Things I Wish I’d Known (and Done) Before I Retired

  

It’s hard to believe that I’ve now been “retired” for three years. That said, there are some things that, in hindsight, I wish I had known and/or acted on sooner. And a couple that I actually did - but might easily have overlooked. 

Here they are:

Do More Roth — Sooner

I’ve long been a huge fan of Roth. It’s not hard to look at the federal government’s finances, the current tax brackets, and figure out that the rates aren’t likely to get any lower in the future.

And yes, for the last decade or so of work, I went all Roth, including catch-ups. In fairness, Roth wasn’t an option for most of my retirement savings career. Even so, in those first years, recordkeepers weren’t really ready — and I, like most of my generation, had by then been so thoroughly coached on the advantages of pre-tax accumulations — well, it was easy to shrug off Roth as one of those things of which only the wealthy could afford to benefit.

But — and particularly as I got closer to retirement — the question has always been, where will your income in retirement line up with those brackets? That said, the closer I got to retirement, the easier it was to make that determination — and even more fully appreciate the benefits of tax diversification, particularly as I look ahead to the implications of required minimum distributions (RMD), when taxes on all those previous years of pre-tax savings come due — with a vengeance.

So, if you haven’t been thinking about Roth — and those new catch-up contribution limits are a good opportunity — do so.

Set Up the Roth IRA Before the Rollover

This one still makes me shake my head.

A few months after retirement, I rolled those balances into an IRA: one for a Roth, another for the pre-tax accounts.

Only to “discover” that the five-year clock on the withdrawal of Roth account earnings without penalty starts with the date of the IRA account opening, NOT the date from my 401(k). This turns out not to be a hidden secret — but I never picked up on it.

Now, as it turns out, I won’t need to pull that money out before the five-year clock resets with the rollover Roth IRA. But I could have spared myself a bit of worry if I had opened that Roth IRA earlier — and THEN rolled over to that account after retirement.

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Lesson learned: Open the account early — even if you don’t think you’ll use it right away.

Future You will thank you.

Know That 1099 Income Is … Messy (and It All Counts)

I assumed income in retirement would be simpler (there’s surely less of it) than working-life income.

That assumption did not survive contact with my new status as a 1099 worker. The good news is that, post-retirement, I’ve had several amazing opportunities not only to continue contributing my writing and expertise, but also get paid for it.

The bad news is, I wasn’t really prepared for the financial challenges of estimated tax payments, and, more critically, the financial toll of self-employment tax, wherein I am — even as a Social Security recipient — expected to pay both the employer and employee portions of FICA withholding. From a practical standpoint, that means that that “extra” income — well, less of it goes into my pocket than one might think.

Without withholding, income timing becomes trickier. Estimated tax payments become real (and, oh so large). Cash flow planning requires more attention. And there’s a persistent, low-grade constant uncertainty about whether I’m underpaying, overpaying, or just guessing until April rolls around. Oh, and the IRS has some pretty specific rules around how much estimated tax is due — and when.

And yes, there are financial penalties for guessing “wrong”.

The More You “Make,” the More They’ll “Take”…in Unexpected Ways

I have previously written about the biggest surprise of my retirement[i] — and I continue to struggle with it.

Like most people (I assume), I never gave much thought to post-retirement healthcare insurance. Oh, I’m aware of the funding issues (it’s actually in a more financially precarious position than Social Security), but as post-retirement healthcare has pretty much evaporated in the private sector, I figured we’d deal with it …when we had to.

Turns out, Medicare health insurance premiums are based on income. And if you’ve filed jointly, BOTH of your premiums are based on your adjusted gross income (AGI). Which means that 1099 income counts, and most particularly those withdrawals of pre-tax savings count. Big time.

Together, they can quietly push you into higher income-related premium tiers for Medicare — increasing Part B and Part D premiums in ways that feel disconnected from the original retirement planning conversation …but absolutely aren’t. That’s where those Roth decisions can really pay off.

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The interaction is subtle, but the dollars aren’t.

File for Medicare Before You Need It

Once you start receiving Social Security benefits, you are automatically enrolled in Medicare Part A. But even if you work past age 65 (as I did) and don’t start taking Social Security (like me), you still have to sign up for Medicare — even if you’re still working, have insurance, and don’t plan to use Medicare (this will, of course, confuse your current health care providers, at least momentarily. Everyone assumes when you turn 65, you’re on Medicare). 

There’s a seven-month initial enrollment period that begins three months before the month you turn 65 and ends three months after your birthday month. Now, there are some exceptions to that timing, but — the bottom line is, you’ll likely find it to be less complicated to sign up around your 65th birthday, and then you don’t have to worry that you’ll run afoul of deadlines that can cost you a lot later on.

