A 2024 Guide to Retirement for Seniors

Consider Your Ideal Retirement

No two retirements look the same, so it’s essential you prepare correctly. A retiree who plans to travel the globe will likely need to save more than someone who plans to lead a more modest lifestyle.

There are also many different retirement plans, such as traditional 401(k)s, Roth 401(k)s, IRAs, cash-balances, Federal Thrift Savings, cash-value life insurance, and guaranteed income annuities.

When choosing the right plan, you’ll want to consider factors like your ideal age, location, and lifestyle in which you’d like to retire. While you can start receiving Social Security retirement benefits as early as 62, you’re qualified to receive full benefits once you reach your full retirement age. If you decide to delay taking your full retirement benefits from your full retirement age until 70, your benefit amount will increase. However, if you choose to receive your benefits early, they’ll be reduced a small percentage for each month before your full retirement age.

How Much Do You Need to Save?

When planning your retirement, it’s important to estimate your spending. Be prepared to account for 70 to 80 percent of your pre-retirement income each year before retirement. While this isn’t a set rule, you should at least take it into account, with the possibility of needing to save more. You should also consider health care costs, long-term care costs, Social Security, annuities, inflation, taxes, and debt.

Health Care Costs

Health care costs are often overlooked, and those over 65 should expect to spend roughly $6,500 per person annually. You should anticipate 15 percent of your retirement expenses will be related to health care costs each year.

You can defray these costs using Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs). The major difference is that you can control an HSA and contributions can roll over into another account whereas FSAs are employer-owned and less flexible.

While Original Medicare (Parts A and B) cover a broad range of hospital and medical services, there are gaps that require you to pay out-of-pocket costs. For example, Part A and B typically don’t cover most prescription drugs; further, Original Medicare generally doesn’t cover costs like hearing care, nursing home care, routine vision care, and dental services.

Long-Term Care Costs

Long-term care will vary per individual. On average, if you’re turning 65, you have a 70 percent chance of requiring some type of long-term care service. The average annual cost for nursing home care is around $97,000-$111,000, assisted living facility care is around $55,000, and adult day healthcare  is around $20,000.

Medicare and Medicaid cover long-term services but both have limits on items, such as: benefit qualifications; the types of services that are protected; how long you can receive specific long-term care benefits; how much out-of-pocket costs will be; and if your estate needs to reimburse the government once you pass. There are ways to pay for long-term care such as a reverse mortgage, home equity loan, annuities, and long-term care insurance.

Social Security

The Social Security amount you receive each month depends on how much you’ve earned over the course of your working life, when you start to take your benefits, and your cost of living adjustment increase. Social Security amounts are determined using the average indexed monthly earnings, which summarizes up to 35 years of your working career’s indexed earnings. A formula is then applied to the number to create your primary insurance amount (PIA). The average Social Security check you can expect to receive per month is around $1,600. However, the maximum monthly benefit does vary per age group:

• Age 62: $2,364
• Age 65: $2,993
• Age 66: $3,240
• Age 70: $4.194

Annuities

Annuities are insurance contracts in which you pay a set amount (today or over time) in exchange for a lump-sum payment or future revenue stream. There are different types of annuities: fixed (immediate and deferred), variable, and indexed.

Fixed annuities require insurance companies to provide you with a set interest rate that’s locked in instead of being tied to market rates. Variable annuities are more of an investment where you’ll need to decide which options to direct your annuity payment to. Indexed annuities are a mix of fixed and variable. While they offer protection from drops in the market, you’re not going to benefit as well if the market increases.

Purchasing an annuity can provide you with a reliable stream of income in addition to pensions or Social Security benefits; however, they can be complex and depend on the insurer’s ability to make payments.

Inflation

The Federal Reserve predicts the average U.S. inflation rate will surpass five percent by the end of this year. Having currently reached the highest level since 1981, it’s vital you plan accordingly. It’s a good idea to keep an eye on the stock market.

Dividend-paying stock options can help defray the burden of inflation, as they distribute a chunk of a company’s earnings to investors on a regular basis. Earnings are then issued quarterly and can be paid out via cash or in the form of reinvestment in additional stock. These are suitable to help formulate your retirement because they can generate a growing revenue stream regardless of market conditions.

Taxes

You’ll be required to pay income tax on your pension and withdrawals from any tax-deferred investments like Social Security, traditional IRAs, 401(k) accounts, Roth IRAs, Roth 401(k) accounts, investment income, and interest income in the year you take the money.

If you take a direct lump-sum payout from your personal pension, you’ll need to pay the total tax due when filing your return for the year you receive the money. In traditional IRAs, taxes are paid on the earnings portion of those withdrawals at your regular income tax rate. While Roth IRAs don’t require you to pay taxes on your earnings as they multiply or when you withdraw following the rules, you need to have had the account for at least five years before qualifying for tax-free provisions on earnings and interest.

Debt

It’s crucial you pay down any existing debt like car loans, credit cards, and mortgages. Credit card interest rates are currently around 20 percent (every dollar you pay is equivalent to $5 borrowed). To reduce this, determine which credit card has the highest interest rate and continue to make at least the minimum payment.

While car loans usually have a low interest rate, an easy way to lessen car debt is to determine if you need to remain a two-car household after retirement. If not, think of selling/trading one in for a less-expensive model.

Testing Out Your Retirement Budget

Creating an actionable retirement budget will benefit you in the long haul. A good way to test-drive this budget is to live on your expected retirement income.

1. Calculate how much you’ll need in retirement overall (at least 70 to 80 percent of your pre-retirement income).
2. Estimate your retirement income (i.e., 401(k), pensions, Social Security).
3. Determine factors that can build in flexibility.
4. Track your finances.

Retiring on a Limited Income

Below is a list of resources that can help if you’re retiring on a limited income.

• Medicare.gov: Lists the most common types of Medicare Advantage plans, such as HMOs, SNPs, PPOs, and PFFs
• Medicaid.gov: Lists the different Medicaid programs and policies
• Benefits.gov: Explains the SNAP program and how you qualify
• CMS.gov: Provides an overview of the PACE program, guidelines for different states, and information for PACE organizations
• Administration for Children & Families: Provides information on the LIHEAP program and how you can apply
• Veterans of Foreign Wars: Explains what VA benefits are as well as provides resources for you and your family
• U.S. Department of Housing and Urban Development: Provides information on affordable housing options near your geographic location, house counseling services, reverse mortgages, and rural housing loans; they can also help inform you on what your insurance will cover

Bottom Line

No two retirements are the same. While it’s an exciting milestone, it’s important you understand how to effectively create an actionable retirement plan. Be sure to consider health care costs, Social Security, long-term care, taxes, annuity, inflation, and debt. Whether retiring on a limited income or not, it’s always a good idea to test your retirement budget so you’ll be prepared for the future.