403(b)

What It Is:

–       A 403(b) plan is a retirement plan for certain employees including

  • Public school employees
  • Employees of tax-exempt organizations
  • Ministers

– Also known as a tax-sheltered annuity (TSA) plan

– Similar to 401(k) retirement plans offered by for-profit companies

Who Contributes:

–  Employees make before-tax contributions, similar to a traditional 401(k)

–  Employer can also make contributions (including self-employed ministers)

Rules and Limits:

–  Taxes: earnings and gains in a 403(b) account are not taxed if withdrawn as a qualified distribution, similar to a Roth 401(k)

–  Contribution limits: Employees may contribute the lesser of

  • Employee contribution: $17,500
  • Total contribution (employee and employer): the lesser of
    • $52,000
    • 100% of total compensation

457

What It Is:

– A 457 plan is a retirement plan available for

  • State and local public employees
  • Employees of certain non-profits

–  A 457 plan is a defined-contribution plan

Who Contributes:

– Employees can choose to automatically deduct a portion of their salaries before taxes are taken out for their 457 plans

Rules and Limits:

– Taxes: Money grows tax-deferred until withdrawals are made, and then it’s taxed

– Contribution Limits: The contribution limit for a 457 is the same as a 401(k). However, if an employer offers both 401(k) and 457 retirement plans, employees can invest the maximum in both plans

–   Distributions: employees pay income tax on all distributions (withdrawals made)

  • There is no additional penalty for withdrawing before age 59 ½

Thrift Savings Plan

What It Is:

–  A Thrift Savings Plan (TSP) is a defined-contribution retirement plan for federal government employees, including members of the

  • Army
  • Navy
  • Marine Corps
  • Coast Guard
  • National Guard
  • Public Health Service
  • National Oceanic and Atmospheric Administration (NOAA)

–  TSP’s are similar to 401(k) plans

–  Employees are given the option of investing in 6 different mutual funds investing in stocks and bonds of various kinds

Who Contributes:

–  Employees can choose to contribute portions of their salaries to their TSP

–  Some federal agencies make matching contributions

–  Employers of uniformed personnel can choose to match employee contributions, but currently none have chosen to do so

Rules and Limits:

–       Taxes: Taxes are paid upon withdrawal from the TSP account

–       Contribution Limits: Contribution limits are the same as those for a 401(k) plan

–       Distributions: There may be an early withdrawal penalty for employees who withdraw before reaching age 59 ½

Retirement Plan Resources:

–       Get familiar with what the Department of Labor thinks you should know about your retirement plan

–       Read up on consumer information on retirement plans

–       Learn more from the IRS on all types of retirement plans

–       And get more tax information on retirement plans

Annuities

Annuities are an investment that pays out a steady income in the future. These payments can occur for a few years or for an investor’s lifetime.

Annuities are an investment that can be made within common retirement accounts including IRAs and 401(k) plans.

  • Money invested in an annuity grows tax-free
  • When you make withdrawals or receive payments from an annuity, any gains made on the principle invested are taxed

The different kinds of annuities are lumped into two groups:

Immediate : immediate annuities make payments soon after the investor has made the initial investment

  • Immediate annuities are a popular choice for people nearing retirement

–  Longevity: longevity annuities make payments later in life, usually with a stipulation that the investor reaches a certain age (for example, payments begin when the investor reaches age 80)

  • Also known as deferred annuities
  • A popular option for people who want to protect against outliving their savings
  • If the investor dies before receiving payments, the account goes to the issuer of the annuity and heirs receive no payments

Within those two basic categories, there are three kinds of annuities:

  •  Fixed: guarantee the investor a specific interest rate while the account is growing, and guarantees the amount of future payments
  •  Indexed: indexed annuities track a stock index and pay out to the investor accordingly
  •  Variable: can track a mutual fund or other investment tool, with future payment amounts dependent on the returns of those holdings

Resources:

–   Learn more about annuities, including the benefits and risks of owning annuities, by reading about them in our Guide to Investing

Self-Employment Savings Options

Self-employed workers can still save for retirement using many of the same options as workers with employers. Some options include:

–  SEP: In addition to contributions made as an employee, self-employed workers can contribute

  • Up to 25% of net earnings from self-employment, up to $52,000

–       401(k): A 401(k) for a self-employed worker is often called a one-participant 401(k) or a Solo-401 (k).

