21 Retirement Planning FAQs [2024]
Retirement planning can feel overwhelming. But armed with the right information, you can make informed decisions about your future.
Here are our answers to the most common retirement questions.
1. When should I start planning for retirement?
The sooner, the better! Starting your retirement planning as early as possible gives you more time to take advantage of compound interest. That means earning more interest on the interest you’ve already built up. This snowball effect can significantly boost your retirement funds over the decades. Even if you start with small contributions in your 20s or 30s, those investments can grow substantially by the time you retire, thanks to the power of compounding.
If you're beginning to plan later in life, such as in your 40s or 50s, it's still possible to build a solid retirement fund, but you may need to contribute more aggressively. At this stage, the most important steps are:
Maximizing your contributions to retirement accounts, such as a 401(k) or IRA
Taking advantage of catch-up contributions
Optimizing your investment portfolio for rapid growth
These strategies will help ensure you meet your retirement goals as quickly as possible.
2. What type of retirement plan should I choose?
Retirement plans generally fall into two categories: defined benefit plans and defined contribution plans.
Defined benefit plans, like traditional pensions, guarantee a specific monthly payment in retirement based on factors like salary and years of service. These plans are less common today, especially in the private sector, as they place a financial burden on employers.
Defined contribution plans — such as 401(k)s, 403(b)s, and IRAs — are more prevalent. These plans depend on contributions from you and possibly your employer, with the final amount depending on your investment choices and market performance. The flexibility and potential for growth make defined contribution plans a popular choice, but they require careful management since there’s no guaranteed payout.
3. How much money do I need to retire?
Determining how much money you'll need to retire comfortably depends on several factors, but a common guideline is to aim for 70% to 80% of your pre-retirement income. This percentage assumes that while some expenses will decrease in retirement, others, like healthcare, may increase.
A useful guideline is the 4% rule, which suggests that if you withdraw 4% of your retirement savings annually, your savings should last for about 30 years. For example, if you have $1 million saved, you could withdraw $40,000 in the first year of retirement. However, your actual needs will vary based on your lifestyle, health, and retirement goals
4. When can I start collecting Social Security benefits?
The timing of when you start collecting Social Security significantly impacts your monthly benefit. You can begin as early as age 62, but your benefits will be reduced by about 25%–30% compared to waiting until your full retirement age, which is typically around 66 or 67. If you wait until age 70, your benefits will increase by about 8% for every year after your full retirement age, maximizing your monthly income.
Starting early might be beneficial if you need the income immediately or have health concerns. On the other hand, waiting can be advantageous if you expect to live longer and want to maximize your lifetime benefits.
5. How can I maximize my retirement income?
Relying on a single source of income in retirement can be risky. One effective strategy to protect and grow your wealth is to diversify your income sources. This might include:
Social Security
Pensions
Retirement savings accounts like 401(k)s and IRAs
Additionally, you might consider part-time work or rental income, which can supplement your retirement funds and reduce the pressure on your savings.
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6. What healthcare coverage should I use in retirement?
Healthcare is a significant concern in retirement, and planning ahead is essential. Medicare is the primary option for retirees, becoming available at age 65. It includes:
Part A (hospital insurance)
Part B (medical insurance)
Part C (Medicare Advantage)
Part D (prescription drug coverage)
Each part covers different aspects of healthcare, and choosing the right combination depends on your needs.
Another option for healthcare in retirement is Medigap. Medigap is a supplemental insurance option that covers costs Medicare doesn't, like copayments and deductibles. Additionally, long-term care insurance helps cover services such as nursing home care, which Medicare typically doesn’t cover. Considering these options early can help ensure you’re well-prepared for healthcare costs in retirement.
7. How will my income be taxed in retirement?
In retirement, different sources of income are taxed differently. Understanding these distinctions is crucial for effective financial planning.
Social Security benefits: Your Social Security benefits may be partially taxed depending on your overall income. If your combined income — which includes half of your Social Security benefits plus other income — exceeds $25,000 for individuals or $32,000 for married couples filing jointly, up to 85% of your benefits may be taxable at your regular income tax rate.
Withdrawals from retirement accounts: Withdrawals from traditional IRAs and 401(k)s are taxed as ordinary income. This means that the amount you withdraw will be added to your taxable income for the year, potentially pushing you into a higher tax bracket. Roth IRAs, on the other hand, allow for tax-free withdrawals, provided the account has been open for at least five years and you are over 59½.
Pensions and other income: Income from pensions is typically taxed as ordinary income, similar to withdrawals from traditional retirement accounts. If you have other forms of income, such as rental income or dividends from investments, those will also be subject to taxation according to their respective rules.
PRO TIP: By withdrawing from taxable accounts first, you can delay taxes on tax-deferred accounts and allow them to continue growing. Plan your withdrawals strategically to capture this benefit.
8. Should I keep working after retirement?
Continuing to work after retirement can provide financial and personal benefits, but it can also impact you in negative ways.
Social Security benefits: If you start Social Security before your full retirement age and continue working, your benefits might be reduced. In 2024, for every $2 earned over $21,240, your benefits are reduced by $1. Once you reach retirement age, you can work without any reduction in benefits, and any previous reductions may be recalculated.
