The Quickstart Guide To Retirement Planning

 THERE IS NONE.

But a well-thought-out plan along with some discipline will increase your chances for success. 

Many people put off planning for retirement until it’s way too late. Busy with the demands of everyday life, putting together and managing a plan for retirement often takes a backseat. In this guide, we summarize the key components of how to begin preparing for retirement. After reading the guide, we hope you will feel much more confident in the retirement planning process and know what steps to take to move forward.

This guide will cover:

Take some time to begin thinking about your ideal retirement (preferably with your spouse if you’re married) and write down the answers to the following questions:

• When do you want to retire? In 10 years? 20 years?
• Where do you want to live?
• How long will your retirement last? We know, it's a strange question to try and answer how long you'll live, but it's important to know how long your money needs to last.
• What do you want to do during your retirement? Start a second business, travel, get involved in philanthropy or working with non-profit organizations?
• Do you want to leave a legacy behind? Giving to others is wonderful but requires special planning

These questions are not always easy to answer, but they lay the groundwork for your retirement plan. Once you know your goals, you can begin estimating expenses, identifying sources of income, and constructing a savings plan

Outlined here is some general information regarding Social Security Income, but it may not apply specifically to your situation. As with any large government program, there are many exceptions and special rules that may apply to your situation. You can find more detailed information as well as download a copy of your Social Security statement at www.socialsecurity.gov. If you want to set up an appointment and speak to someone in person, you can find your local office using the SSA office locator:

1. What is Social Security?
2. Who is eligible for Social Security retirement income benefits? 
3. How is the Social Security benefit calculated? 
4. How much can you receive from Social Security in retirement? 
5. Receiving Social Security before FRA and still earning income
6. Taxes
7. Windfall Elimination Provision 
8. Government pension offset
9. Strategies to consider for maximizing your Social Security Benefit

2. Who is eligible for Social Security Retirement income benefits? 

All workers paying into Social Security earn "credits" toward eligibility. For 2020, a worker earns one credit for every $1410 of earnings but can only earn a maximum of four credits in a single year. After earning 40 credits, which is effectively ten years of work, you are eligible to receive retirement benefits

If you have not earned 40 credits, you may still be eligible for spousal benefits if your current or former spouse earned 40 credits. The benefit could be as much as 50% of your spouse's FRA amount. Even if you did earn 40 credits, sometimes the 50% of the higher earning spouse's benefit is more than yours. Receiving a spousal benefit will not affect the higher earner's benefit. If you are a widow or widower at FRA the benefit is 100% of the deceased worker's FRA benefit.

If you were married to a worker for at least ten years and are now divorced, you may be eligible for a benefit. There are some rules for eligibility, such as if you are currently unmarried, are age 62 or older, if your ex-spouse is entitled to a retirement benefit, and if your own retirement benefit is less than the benefit you would receive based on your ex-spouse's working income. Also, the benefit you receive will not affect your ex-spouse's benefit and they will not be notified you are even receiving a benefit based off their earnings. Note that you will need to know your ex-spouse's Social Security number.

If you are unsure if you are eligible for a benefit or even if you don't have all the information you may need, still make an appointment with a SSA representative. In our experience, they have been very helpful to our clients and helped them to figure out if they were eligible or not.

4. How much can you receive from Social Security in retirement? 

Obviously, a big portion of your Social Security benefit will depend on the size of your income in your working years. But another very large factor is when you decide to receive your Social Security benefit. Even though your FRA may be 66 or 67 you are eligible to start receiving the benefit at age 62. The catch is that your benefit will be reduced if it is taken prior to your FRA. If your FRA is 66 and you elect to take your benefit at age 62, the benefit is reduced 25%. If your FRA is 67 and you elect to take the benefit at age 62 it is reduced even more at 30%. Conversely, you have the option to delay your benefit and allow it to increase. For every year you elect to delay your benefit up to age 70, it will increase 8%. I used annual increases and decreases as an example, but there are formulas for calculating the differences by month. You do not have to be concerned with electing to take benefits on an annual schedule but can take it on any month once you become eligible. For an example of what you may receive for a monthly benefit, for 2020, the maximum benefit for someone filing at age 62 is $2265. The max benefit for someone filing at Full Retirement Age (FRA is currently 66) is $3011, and the max benefit for someone filing at age 70 is $3790. And according to the Social Security Administration, the average monthly benefit paid in January 2020 was $1503. If you download a statement from the Social Security Administration website, it will list a current estimate of your benefit for age 62, FRA, and at age 70. While you are at it, check your statement to make sure it is accurate and lists your earnings correctly

