Ah, retirement! Whenever people are eating cake at a retirement party some form of this conversation takes place. Friend: “Well, what are you going to do now?”. Immanent retiree: “Whatever I want”. Sounds good to me though I’m not looking forward to retirement myself. That means the kids are all grown and out of the house busy with their own lives. But we all must realize, time is the undefeated champion and will not be stopped. I’d like to be able to visit my kids wherever they may be when they are all grown and maybe with kids of their own. Being successfully retired would make that easier.
So I’ve actually started thinking about retirement a little more even though I’m at least 20 years away from that milestone. Keep in mind, I’m a certified Financial Specialist, not a Financial Planner. These are three key retirement planning questions that seem to come up often.
1. Will I ever retire?
Crazy question for a blog about retirement planning but I think it’s essential. I talk to so many friends and clients that casually state, “Oh, I’ll never retire. I’ll work until I’m dead”. They might even come out and say the real issue, “I can’t afford to retire.” Will you be able to afford to retire? It takes a little bit of planning and it depends where you are starting from. The biggest key to building a nest egg for retirement is compound interest. Compound interest is a fundamental concept to financial literacy. Just this month, Johnny Cantrell, CEO of Apprisen, described compound interest as follows: “Simply put, compounding is interest earned (or charged, in the case of a loan) on interest previously paid or charged”.
In the case of retirement planning, compounding is a return on your returns with the positive impact being that your wealth will increase exponentially over time. In the case of borrowing money the impact is negative as your debt could increase over time due to the compound interest you are being charged. This is why we often see credit card balances not declining even though minimum payments are being made monthly, and also why we see so many finding themselves “upside down” on auto payments.” You don’t need a six figure income to retire someday. Starting to save for retirement early really helps that compound interest compound but even if you didn’t start early, now is the time!
2. Should I invest in a Roth IRA or a Traditional IRA?
This is another common question. Generally speaking, the answer is mostly dependent on your tax rate now vs. when you retire. For a traditional IRA or 401(k) plan, the tax benefit is up front. For a Roth IRA or 401(k) plan, the tax benefit is taken later. So the most common advice is as follows. Do you think your future tax rate will be higher or lower than your current tax rate? Choose a Roth IRA if you think your tax rate will be higher in retirement and choose a Traditional IRA if you think your tax rate will be higher now. This is the largest consideration but certainly not the only one. There are other benefits tied to flexibility with a Roth IRA that make them attractive. NerdWallet has a blog that gives you a comprehensive comparison. I encourage you to check it out here.
3. When will I retire and how will I secure health benefits?
I admit that’s two questions but they are so closely related I wanted to keep them together. As of now, Medicare benefits kick in at age 65. If you retire early before the age of 65, you need to consider how you will obtain medical benefits. I have had conversations with more than a handful of people that are counting the days until they reach 65. They have the retirement income available now but not the heath care benefits. For those of us born after 1960, social security benefits are not going to start until the age of 67. As of now, you can still enroll in Medicare at age 65 but adjustments could be coming in the next 20 years. For those retiring sooner rather than later the name of the game is reaching age 65.
There are some other private insurance options available to those that want to retire before age 65 but most are expensive and would consume too large a chunk of one’s retirement income. The most affordable option currently is likely to be the ACA or Affordable Care Act. This is a political hot potato that could certainly change in the future but these days, retirement is married to health care. So anyone who wants to retire should continue to pay attention to the state of health care.
The above is by no means a comprehensive list of retirement planning questions. They are three questions and discussion topics I hear most often at work and with friends and family. As always, having plan that allows you to pay attention to retirement is the most fundamental factor to financial health.