Tax implications: Working while drawing retirement income can push you into a higher tax bracket, potentially increasing your tax liability and the amount of Social Security subject to taxes. Planning ahead can help manage these tax implications.
Healthcare: If you’re under 65, working might allow you to keep employer-sponsored health insurance. Over 65, you'll need to coordinate with Medicare, which might affect whether you should enroll in certain parts of Medicare immediately.
9. How should I start planning my estate?
Estate planning ensures your assets are distributed according to your wishes and can help reduce the tax burden on your heirs.
Update beneficiary designations: Make sure your beneficiary designations on retirement accounts, life insurance policies, and other financial assets are up to date. These designations take precedence over your will, so they must reflect your current wishes, especially after major life changes like marriage or divorce.
Create or update your will: Your will is a key document that outlines how your assets will be distributed. Without a will, state laws determine the distribution, which may not align with your intentions. Regularly review and update your will to ensure it matches your current circumstances.
Consider a trust: Trusts can help you control your assets, avoid probate, and potentially reduce taxes. Trusts are particularly useful if you have complex estate planning needs or wish to set specific conditions for inheritance.
PRO TIP: For personalized help with your estate planning, consult a fiduciary financial advisor. Your advisor will take the time to understand your unique needs and tailor a retirement plan just for you.
10. What are required minimum distributions (RMDs)?
Required minimum distributions (RMDs) are mandatory withdrawals from tax-deferred retirement accounts like traditional IRAs and 401(k)s. You must start taking RMDs by April 1 of the year after you turn 73. After that, you’ll need to take them annually by December 31.
RMDs are calculated based on your account balance and a life expectancy factor from IRS tables. Missing an RMD can lead to a significant penalty, which is generally 25% of the amount not withdrawn, though this can be reduced if corrected promptly.
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11. Can I contribute to an IRA if I'm already covered by an employer-sponsored retirement plan?
Yes, you can contribute to an IRA even if you’re covered by an employer-sponsored plan like a 401(k). However, whether you can deduct contributions to a traditional IRA depends on your income. For 2024, the deduction phases out if your modified adjusted gross income (MAGI) is:
$73,000 – $83,000 for single filers
$116,000 – $136,000 for married couples filing jointly.
If you exceed these limits, you can still contribute to a Roth IRA, provided your MAGI is below $153,000 for singles or $228,000 for couples. Roth IRAs allow for tax-free withdrawals in retirement, making them a valuable option even without a tax deduction now.
12. Can I make early withdrawals from my retirement accounts?
Withdrawing from your retirement accounts before age 59½ typically incurs a 10% penalty on top of regular income taxes. This applies to traditional IRAs, 401(k)s, and similar accounts.
There are exceptions to the 10% penalty, including:
Using funds for a first-time home purchase (up to $10,000)
Covering qualified higher education expenses
Paying for unreimbursed medical costs that exceed 7.5% of your adjusted gross income
Roth IRA contributions can be withdrawn at any time without penalty. However, you may have to pay taxes and penalties on any earnings in your Roth IRA.
PRO TIP: Before taking an early withdrawal, explore all other options, such as hardship withdrawals of loans, which may have more favorable tax and penalty conditions.
13. How do I make sure my retirement savings last long enough?
One of the greatest fears of any retiree is “outliving” your savings. To help avoid that outcome, here are some tips.
Use a sustainable withdrawal rate: The 4% rule mentioned above is a common guideline to help stretch your retirement savings as far as possible. This approach aims to make your savings last about 30 years, but depending on market conditions, a lower withdrawal rate may be safer.
Consider annuities: Annuities can provide a guaranteed income stream for life, helping to ensure you don't run out of money. They are particularly useful for covering essential expenses, offering peace of mind regardless of market performance.
Adjust your investment portfolio: Maintain a diversified investment portfolio that includes both conservative assets like bonds and growth assets like stocks. This balance helps protect against market volatility while allowing your savings to grow over time.
14. Can my spouse or family members receive Social Security benefits based on my record?
Yes, your spouse and certain family members may be eligible for Social Security benefits based on your record.
Spousal benefits: Your spouse can receive up to 50% of your full benefit if they claim it at their own retirement age. If they qualify for benefits based on their own work record, they’ll receive the higher of the two, not both.
Divorced spouse: A divorced spouse may qualify if the marriage lasted at least 10 years, they are unmarried, and they are at least 62 years old.
Children: Unmarried children under 18, or up to 19 if still in high school, and children disabled before 22 may also receive benefits. These benefits don’t reduce the amount you receive.
Family maximum: There’s a limit to how much your family can receive, usually 150% to 180% of your primary insurance amount.
15. How does my earnings history affect my Social Security benefits?
Your Social Security benefits are calculated based on your average indexed monthly earnings (AIME) over your highest 35 years of earnings. Higher earnings throughout your career result in a higher AIME, which leads to a higher monthly benefit. Conversely, lower or inconsistent earnings can reduce your benefits.
PRO TIP: If you have fewer than 35 years of earnings, the years without income are calculated as zeros, which can significantly reduce your average and, thus, your benefit amount. Ensuring you work for at least 35 years helps optimize your Social Security benefits.
