Retirement Strategies for the Most of Us
I always find it a bit bemusing that so much of the personal finance media space is consumed by “Best Tax Strategies for Retirement Savings” and the like, when most retirees don’t have enough retirement savings for this to be a relevant issue. (Given how much I write about Roth versus traditional retirement accounts, I am as guilty as the next.)
Don’t believe me? Consider that for pre-retirees (persons aged 55 to 64), the median retirement account balance is $185,000. And if that sounds like a lot of money to you, take a beat and understand that by conventional methods, that translates into a cash flow of about $600/month. I would not call that chump change…but it’s not enough to make engaging in complex tax-saving strategies worthwhile.
Here’s my real point. What’s the guidance for near retirees who don’t have a big savings nest egg, and whose primary (perhaps only) source of income in retirement is Social Security? That’s about 22 million people!
I first wrote about this in 2023. In retirement, the name of the game is to be able to fit your must-have expenses comfortably within that Social Security “envelope” with something left over for both the unexpected and the delightful. (And don’t forget that if you are a two-Social Security check household, one day there will only be one.) So, you can either grow the envelope bigger or reduce your expenses, preferably a bit of both.
Working longer is an obvious tactic, but let’s explore why…
Allows you to delay starting Social Security benefits. The penalty for claiming before your Full Retirement Age (67 for most these days) is steep and permanent.
It gives you more opportunity to increase your retirement savings, especially if you have an employer match.
On the other side of the ledger, you can use the remaining work years to reduce your expenses in retirement. If you have non-mortgage debt, these are the years to pay it off. If you have important home maintenance needs or lingering uninsured medical needs (such as dental work), use your final working years paychecks to address these.
Working part-time in retirement (after you have reached 67 and turned on your Social Security benefit) is an option, but the reality is that this is not a tactic with a long shelf life. What you are willing to do at 67 could be quite different from what you are able and willing to do at 70. Think of it as a bridge strategy that gives you time to shrink the liability side of your ledger so that there is less demand on your Social Security check later when it is your sole income source. If you are working part-time in retirement, what are you specifically doing with your income to prepare for not working? If your part-time income in retirement is essential to meet your day-to-day living costs, that’s a recipe for future disaster.
This may seem like a topic switch, but it is not. Medicare Advantage plans now account for more than half of the Medicare market. Traditional Part B Medicare is increasingly less popular. And the reason goes directly to the above: If your savings and retirement income stream are modest, you have less ability to meet out-of-pocket medical expenses which can be fearsome under traditional Medicare if you do not also have a supplemental insurance plan…which you may not be able to afford if you only have Social Security income and little cashflow from savings.
I suppose I should say a word or two about paying off your mortgage before retirement. I will limit myself to just two words: It depends. The pros and cons of this strategy are multi-faceted and highly dependent on each household’s unique circumstances.
Finally, if you do have just a modest nest egg, how should you invest it? As I wrote before in 2023, now is not the time to swing for the fences. Unlike our “rich” retiree, you simply cannot take the risk of a market wipe-out. Yes, do invest some portion in stocks because retirement will probably last a long time and you need to stay ahead of inflation if you can; there is likely no need to shelter every single dollar in a bank account.
Will you have predictably large medical expenses in retirement? Does your roof look a bit shoddy? Do you envision drawing from your savings consistently to meet routine living expenses? Or is the most likely use of your savings an annual vacation or gifting? Think about the specific circumstances under which you will tap into your nest egg and let that be your guide to how much risk you can take on.
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