  • In addition to the $17,500 employee contribution limit (plus an additional $5,500 if age 50 or older), self-employed workers can contribute
    • Up to 25% of net earnings from self-employment, up to $52,000

– SIMPLE IRA Plan: Self-employed workers can contribute all net earnings from self-employment up to $12,000 in a SIMPLE IRA Plan

–       Roth IRA: Almost anyone can open a Roth IRA, making them a good option for the self-employed as well

  • There are income level restrictions on IRAs, so individuals or jointly-filing married couples who make more than the income threshold are not able to open a Roth IRA

Resources:

–  Learn more about Retirement Plans for Self-Employed People

–   Compare the advantages and disadvantages of the Best Retirement Plans for the Self-Employed

Living in Retirement

Social Security

How It Works

The United States Social Security program was created in 1935 as a federal social insurance and benefits program.

  • Social Security is funded by a payroll tax on workers’ earnings in the United States, with some 158 million Americans paying Social Security tax
  • Social Security tax is 6.2% of earnings for the employee with a 6.2% employer match (so 12.4% total)
  • All Social Security taxes collected go to a Social Security Trust Fund.

The government pays out benefits to qualified individuals including:

  • Retirees
  • Disabled people
  • Families of retired, disabled, or deceased workers (survivor benefits)

About 57 million Americans receive Social Security benefits today, with nearly one in four households receiving Social Security income.

Determining Eligibility and the Retirement Age

Anyone who was born after 1929 and has worked for at least 10 years is eligible for Social Security benefits.

However, you cannot receive benefits until you have reached retirement age, which begins at age 62. Though you can start your benefits at age 62, your benefits will be reduced until you reach full retirement age. At full retirement age, there is no reduction in benefits. Full retirement age is:

Retirement Chart

[Source]

It should be noted that you may choose to delay collecting benefits upon reaching full retirement age (age 65-67, depending on year of birth). Your benefit payments will go up 8% for each additional year after reaching full retirement age that you delay collecting benefits until age 70.

Resources:

– Determine your benefit eligibility using the Benefit Eligibility Screening Tool

– Use the Benefits by Year of Birth chart to see the affects of retiring early

– If you’re age 62 or older, apply online for Social Security benefits

Payouts

The exact amount of Social Security payout depends on two main factors:

  • How much you earned over your lifetime (i.e. how much Social Security tax you paid)
  • How old you are when you start receiving benefits

The maximum benefit for a worker retiring in 2013 at full retirement age is $2,533 a month; the average payout was $1,264 a month.

Resources:

  •  To find your anticipated benefits, use the Social Security Administration’s Retirement Estimator. Your future benefits will be more accurate the closer you are to retirement age
  • Also, use AARP’s Social Security Calculator to see the benefits of waiting to collect and to further personalize your benefit estimate
  • For other benefits, including disability and survivor benefits, use these other benefit calculators

Other Common Questions

Q: How do I know how many years I’ve worked and been credited toward Social Security?

A: Create a My Social Security account to view your earnings record, estimated taxes paid toward Social Security, and estimated benefits.

Q: Can I receive benefits if I’m still working?

A: Yes, but there may be some reductions to your benefits or you may be susceptible to a higher tax on benefits

Q: Would my family still receive benefits if I died?

A: Short answer, yes – to varying extents. Learn more about survivor benefits.

Q: Can I still withdraw from other retirement plans, like a 401(k), and receive Social Security benefits?

A: Yes, and it is highly encouraged to have other retirement resources and savings in place. The average Social Security payout is $1,264 a month – most likely less than you’ll need to cover monthly expenses in retirement.