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16. What should I do if I plan to move in retirement?
Relocating during retirement requires careful planning to ensure your new location supports your lifestyle and financial needs. Here are some key considerations:
Cost of living: Research the cost of living in your desired location, including housing, food, and healthcare costs, to ensure they fit within your retirement budget.
Taxes: Consider how state taxes might affect your retirement income. Some states tax Social Security benefits and retirement income, while others do not. Additionally, property and sales taxes can vary widely.
Healthcare access: Ensure that your new location has good access to healthcare facilities and services, especially if you have ongoing medical needs.
Climate and lifestyle: Consider the climate and local amenities. Some retirees prefer warmer climates, while others prioritize proximity to family, recreational activities, or cultural attractions. This could have a major impact on the funds needed to move to your ideal location.
Weighing these factors will help you determine whether moving after retirement is wise — and if so, what option is best for you. Your fiduciary financial advisor can help you make an informed decision.
17. Should I retire early?
Deciding whether to retire early depends on your financial situation, health, and personal goals.
Reduced Social Security benefits: If you retire before your full retirement age, your Social Security benefits will be permanently reduced. For example, retiring at 62 could reduce your benefits by 25%–30% compared to waiting until full retirement age.
Healthcare costs: If you retire before age 65, you won't be eligible for Medicare, meaning you'll need to find alternative health insurance, which can be costly.
Savings longevity: Retiring early means your savings need to last longer. Ensure you have enough saved to cover your expenses for the additional years you'll be retired.
Personal fulfillment: Some people find that early retirement provides the freedom to pursue passions, travel, or spend more time with family. Others might miss the structure and social aspects of work.
In most cases, early retirement is not the best choice. However, there are plenty of exceptions. Consult a qualified financial advisor to learn more about the details of your case.
18. What are health savings accounts (HSAs)?
A health savings account (HSA) is a tax-advantaged savings account designed to help you pay for medical expenses. HSAs are available to individuals enrolled in high-deductible health plans (HDHPs). Here’s how they work:
Tax advantages: Contributions to an HSA are tax-deductible, the account grows tax-free, and withdrawals for qualified medical expenses are also tax-free health savings account (HSA).
Rollover: Unlike flexible spending accounts (FSAs), HSA funds roll over year to year, so you don't lose money if you don't spend it all within a certain period.
Retirement benefits: After age 65, you can use HSA funds for non-medical expenses without penalty, though you will pay income tax on these withdrawals. This makes HSAs a useful tool for covering healthcare costs in retirement.
19. What types of insurance do I need for retirement?
Insurance is a critical component of a secure retirement. While everyone’s needs are different, some forms of insurance are essential for all retirees.
Health insurance: Medicare is essential for covering healthcare costs in retirement. Consider supplemental insurance like Medigap or a Medicare Advantage Plan to cover out-of-pocket expenses.
Long-term care insurance: This insurance helps cover the cost of services that assist with activities of daily living, such as nursing home care or in-home care, which are not typically covered by Medicare.
Life insurance: Depending on your financial situation and dependents, life insurance can provide financial security for your loved ones after your death. Term life insurance is often recommended for those looking to cover specific financial obligations.
Homeowners or renters insurance: Protect your home and belongings with the appropriate coverage. If you downsize or relocate in retirement, review and adjust your policy as needed.
20. How can I optimize my taxes for retirement?
Strategic retirement planning can help you manage and reduce your tax burden.
Roth conversions: Consider converting a traditional IRA to a Roth IRA during years when your income is lower, which can reduce your tax liability on withdrawals in retirement.
Tax-efficient withdrawals: Withdraw funds from taxable accounts first, followed by tax-deferred accounts like traditional IRAs and 401(k)s, and lastly from tax-free accounts like Roth IRAs. This strategy can help minimize your tax bill.
Charitable contributions: Donating to charity directly from your IRA can reduce your taxable income. This is known as a qualified charitable distribution (QCD) and is especially beneficial for those who must take RMDs.
Capital gains management: If you have investments in taxable accounts, consider managing the sale of assets to minimize capital gains taxes. Holding investments for more than a year qualifies for lower long-term capital gains rates.
21. Can TrueWealth help me plan for retirement?
Absolutely! At TrueWealth Financial Partners, we specialize in crafting personalized retirement plans that align with your unique goals and financial situation. Our team of experienced financial advisors will help you:
Optimize your savings: We’ll work with you to maximize contributions to your retirement accounts, taking full advantage of tax benefits and employer contributions.
Develop a sustainable withdrawal plan: We’ll create a tailored plan to ensure your savings last throughout your retirement, helping you balance income needs with the preservation of your nest egg.
Navigate healthcare and insurance options: We’ll guide you through Medicare, Medigap, and other insurance options to protect your health and finances.
Plan your estate: Our advisors will help you structure your estate to minimize taxes and ensure your assets are distributed according to your wishes.
Whether you're just starting to save or are approaching retirement, TrueWealth is here to provide expert guidance every step of the way.
Schedule a free consultation today and take the first step toward a better retirement!