Ingredients for a Fulfilling Retirement

I recently attended a webinar titled Creating a Fulfilling Retirement presented by Fidelity Investments. Below are eight of my key take-aways: 

 

Three Happiness Components- The speaker noted that money (income and wealth) is only one part of the retirement happiness equation. While happiness improves with higher earnings, especially guaranteed income like a pension or annuity, two other key factors are relationships (interestingly, a spouse and friends but not children, according to one study) and health.

 

Happiness Investments- All three retirement happiness factors (money, relationships, and time) are “investments” that require regular time allocations. For example, time for exercise and eat well and to build and maintain relationships. The greatest wealth is good health.

 

Retirement Pursuits- When people are working, their weekend activities are a getaway. In retirement, when “every day is Saturday,” they need to think about how they will fill their days. Otherwise, they can become bored, depressed, and/or isolated. A common retirement task is finding balance among different activities.

 

Spending Money- Retirement spending can be very successful if it provides an entry into socialization activities. An example of so-called “social spending” is purchasing a classic car to be able to participate in car shows and informal get togethers of car enthusiasts.

 

Congregate Living- There are different stages of aging and different mindsets associated with each one. For example, people who reach their 80s are often happier to live in shared housing arrangements for less isolation, less maintenance, and more well-being checks vs. “young old” retirees in their 60s and 70s who still prefer to live in single-family homes.

 

Long-Term Care (LTC) Need- The need for LTC is not determined by age but by life events and an inability to perform activities of daily living (ADLs). Not everybody needs LTC insurance, but everyone needs a LTC plan, including a liquidation plan to sell assets to free up money for LTC.

 

Common Errors of Retirees- Two common errors that were mentioned were underestimating health care costs (estimated to be $165,000 for 65 year olds for the remainder of their lives, excluding LTC) and underestimating irregular expenses for things like car repairs and dental bills.

 

Guaranteed Income Sources- Retirees with a “retirement paycheck” of regular monthly income from Social Security, annuities, and/or pensions that pays all of their living expenses are generally happier- and spend more money in retirement- that those who have to withdraw money from invested assets (e.g., a 401(k) plan) and worry how long their money will last.

At the end of the webinar, attendees were encouraged to "make retirement the best chapter of your life." For many people, the last third of their life is their happiest.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

Financial Security and Happiness in Later Life: Reflections from Recent Webinars

Being the author of a book about transitions in later life, I am always looking for new information about this topic. I recently attended a number of webinars about retirement planning.

Below are 10 of my top take-aways:

 

Knowledge is Power- While new state financial education mandates are getting lots of media attention (and rightly so), financial education works for everyone! This includes topics of interest to older adults in later life such as required minimum distributions (RMDs), taxes on Social Security benefits, and Medicare premiums. Recent research provides clear evidence of the positive effects of financial education on financial behaviors.

 

Limited Investment Alternatives- Stocks have not been doing well during most of 2022 but neither are bonds, cryptocurrencies, or cash equivalent assts (money market funds and CDs) that are losing purchasing power to inflation. The best thing that older investors- in fact, all investors- can do right now is to maintain a diversified investment portfolio and “tough it out” and not panic and sell securities at a loss.

 

Recovering Losses is Difficult- In one webinar, an example was given of stock originally purchased for $100 a share and sold in a panic at $66.66 a share, a 33% loss. In order to get back to $100 a share, an investor would have to have a 50% gain because $33.33 is 50% of $66.66. Also, the sequence of investment returns matters. The 4 L’s of retirement income optimization are Longevity, Lifestyle, Legacy, and Liquidity.

 

Decumulation is Different- One webinar presenter noted that “investing for distribution in retirement is different from investing for accumulation” and used the analogy of climbing a mountain (investing for retirement) and “making it safely down the mountain” (not running out of money during your lifetime). Key risks in retirement include longevity, health care expenses, taxes, and inflation.

 

Reverse Mortgages Uses- In addition to providing a lump sum or regular income payments in later life, reverse mortgages have other uses. For example, they can serve as a “delay bridge” so people don’t have to withdraw  assets during market downturns. Borrowers age 62+ can also use reverse mortgage proceeds to pay premiums for a long-term care insurance policy so they don’t lapse it (due to increasing premiums) before it is needed.

 

The Great Resignation- Millions of Americans quit jobs in 2021-2022 and remote work went “from the margins” to mainstream in many industries. Key reasons for older adults to leave jobs included increased asset prices (many of which have plummeted since 2021) and health/safety reasons. Ageism can make it difficult for older adults to earn their previous salary if they decide to return to the labor force. Many have to settle for less.

 

It’s What You Keep- Retirees with tax-deferred savings in traditional IRAs and 401(k)/403(b) and similar employer savings plans cannot forget about taxes due on this money. It is not all theirs to keep. Sometimes, mandatory RMD withdrawals can even push them (or their heirs) into a higher tax bracket. An option that some people consider is donating these assets. When a charity is a beneficiary of retirement accounts upon someone’s death, no taxes are due and the full amount of the account balance can benefit recipient non-profit charities.