Resources:

– For answers to more Social Security questions, see Social Security FAQs

– Learn more about the history of Social Security with these FAQs

Working During Retirement

More and more Americans over age 65 are going back to work to cover expenses, receive health care benefits, or just to stay busy.Working during retirement can increase Social Security benefit amounts later because with the added paychecks, you will be contributing more to your Social Security. However, if over age 62, you need to consider any potential cuts to your Social Security benefits before reaching full retirement age and receiving full Social Security benefits at age 66 or 67, depending on year of birth.

–       Once you reach full retirement age, your benefits are not reduced no matter how much you earn

–       Before reaching full retirement age, you may be susceptible to Social Security benefit cuts including

  • Your benefits will be reduced by $1 for every $2 you earn above the $15,120 annual income limit
  • Your benefits will be reduced by $1 for every $2 you earn above the $40,080 higher limit

Resources:

– Read the Social Security Administration’s guide to getting benefits while working

– Learn more about the financial considerations you’ll need to take into account when going back to work in retirement

Medicare and Medicaid

Health care costs are one of the largest expenses retirees have to plan for. It is estimated that as of 2013 a 65-year old couple retiring will need $220,000 to cover medical expenses through retirement. That number is actually down some $20,000 from the year previous.

Thankfully, retirees have some federal insurance programs to help pay for health care costs.

Medicare

All Americans age 65 and over are automatically enrolled in Medicare, the federal health insurance program.

Medicare is run by the Social Security Administration and funded through payroll taxes, similar to Social Security. 1.45% of earnings go to the Federal Insurance Contributions Act (FICA), which pays for Medicare, with an employer match (so 2.9% total).

There are four basic “parts” to Medicare:

  • Medicare A provides hospitalization coverage
  • Medicare B covers doctor visits, physical therapy, and preventative treatment
  • Medicare C is a private plan that retirees must pay for out of pocket. It is a private alternative to parts A and B
  • Medicare D is a private plan for prescription insurance

Resources:

Medicaid

Medicaid is a health insurance program for low-income individuals and families that is jointly run by your state and the federal government. Certain people over age 65 may be eligible for Medicaid if they meet limits for:

  • Income
  • Assets

The main differences between Medicaid and Medicare are:

  • Medicaid serves people of every age
  • Medicaid patients pay little or no cost for their healthcare. People with Medicare may pay deductibles and other costs
  • Medicaid varies from state-to-state. Medicare is a federal program
  • Medicaid will cover long-term costs such as nursing home or in-home care expenses. Medicare does not provide this coverage

Resources:

– Find out if you qualify for Medicaid

– Get answers to these commonly asked questions about Medicaid

Insurance

Health Insurance

Medicare will not cover all your medical expenses. Retirees will have to purchase other insurance to cover medical expenses, including:

  •  Medical care outside of the U.S.
  • Copayments
  • Coinsurance
  • Deductibles

A popular option to help cover these expenses is Medicare supplement insurance, commonly known as Medigap insurance .

  •  Medigap policies are only available to retirees with Medicare Parts A and B
  • A Medigap policy only covers one person
  •  Your insurer cannot cancel your Medigap policy as long as you pay the premium
  • Medigap policies are not allowed to cover prescription drugs (you’ll need Medicare Part D for that)
  • Medigap policies typically don’t cover
    • Vision
    • Long-term care (nursing home or in-home care)
    • Dental
    • Hearing aids

In addition to Medigap insurance, retirees may want to consider insurance for other medical expenses including:

  • Dental care
  • Vision

Resources:

Long-term Care Insurance

Medicare does not cover the cost of assisted living, either at a nursing home or with in-home care, and so many people choose to purchase long-term care insurance plans. The average private nursing home room costs $87,000 a year, so long-term insurance is an insurance many retirees choose to carry so as not to deplete their savings or pass those costs on to loved ones.

Long-term care insurance covers out-of-pocket expenses associated with:

  •  Home care
  • Assisted living
  • Nursing homes

Resources:

Life Insurance

Life insurance is an insurance policy that pays out benefits to your dependents upon your death. Life insurance is more important earlier in life to parents with young families who are still building assets, but may be an important investment for retirees.