Your benefit is also subject to cost of living adjustments where the benefit is increased to reflect the increase in the cost of living. This is a big deal, especially as people continue to live longer and receive the benefit for many years. Just a 2% increase adjustment every year equates to almost a 50% total increase in the monthly payment after 20 years. This is one of the reasons the Social Security retirement benefit can be so valuable.

7. Windfall elimination provision

The Windfall Elimination Provision (WEP) might impact your Social Security payments if you receive a pension from a job in which you didn’t pay into Social Security while working there. These situations most often arise with state or local public sector jobs, including teachers in some cases.

If you are subject to WEP, this provision can reduce but not fully eliminate your Social Security benefit. WEP could reduce your Social Security benefit by up to half of the amount of your pension benefit from the applicable public sector job. According to the Congressional Research Service, the WEP provision applied to about 3.0% of all Social Security beneficiaries as of December, 2019.

Your earnings under the employment covered by the pension subject to the WEP provision will be factored into your overall PIA calculation to come up with a reduced PIA.

A couple of items to note here:

• The impact that WEP can potentially have on your Social Security benefit is proportional. If you had both covered work under Social Security and non-covered work, the greater the proportion of covered work, the lesser the impact of WEP on your benefit. 
• WEP only impacts Social Security retirement benefits and does not impact beneficiaries receiving spousal benefits or survivor’s benefits who also may be receiving a non-covered governmental pension.

9. Strategies to consider for maximizing your Social Security benefit

As you near retirement, there are a number of strategies to consider and steps to take to help ensure that you maximize your benefit

Make sure you have at least 35 years of income

Your Social Security benefit will be based upon your 35 highest-earning years. If you haven’t worked for 35 years upon claiming your benefit, the years not worked between the number you did work and 35 will be counted as zero earning years. This will reduce your benefit.

If you are considering collecting benefits but find yourself short of the full 35 years of earnings history, consider working a few years either to reach the full 35 years, or to at least reduce the gap a bit.

Not only for the 35-year issue, but in general, it is a good idea to review your earnings history to ensure that all years of work are recorded and that the amount of earnings looks correct. You can do this by obtaining a copy of your statement online or checking the statement you receive in the mail each year if you are age 60 or over.

Work a few years longer

As discussed in the prior section, working a few years longer can help you get to 35 years of covered earnings to be used in calculating your benefit. Even if you have achieved a full 35 years of covered earnings, working for additional years can help replace lower-income years that might be part of your earnings record. For many nearing the end of their working careers, these last years of work may be among your highest earning years.

Beyond considerations for your Social Security benefit, working a few years longer can have a positive impact on your overall financial picture in retirement. Working longer can offer the dual benefits of not tapping into your retirement nest egg for a few additional years as well as offer the chance to contribute to a retirement plan for those extra years as well. This combination can have a significant impact on your retirement finances.

Social Security Benefit Calculator

For those who want to estimate their benefits, check out the retirement estimator offered by the Social Security Administration. The calculator is straightforward and can be a helpful tool.

When should you apply for Social Security Income? 

Applying for your Social Security retirement income benefit is a big decision. Should you take a lower payout now and receive extra payments, or should you delay the benefit to get a higher amount? It really is going to depend on your personal situation. Things to consider:

• Download your statement and know your Primary Insurance Amount and Full Retirement Age
• How is your health and how long do you feel you'll live? Tough question, but maybe you can venture a better guess by how long your immediate family members have lived and if you have similar health or lifestyle?
• What other income or assets do you have to support your retirement?
• Does your spouse have income or assets and when will they take Social Security?
• Will your Social Security benefit be reduced by WEP or GPO?