 

Diminished Capacity is a Concern- One webinar speaker suggested having a “trust circle” of trusted family and friends when you have a major financial question or decision. Many financial services firms also request the names of trusted third parties for older clients. Shockingly, 1 in 6 people age 60+ have experienced some type of financial abuse (i.e., withholding, stealing, or restricting the use of money or financial information).

 

Inflation Impact- Older adults are uniquely impacted by inflation because they are often living on a fixed income and are unable to earn more money to mitigate the impact of inflation. Some people are buying inflation-adjusted TIPS (Treasury Inflation-Protected Securities) and Series I bonds for inflation relief. The spread between TIPS and regular Treasury securities is the market’s best estimate of future inflation. Retirees worried about inflation can bump up the assumptions used in their financial planning projections and analyses.

 

Your Future Self- Many people avoid planning for later years of retirement and focus on beautiful imagery (travel, beaches, etc.). A speaker advised putting your fears and plans on paper and put “structures in place” to address them. Start by making a list of five things you do now that you want to continue doing. For example, if you really enjoy working, maybe you shouldn’t retire at all in the traditional sense. Play pickleball or golf on the side. Also, discuss your preferences with others. Without dialogue, nobody knows what you are thinking.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

 

Financial Aspects of “Unretirement”

The year 2021 was noteworthy for the “Great Resignation” as about 47 million people quit jobs last year. The year 2022 is equally noteworthy for a “Great Unretirement” as millions of older workers who left jobs during the pandemic decided to come back into the labor force. One study found 1 in 5 retirees were likely to start working again soon.

Factors contributing to this trend include:

 1. a high demand for workers (sometimes coupled with increased pay, signing bonuses, and/or remote-work flexibility)

 2. vaccinations and booster shots reducing COVID infection fears

3. high inflation that increased living expenses 

4. a poorly performing stock market decreasing retirees’ savings account balances. 

Some “unretirees” may have also gotten bored with too much unstructured free time and simply want to stay productive. Others may no longer be caregivers for a spouse or aging parents, which is why they retired previously.

 

Benefits of unretirement (or remaining employed immediately following a primary career, as I have done) include:

 

¨    Additional Income- Money is available for living expenses, home maintenance, and/or “extras” such as travel

¨    Sense of Purpose- Work provides outlets for creativity, a way to help others, and a sense of meaning and purpose

¨    Socialization- Life after full-time work can be isolating and working helps keep older adults socially connected

¨    Longer Life Expectancy- Research has found that working past age 65 may lead to a longer life vs. retiring early

¨    Staying Current- Continued work keeps job skills (e.g., computers and technical expertise) and contacts up-to-date

 

Whatever a person’s reason for unretiring, re-entering the labor force after being away for a year or more requires some advance financial planning. Below are six factors to consider:

 

Social Security Earnings Limit- Before full retirement age or FRA (e.g., 67 for workers born in 1960 or later), Social Security deducts $1 from benefits for every $2 earned above the annual limit ($19,560 in 2022). While benefits are withheld during this time, they could be larger later as payment amounts are recalculated to account for a person’s longer work history. Above FRA, there is no earnings limit to obtain full Social Security benefits.

 

Tax on Social Security Benefits- Income from unretiring may push older taxpayers into the income range where tax is due on a portion of Social Security benefits. For individual taxpayers, if combined income (adjusted gross income or AGI + nontaxable interest + ½ of Social Security benefits) is between $25,000 and $34,000, up to 50% of benefits are taxable. For income more than $34,000, up to 85% of benefits may be taxable. For married couples filing jointly, the income ranges are between $32,000 and $44,000 (50%) and more than $44,000 (85%), respectively.

 

Tax Withholding Adjustments- Adding income from employment to what could be multiple streams of income in later life (e.g., pension, Social Security, annuities, required minimum distributions) may necessitate adjustments in tax withholding or quarterly estimated tax payments. The IRS Tax Withholding Estimator online tool can help make an accurate withholding projection and the IRS safe harbor rules can help taxpayers avoid underpayment penalties.

 

Higher Income Tax Payments- Again, adding employment income to several other income sources in later life can place taxpayers in a higher tax bracket. It could also trigger higher Medicare Part B and Part D premium surcharges known as IRMAA (income-related monthly adjustment amount) and/or the 3.8% net investment income tax (NIIT), which affects individuals with a modified AGI (MAGI) of $200,000+ and couples with a $250,000+ MAGI.

 

Medicare- Older adults age 65+ who are on Medicare, begin working again, and receive primary creditable employer-provided health insurance coverage (i.e., coverage that meets certain minimum requirements) can drop Medicare and re-enroll later when they stop working again. By doing this, they avoid having to make monthly premium payments for Medicare Parts B, C, and/or D while they are working. The coverage must be deemed creditable or late enrollment penalties will apply. A new job may also provide access to valuable employer term life and disability insurance.

 

Budget Adjustments- Additional income earned by unretiring should be factored into household spending and saving via an updated spending plan (budget). This money provides an opportunity to help keep pace with recent price increases (e.g., food, gas, utilities, housing, etc.) caused by high inflation and to beef up retirement savings in IRAs and employer retirement savings  accounts, if necessary.

 

Bottom Line: If you are considering “unretirement,” be sure to cover your financial bases, especially budgeting, taxes, and health insurance. Best wishes for a great encore career.

 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.