Author: Nick Prigitano
Financial planning, and the considerations involved, vary greatly depending on where you are in life. A typical benchmark for what life events you may be experiencing is your age. While there will clearly be overlaps from decade to decade, there are some unique circumstances that certain age groups will experience. In this series, we will review some of the common financial planning topics during many decades of life. We thought a good place to start would be financial planning considerations for someone in their 60s. Some common questions for those in this age group include:
When to go on Medicare, and what plan to choose?
When to take Social Security?
What will your taxes look like in retirement?
What will you do with your time?
Healthcare is one of the largest expenses for those in retirement. Making sure you have adequate coverage for when medical emergencies arise is an essential part of a comprehensive retirement plan. Unless you worked for the government, most retirees will rely on Medicare for their healthcare coverage. There are various plans that you may choose from, but you only have a short amount of time to make a decision. Here are some of the key considerations when going on Medicare.
When are you eligible for Medicare?
Generally, you are not eligible for Medicare until you turn 65. This can pose problems for those who retire voluntarily, or involuntarily, before reaching that age. If you are under age 65 you will need to find an alternative for your health insurance. Depending on your situation, your previous employer may allow you to stay on their health insurance until you become eligible for Medicare. If this is not an option, you may be able to stay on the plan through COBRA, usually for up to 18 months. This is only possible if your employer had at least 20 employees. If you do qualify, you will likely need to pay for the full insurance yourself without any assistance from your previous employer. Lastly, you may be able to acquire insurance through a healthcare exchange or obtain private insurance, although this may also be more expensive.
Of course, if you are still working you may be allowed to stay on your current employer's health insurance. If that is the case, you will need to make sure that it is qualified coverage for Medicare, otherwise, you may still face a late enrollment penalty if it’s not. Your HR department should be able to provide that information to you.
When do you enroll in Medicare?
Although you don't become eligible for Medicare until you turn 65, the enrollment period begins before that. You have a narrow 7 month period to enroll in Medicare, otherwise if you miss your window, you may face penalties for life. The 7-month window begins 3 months before and lasts until 3 months after the month of your 65th birthday. If you enroll in the months before you turn 65, coverage will not start until you reach that age. To ensure that you have coverage available, we suggest enrolling in Medicare in the 3-month window before 65 so that your coverage can start right away.
What Medicare plan should you choose?
When it comes to Medicare, there are a lot of decisions you need to make about your coverage. Medicare consists of 3 main parts.
Part A - Hospital Insurance
Part B - Medicare Insurance
Part D - Prescription drugs
What happened to Part C? We'll cover that later. First, what you need to know about Part A is that it is free as long as you enrolled on time. If you enrolled late, you may owe an enrollment penalty for life. Part B has a cost, that is usually taken out of your Social Security if you are collecting, and it is based on your income. The higher your income, the more you may need to pay for this coverage. You can see a list of the income brackets on Medicare's website.
Your Part D coverage will vary depending on what medications you are taking. There will be a variety of plans, that change every year, which will cover different prescriptions and have different costs. This is coverage that should be reviewed annually to make sure that your plan still covers the drugs you take. Or, if you're taking new drugs, to switch to a plan that covers your new prescription. Medicare has a specific site to compare the various drug plans that are currently available.
Now that we've covered the basics of A, B, and D, we can look at Part C, or as it's also called Medicare Advantage. The purpose of a Part C plan is to fill some of the coverage gaps from A, B, and D. The plans are provided by private insurance companies and there is a separate cost to them, which will vary depending on the plan you choose. These plans are typically HMO plans, meaning, you are only covered if you use doctors/hospitals that are in-network, and you are usually not covered if you use a medical provider that is not in your home state.
In lieu of using a Medicare Advantage plan, you can instead purchase a Medicare Supplement Insurance Policy, also called a Medigap Policy. These are typically PPO plans, which means that you will be afforded some coverage if you use a doctor/hospital that is out of network, and there is typically coverage outside of your home state. Not to be confused with Medicare Part A, B, C, or D, these Medigap plans are also identified by letters (currently A-N).
To confuse things further, some plans are no longer offered (like plan F), but if you were on the plan prior to decommission you can stay on the plan (but due to the dwindling subscribers, the premium is likely to rise). The type of coverage you receive from the plan is uniform, based on the letter plan you purchase, regardless of which insurance company is providing it. Since these plans generally give you more control of the doctors and services you can receive, we usually recommend choosing a Medigap Plan over a Medicare Advantage Plan.
Another consideration is that you cannot continue to save in a Health Savings Account (HSA) if you are enrolled in Medicare. However, you can continue to use your existing HSA balance.
When to Collect Social Security
Another big consideration for those in their 60s is when to start collecting Social Security. Unlike Medicare, which starts when you turn 65, you can begin collecting Social Security as early as age 62 or defer until age 70. When it makes sense to start collecting will depend on your unique financial situation.
If you begin collecting Social Security before your "normal retirement age" there will be a reduction of your benefit amount. Alternatively, if you defer collecting beyond your full retirement age you will receive a larger benefit for doing so. There is no additional benefit for deferring beyond age 70. If you are 70 or older and are not yet collecting Social Security you should apply, because there is no longer a benefit for holding off.