Social Security is a key tool as you plan for your financial future in retirement. It's important to understand how it fits into your overall retirement planning in order to manage it to your greatest benefit.

For most retirees, the cost of healthcare is a major expense. This expense is often overlooked, but it is significant and tends to increase faster than the general rate of inflation. In their latest study, Fidelity Investments pegs the cost of healthcare in retirement at $285,000 for a hypothetical couple, both age 65.

This is up from $280,000 in the 2018 study and $245,000 in their 2015 study. There are a number of issues for retirees surrounding healthcare costs to consider in their planning: 

1. Retiring early
2. Medicare
3. Medicare eligibility
4. Initial enrollment in medicare
5. What if I'm still working past age 65? 
6. Medicare parts — coverage and costs
7. Annual open enrollment
8. Healthcare considerations for retirement

2. Medicare

Medicare is the primary health insurance vehicle for most retirees. It offers coverage in a variety of areas, but retirees need to be aware of the rules and features.

3. Medicare eligibility

For most people, eligibility for Medicare occurs at age 65. If you are disabled or suffer from certain medical conditions such as End-Stage Renal Disease, you may be eligible prior to age 65.

4. Initial enrollment in Medicare

When you first become eligible for Medicare at age 65, you have a seven-month window to enroll. This includes the three months prior to and after the month in which you turn 65, as well as the month of your birthday.

If you are receiving Social Security benefits at age 65 you will automatically be enrolled for Medicare Parts A & B. If you are not receiving Social Security at that time you will need to take steps to enroll for coverage.

If you don’t enroll in Medicare when initially eligible, you could be hit with a late enrollment penalty for Part B that will last for as long as you are enrolled in Part B.

An exception to the need to enroll is if you are covered under an employer’s health insurance plan at age 65. This includes coverage under a spouse’s employer’s plan as well. The size of the employer and other factors will determine whether or not this coverage allows you to defer enrollment in Medicare. Note that COBRA coverage is not considered eligible coverage in deferring Medicare enrollment.

Beyond the initial enrollment, there is an annual open enrollment period for existing Medicare users discussed below.

6. Medicare Parts — coverage and costs

Medicare Part A is generally known as hospital insurance. Examples of they types of care covered by Part A insurance are:

• Hospital care
• Skilled nursing facility care
• Hospice care
• Home health care
• Lab tests
• Surgical procedures

Part A is generally free if you or your spouse paid into Medicare while working for a minimum period of time. There are other circumstances where Part A coverage is free, including: 

• If you are receiving retirement benefits from Social Security or the Railroad Retirement Board.
• You are eligible for these benefits but have not filed for them yet at age 65.
• You or your spouse worked at a government job that included Medicare-covered employment.
• If you are under 65, you can get free Medicare coverage if:
• You received either Social Security or Railroad Retirement Board disability coverage for at least 24 months.
• You have End-Stage Renal Disease and meet certain other requirements.

If you do end up needing to pay for Part A coverage, the costs for 2020 are: 

• $458 per month if you paid into Medicare for less than 30 quarters while working.
• $252 per quarter if you paid into Medicare for 30-39 quarters while working.

There is a deductible for Medicare Part A of $1408 for the first 60 days of hospitalization.

Medicare Part B covers medically necessary services, such as services and supplies that are needed to diagnose or treat a medical condition. Part B also covers preventative medical services as well. Examples of services covered by Part B include:

• Doctors visits
• Ambulance services
• Durable medical equipment
• Inpatient and outpatient mental health services

Part B carries a monthly premium that will be deducted from benefits received from Social Security, the Railroad Retirement Board and the Office of Personnel Management. If you don’t receive benefits from one of these sources, you will be billed for the cost of Part B coverage.

Part B has a $198 deductible on covered services for 2020. Some services require a 20% co-pay as well. 

Medicare Parts A & B are known as Original Medicare.

Medicare Part D is the prescription drug component of Medicare. This coverage is optional, but if you don’t take this coverage when you are first eligible, you will be forced to pay a permanent late enrollment penalty each year. The exception to this is if you have credible coverage (as defined by Medicare) from another source such as an employer plan.

