5 Frequently Asked Retirement Questions
- Limit your spending to the “yield” from the portfolio – the income-based approach. You would only consume the income (dividends and interest) that the portfolio generated. At low interest rates and dividend yields, it may not generate enough income to meet your spending needs. Investors in this approach often increase exposure to “higher yielding” investments (reach for yield) to get the income needed to meet expenses which increases the risk of the portfolio. In a low yield environment, some of the highest yielding investments are the most popular, and therefore are relatively expensive and have lower expected total returns. A last point, company dividend policies could change.
- I believe a better approach is to build a portfolio based on your need, willingness, and ability to take risks. This approach seeks to build a mix of investments with a total expected return (dividends, interest, and appreciation) to meet your goals and is unconcerned with how income is generated – through yield or selling securities. The yield of the portfolio is simply a byproduct of a broadly diversified portfolio.
- – If your spouse is still working, joining his or her employer-sponsored plan is a great option as often the employer will subsidize some of the insurance payment. Be sure to enroll in the spouse’s plan within 30 days of the qualifying event.
- – Some employers (albeit not many) do offer insurance plans for retirees. The cost and coverage vary significantly. Some employers will allow retirees to remain on the plans with subsidized premiums, others will expect the retiree to pick up the entire cost of premiums. Depending on the cost and coverage, there may be better options available.
- – Many employers are required to give employees the option to continue coverage for 18 months upon leaving an organization. However, the full cost is covered by you.
- – You may qualify for a special enrollment on the website. Depending on the qualifying event, you may have 60 days from the event to obtain insurance. The American Rescue Plan has extended subsidies for marketplace plans through 2025. Since eligibility for subsidies is based on income, it’s important to review your situation to see if this is an affordable option.
- - If you have poor health or family history that may predispose you to certain illnesses, taking Social Security may make sense. However, if you have a reasonable expectation of longevity, postponing may provide a key source of income.
- - Claiming Social Security prior to FRA is normally not advisable if you are still working. Again, your benefit may be reduced by up to 30% and, in 2022, if your earned income is above $19,560, your Social Security benefits will be reduced by $1 for every $2 earned over the limit. Once you reach FRA, you may still earn any amount of income and still receive your full Social Security benefit. If you are not earning any income and do not have sufficient financial resources, taking Social Security early may be the only feasible option.
- - Your financial resources and how they are structured may impact the Social Security timing decision. If you have substantial assets that can be used to fund expenses in a tax-efficient matter, delaying Social Security may be feasible even if you retire prior to FRA. If you do not have adequate liquid financial resources or your balance sheet is comprised almost exclusively of tax-deferred accounts, delaying Social Security may not be advisable.
- - Your marital status is an important factor. If you are married, reviewing Social Security options in context of spousal benefits is important. Depending on the Social Security benefit amount, it may be beneficial for one spouse to take benefits at FRA and the other to delay till age 70. Analysis should also be run for widowers and divorcees to determine if there are any additional Social Security benefits that may apply.
- How is your income in retirement structured? If you have high pension income and Social Security income, your mortgage payment may easily continue to be covered in retirement. With those income sources, you may also qualify for a mortgage in retirement.
- Your financial resources and how they are structured may impact your ability and decision regarding a mortgage. If your financial resources are not sufficient to pay down the mortgage or purchase a home without one, then focus on the appropriate mortgage product for your circumstance. If you have substantial financial resources but they are all in tax deferred accounts such as IRAs and 401ks, the tax impact of pulling a large amount out may not make this a prudent option.
- Other considerations are and . If you have a low interest rate and can support the monthly payments, keeping the mortgage as is may make sense. A low fixed interest rate mortgage on a home might also be a reasonable inflation “hedge”. In an environment with higher mortgage rates, financing a new home may have a bigger impact on your long-term financial stability. If you are planning on moving in the near term, it may be better to wait on paying off the mortgage till there is clarity on the financial impact of the new home.
As you can see, there are many variables that go into answering these questions and each decision is dependent on your own personal situation. A qualified financial advisor may be able to help. If you don’t already have one, we encourage you to find a guide. To schedule a call with with a TandemGrowth advisor today, please click here.