Resources:

– There are several different kinds of life insurance. Learn about how each works and how they compare

Do you need life insurance? Ask yourself these questions to help decide

Home Equity

Some retirees use home equity to help support themselves during retirement. Home equity is:

  • The difference between the home’s fair market value and the value of all outstanding debts (like mortgages) on the property

Retirees can use home equity to help fund retirement in two ways:

  •  By selling the home and moving to a less expensive situation (downsizing)
  • Taking out a reverse mortgage

Reverse Mortgages

What It Is:

A reverse mortgage is a home loan that provides the homeowner with regular cash payments based on home equity.

  • You must be 62 or older to qualify for a reverse mortgage
  • You are paid a monthly payment from the lender
  • These monthly payments are usually tax free
  • You typically do not have to pay back this money for as long as you live in your home
  • The loan must be repaid when the homeowner/borrower
    • Dies
    • Moves out of the home
    • Sells the home

The Pros and Cons:

– Pros:

  • Provides a steady stream of cash
  • Can supplement retirement savings and other retirement income

–       Cons:

  • Often has expensive fees, including upfront fees
  • Homeowners still have to pay property taxes, home insurance premiums, and maintenance costs
  • Some states may consider a reverse mortgage an asset, which can disqualify retirees from receiving Medicaid

Resources:

Relocating

Where to Retire

Many people nearing retirement, and retirees, consider relocating for their retirement years. Some reasons include:

–  Living on a fixed income, so need a less expensive place to live

–  Kids and other dependents have moved out

  • Less space needed

–  May not be tied to a job which determines location

–  Desire to live in a different place or climate

Today, many retirees relocate based on their desire for several factors:

–  Urban living:

  • Better public transportation, so can save on car expenses
  • More access to health and social services
  • More opportunities for
    • Certain hobbies
    • The arts
    •  Volunteering
    • Living in or associating with fellow retirees

–  Tax breaks:

  • Some states have no income tax
    • But may have higher sales, property, and other taxes
  • certain taxes, including property tax, for senior citizens

–  Living Abroad:

  • May have lower cost-of-living expenses, including
    • Housing
    • Health care
    • Food
  • Greater opportunities for
    • Travel
    • Experiencing another culture

Resources:

Downsizing

In addition to or instead of relocating, many retirees choose to downsize, or move to a smaller residence. Some retirees move from a house to a condo, apartment, or retirement community.

Downsizing can help save on certain costs, including:

  • Utilities
  • Maintenance
  • Property taxes
  •  Later costs for children/other family benefits to empty a house

Downsizing may incur certain other expenses:

  • Moving costs
  • Closing costs for selling a house
  • Purchasing new furniture, appliances, and other home needs
  • Rent may increase over time

Resources:

–  The timing of downsizing homes is also important. Read the Wall Street Journal’s advice on when retirees should downsize

Estate Planning

Estate planning decides where your assets are distributed when you die. Estate planning can include the distribution of assets such as:

  • Money
  •  Your house
  • Investments
  •  Businesses
  •  Cars
  • Valuables
  • Other possessions

The benefits of estate planning are:

–  You choose where your money and assets go, and how much

  • Wishes made in estate plans are legally binding
  • This can help avoid disputes, confusion, or extra work for your loved ones after your death

–  There is no estate tax paid by heirs unless the value of your estate exceeds $1 million

  • Surviving spouses can receive an unlimited amount of money and/or assets without being taxed

There are three main components to estate planning:

–       Wills: A will is a legal document that dictates

  • Who or what institution receives your assets upon your death
  • How much each person or institution named receives
  • Learn how to write a will
  • Get tips on choosing the executor of your will

–        Trusts: A trust is an account that allows a third party, or trustee, to hold assets on behalf of the beneficiaries (people who receive your money and/or assets)

–       Long-term Care Insurance: As we discussed earlier, long-term care insurance helps cover expenses for nursing homes and assisted living

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