Part D is offered through private insurance companies and can be purchased separately or through a Medicare Advantage plan. Costs will vary, as will the providers and prescription drugs that are covered.

Medicare Advantage or Part C plans are offered by private insurance companies that contract with Medicare to provide all of the benefits under Parts A & B. Most Advantage plans also offer prescription drug coverage, as well as coverage for other services that might not be covered by basic Medicare.

When looking at a Medicare Advantage plan or any type of Medicare health plan, look at what is covered and what isn’t. This is especially critical with the prescription drug portion of the plan.

Other types of Medicare plans include Medigap plans which cover costs not paid by Original Medicare such as copayments, coinsurance and deductibles. Additionally, these plans may cover items not covered under Original Medicare such as medical care received outside of the U.S. when traveling abroad. These policies are offered by private insurance companies.

7. What isn't covered by Medicare

The coverages offered by Medicare is fairly comprehensive, but there are some things that are not covered by original Medicare, including:

• Long-term care
• Most types of dental care
• Eye exams related to prescription glasses and contacts
• Glasses and contacts
• Hearing aids and related fitting exams  Acupuncture
• Cosmetic surgery
• Routine foot care
• Most healthcare delivered while traveling outside the U.S.

If you want to be covered for these and other non-covered services, you will need to enroll in an Advantage plan or some other supplemental plan that offers this coverage.

9. Healthcare considerations for retirement

If you are thinking there is a lot to consider with Medicare and healthcare costs in retirement, you are right. In summary, here are some major points to consider as you move into retirement:

• For those looking towards retirement, it's important to factor the increasing costs of healthcare in retirement into your planning. If you have access to one, consider funding a health savings account (HSA) and saving those dollars to help offset Medicare premiums and other healthcare costs in retirement with tax-free dollars.
• Once you begin taking advantage of Medicare, be cognizant of the income thresholds for premium costs and take steps to manage your income within those thresholds if possible.
• It's important to review your health situation each year prior to the annual open enrollment period to ensure that you are in a position to make changes to your Medicare coverage if needed to meet your current needs.

Planning for and managing your healthcare costs in retirement is a key factor in achieving a financially successful retirement. Do your homework and educate yourself regarding all your options and their impact on your plan.

A good advisor will seek to understand your unique goals and temperament before making any recommendations. While there are plenty of criteria to evaluate when choosing an advisor, here’s what to prioritize:

1. Fiduciary Responsibility: Did you know not all advisors are required to act in your best interests? Only advisors regulated under a fiduciary standard are required to put your interests ahead of their own. A lot of investors are surprised when they first hear this, but it’s simply how the advisory industry is structured. So, find a fiduciary advisor that puts your interests first. A good place to start your search for a fee-only financial advisor is the National Association of Personal Financial Advisors.
2. Clear Communication: The best advisors don’t confuse clients with industry jargon. They listen carefully, speak candidly, and explain complex concepts simply. They also won't limit their communication to once a year but will be accessible and responsive in answering any questions that arise along the way.
3. Personal Connection: Finally, choose an advisor who listens and understands what's important to you. At the very least, they should understand your values, if not share them outright. Put simply, you should feel comfortable calling up your advisor and asking them for advice on a wide range of topics. You want this to be a lifelong relationship, so choose wisely.

We're Robinson Smith Wealth Advisors – a financial planning and investment management firm dedicated to helping improve the lives of our clients by providing financial planning and investment management services. Our philosophy is simple: Wealth should be a source of enjoyment, not a source of contention. We aim to take the stress out of financial planning so our clients can enjoy life both now and in the future. RSWA traces its roots back to 1995 when David Robinson founded Robinson Financial Associates. In 2013, David Smith and David Robinson joined forces to create Robinson Smith Wealth Advisors, LLC with offices in Portland and Portsmouth. With over 40 years' worth of experience in the financial services sector, the two set out to create a firm that they would be delighted to be served by as clients. clients. In 2019, Tracey Daigle joined the “Daves” as the firm’s newest partner. You can learn more at www.robinsonsmithwealth.com.