Some people assume their normal retirement age is age 65 - this is a common misconception. If you were born any time after 1937, your normal retirement age year will be greater than 65. The latest normal retirement age is 67 for those who are born in 1960 or later. While you can still collect before this age, you will receive a smaller benefit.
So, when should you collect? This question depends on many factors, but two of the biggest considerations are cash flow and life expectancy. If you don’t have any other sources of income, it probably makes sense to collect as soon as possible. This is also true if you're unhealthy, have pre-existing conditions that may reduce your life expectancy, or if you have minor children and aren’t working. However, if you're healthy, working with no minor children and can use other funds besides Social Security, it often makes sense to wait to collect. This is because for every year you wait you get an inflation-adjusted benefit increase of 8%. This government guaranteed increase is not something you can buy in the marketplace, and if you have the ability to wait, it can significantly improve your retirement plan.
Also, if you collect before your normal retirement age, you may not receive your full benefit if you are still working.
Another significant consideration is on whose Social Security record should you collect? You can collect on your own, possibly your spouse's, or even potentially an ex-spouse's benefit! Depending on your situation it may be more advantageous to collect from someone else's benefit if allowed.
As you can see, deciding how and when to collect your Social Security is complicated! Working with a fee-only planner can help you review your options and make an educated decision about the choices you have.
What will your taxes look like in retirement?
Just because your working career is winding down, or has already ceased, does not mean your taxes will stop too. In fact, your tax situation may be even more complex in retirement, even if you're paying less in taxes overall. Many people will have a variety of income sources in retirement, and they all may be taxed a little differently.
Your IRAs and 401ks are considered pre-tax accounts. What this means is that you received a tax deduction for the amount you contributed to the account originally. Now, because the money hasn't been taxed yet, when you take money from these accounts they will be considered taxable income. Simply put, if you withdrew $10,000 from your IRA you would be taxed on $10,000, similarly as if you earned $10,000 from work.
A Roth IRA or Roth 401k on the other hand is money that has already been taxed. The trade-off here is that you did not receive a tax deduction when you contributed to the account. However, any of the growth since you contributed will not be taxable. When you withdraw any money from these accounts, you do not owe any tax (assuming the account has been open for at least 5 years).
Many people are surprised to learn that their Social Security will likely be taxable in retirement. Although the most Social Security will be taxed is at 85% (not to be confused with your tax bracket, which will be lower), many people will find themselves in this category. For lower-income individuals, Social Security may either be 50% taxable or not at all. For more information about how Social Security is taxed, you can refer to our previous blog.
Another surprise for many is that your Medicare premiums are calculated based on your income from two years prior. This means that your income at age 63 can impact the amount you pay at age 65. There are ways to mitigate this impact, but you need to be careful of how much you earn in any year starting the year you turn 63.
Tax Planning Opportunities
Not only may your taxes look different, but there may be additional tax planning opportunities that you did not have when you were working. If you have money saved in a 401k or an IRA it may make sense to be taxed on the money "early" to save you taxes in the future. This can be done by moving assets from your IRA to a Roth through what's called a conversion. You're taxed on the amount moved over now, but once it's inside the Roth it will grow tax-free going forward.
A reason you may have an opportunity to do this is that your income may be temporarily lower when you first retire. This can be especially true if you retire in your 60s, and delay collecting Social Security until 70. In addition to that, in the year in which you turn 72, you will be required to take a certain amount of money from your IRAs and 401ks annually, whether you want to or not. This is additional income that may put you in a higher tax bracket. Depending on your tax situation, it may make sense to take money from these pre-tax accounts early to save you money on taxes in the future.
Another consideration to keep in mind is having too much income may both put you in a higher tax bracket and also increase your future Medicare premiums, if only temporarily. Deciding which accounts to take money from and when, along with the decision on when to collect Social Security can have a huge impact on your lifetime taxes. Running the numbers and working with a qualified tax-planner can save you a significant amount of taxes over your lifetime.
What will you do with your time?
Beyond financial planning considerations, one of the most important questions about retirement is what you will do with your time? Some people dream of traveling the world. Others desire to spend time with their grandchildren. Some wish to pursue a passion project or volunteer. Whatever you want to do, it's important to give it some thought before you stop punching the clock for good.
Sometimes we find that people work so hard, and so much of their identity is wrapped into their work, they find themselves lost when they finally retire. Having a game plan to keep you engaged and doing the things you want to do is essential to have a satisfying retirement!
At the end of the day the true job of a fiduciary financial advisor is to help their clients reach their financial goals. Money is a tool that can help you live the retirement of your dreams. Your financial planner can help with the money part, but you need to decide what your goals are and how you want to spend your retirement.
Financial planning for someone in their 60s can get quite complex. Between choosing a Medicare plan, when to collect Social Security, and a changing tax situation, there is a lot to consider! Most importantly, having a plan for how you will spend retirement will help ensure yours is an enjoyable and fulfilling one. If you need assistance with your overall financial planning, please reach out to one of our fee-only advisors.