5 Ways to Prepare for Retirement Today

We speak with Tammy Trenta, founder and CEO of Family Financial, on the ways retirement has changed in the past year and the top strategies to consider before making the decision to retire. Trenta also shares what investors should understand about social security.  

How has retirement changed in the past year and how will it change in the next year?

Overall, the way people are retiring has changed. The pandemic has taught us that life is fleeting, and many Americans took the stimulus money they received as an opportunity to leave their jobs, hop in a camper and go where the road takes them. Now more than ever, retirees are migrating to cities that align more with their values or areas closer to their children and grandchildren. The gig economy has also created new flexibility for supplementing their retirement income. 

Going forward, one silver lining of the inflation we faced this year is that social security benefits will enjoy a sizeable cost of living increase of 8.7%, the highest we have seen since 1981. Therefore, retirees should have their life savings positioned to keep pace with inflation. There are two types of risk: the risk of market volatility that comes with the benefit of keeping pace with inflation and the risk of running out of money because retirees are afraid of investing their money in the stock market. The goal is to strike the optimal balance, which will vary for each individual.

What are some of the top strategies to consider for those approaching retirement? 

The decision to retire is considered to be a significant life-changing event. Before putting your company on notice, let’s explore five key areas that could determine whether you make it or break it in the golden years.

1. Plan for Longevity: There is no question that people are living longer, and health care costs are increasing. Today, in the wake of inflation, we need to ensure our money can go the distance. For example, at Family Financial, we perform a two-pronged test: First, we run retirement projections until age 100. Second, we perform a Monte Carlo simulation. The Monte Carlo is a modeling tool used to predict financial outcomes across various potential market returns and assign a probability percentage of financial success. These two approaches help our clients feel confident about their decision to retire. 
2. Gain Financial Clarity: Planning can get complicated. Make sure you know your numbers and the variables influencing the outcome. If personal finance is not your thing, I recommend working only with a Certified Financial Planner who is also a Fiduciary. A Fiduciary is a person who has a legal obligation to recommend what is in your best interest, not theirs. You can check if your advisor is a broker or a fiduciary here. It identifies a B for Broker, PR for Previously Registered Broker or IA for Investment Advisor. To identify a true fiduciary, you only want to see IA or IA and PR. If you see a B, they are a broker and can be compensated based on certain financial products that they recommend that may not be in your best interest.
3. Keep Emotions in Check: Fear and uncertainty only cloud decision-making. It is essential to take a long-term view while also planning for short-term needs. Most of us are so used to working for money that you might be surprised to learn that it can be difficult to transition from saving to spending money. By gaining a sense of confidence in your financial situation, it will be easier to take that psychological leap.
4. Insulate your Income from Market Risk: Volatility is a normal part of market cycles. That said, as you approach retirement, you may not want to put all your money into investments that can make big moves. Expect the unexpected. It is a good practice to incorporate some more stable types of investments. The silver lining to high-interest rates is that money markets now yield between 3% and 4%. Keep 3-6 months of your monthly spending in a money market for unforeseen expenses. Beyond that, you will want to keep between 3 to 5 years of withdrawals in short-term, low-risk investments, such as bonds. These two strategies allow your money to weather various market cycles and eliminate the need to pull from stocks when they are down.
5. Time Social Security Withdrawals: Just because you decide to retire at age 62 does not mean that you have to take your social security early at the same time. Dual-income families might get burned if one spouse elects to take social security early while another is still working because earned income will phase out the social security benefit of the retired spouse. Taking social security at age 67, which is the normal retirement age, can help families avoid an earned income phaseout. However, if one spouse is still working, your benefits may be taxed at a higher rate. As clients approach retirement, our firm can analyze the timing of electing social security so you can capture more of your benefits at a lower tax threshold. It is important that you do not solely rely on social security income. Social security represents less than 37% of past earnings for most Americans, so you will likely fall short of your needs. Currently, social security benefit payments exceed the amount of social security taxes collected. Therefore, the benefits payments are scheduled to run out in 12 years unless the government revises the program.  

The bottom line is that taking a proactive approach will empower you to make the most of your money in your retirement years and help prepare for the unexpected.

What should investors understand about social security?

During your working years, social security assesses a 6.2% tax on both the employee and the employer on the first $147,000 of income, indexed for inflation. Therefore, the maximum social security benefit is based on this amount, meaning any amount you earn over $147,000 will not count towards your lifetime earnings. For 2022, the maximum benefit is $3,345 or $40,140 per year. From that amount, Medicare will take a haircut from your social security benefit ranging between $164-$560 per month based on your other income. If you have other sources of income, then you can expect social security income to be primarily taxable. So not only are you taxed on your wages when saving into it, but you are also taxed again when you take the benefit. So using this example above, even if you are receiving the maximum benefit, it only represents 27% of your earned income, so retirees should be cautious not to rely on social security as their only source of income. One potential alternative is to delay your social security benefits until age 70. Doing this results in a 25% increase in the monthly benefit of $4,194 or $50,328 if we use the above example.  While the benefit is much higher, this still represents only 34% of the earned income.   

This interview originally appeared in our TradeTalks newsletter. Sign up here to access exclusive market analysis by a new industry expert each week. We also spotlight must-see TradeTalks videos from the past week. 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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