The bottom line here is that your post-retirement spending plans need to include something for health insurance (more precisely, your Social Security benefit will be reduced by that amount). You can find out more at: https://www.medicare.gov/basics/costs/medicare-costs

The Sixth “Lesson”

Let’s face it, even those of us who have spent our lives thinking about retirement don’t get everything right when it comes to our own.

The irony is that I spent years telling others to plan — and I did - at least sporadically. Ultimately, I focused more on the accumulation side of the retirement equation and less on the spending side.  The good news is, even with the “surprises” noted above, the accumulations appear to have provided a pretty good buffer.   

Retirement is good. Really good, in fact. But it’s even better when you make the easy moves before they become harder ones. If you’re still working and thinking, “I’ll handle that later,” take it from someone three years in:

“Later” comes faster than you think.

-          Nevin E. Adams, JD

[i] See The Biggest Surprise About (My) Retirement

The Biggest Surprise About (My) Retirement

My “retirement” isn’t even a year old—and for the most part, it’s played out pretty much as planned.  There was, however, an area that caught us a bit flat-footed.

For us (and this has very much been a joint effort between me and my wife), that surprise was…Medicare. 

Don’t get me wrong; to date the coverage has compared favorably with what we had pre-retirement—mostly because we coupled “standard” Medicare with a Medicare Advantage plan (which has actually provided some nice enhancements over our pre-retirement coverage). 

That said, here are some things we’ve learned along the way that we either didn’t know or hadn’t thought about “before”:

Medicare isn’t free. 

Well, technically speaking, some of Medicare comes without additional premiums/cost, at least if you’ve worked at least 10 years and paid into that system. 

There are two “core” parts to Medicare; what are affectionately referred to as Part A (hospital coverage)—which is “free” (in that your historical payroll deductions fund it) and Part B (medical insurance, which covers outpatient care, services from doctors and health care providers, some preventative services)—which, like your current health insurance, has premiums that you have to pay.  More on that in a minute.

While certainly of benefit, those coverages won’t replace everything covered by the health insurance you’ll have carried pre-retirement (those are likely included in what are called Part C (vision, hearing, dental, and Part D (prescription drug coverage). The bottom line here is that your post-retirement spending plans need to include something for health insurance (more precisely, your Social Security benefit will be reduced by that amount). You can find out more at: https://www.medicare.gov/basics/costs/medicare-costs

You (may) need to apply for Medicare before you “take” Medicare.

Once you start receiving Social Security benefits, you are automatically enrolled in Medicare A. But if you work past age 65 (as I did) and don’t start taking Social Security (like me), then you have to sign up for Medicare—even if you’re still working, have insurance, and don’t plan to use Medicare (this will, of course, confuse your current health care providers, at least momentarily. Everyone assumes when you turn 65, you’re on Medicare). 

There’s a seven-month initial enrollment period that begins three months before the month you turn 65 and ends three months after your birthday month. Now, there are some exceptions to that timing, but—the bottom line is, you’ll likely find it to be less complicated to sign up around your 65^th birthday, and then you don’t have to worry that you’ll run afoul of deadlines that can cost you a lot later on.

There are no Medicare “family” plans.

You may be accustomed to choosing workplace health insurance based on the needs of your family, or at least you and your spouse. For years I have “delegated” that responsibility to my wife, who has always had a better sense for the family doctors and our coverage needs. But we each had to sign up for Medicare separately (though we did “coordinate”).

That said, there can be complications if you are retiring at a different time than your spouse, particularly if you’ve shared coverage under a family plan. We had planned to let my wife (who is the same age, though she maintains that the five-month differential in our dates of birth makes her younger) go on Medicare while I continued with my workplace plan. Now, there is a process that allows for this, but it’s a bit of an exception and—well, we got close to the deadline, and rather than have coverage at risk, we just waited until we could both switch at the same time.

Your Medicare premiums are based…on your income.

One of the biggest surprises (to me, anyway) was to find my Medicare health insurance premiums were based on income. And if you’ve filed jointly, BOTH of your premiums are based on your adjusted gross income (AGI). But that wasn’t the biggest surprise… 

Your Medicare premiums are based on your income…from two years ago.

When it comes to figuring out your income for establishing your Medicare premiums, you might expect that a government agency would turn to an official government record of your income—and that turns out to be your AGI, as noted above. The jaw-dropper (this was the biggest surprise) was that it was our AGI from TWO YEARS AGO. 

Now, mind you, we’ve planned our retirement income needs just fine—but my AGI this year is going to be significantly less than it was when I was employed full time. And that makes a BIG difference in those monthly Medicare premiums. 

Fortunately, there is an appeals process—and even more fortunately, with my wife’s persistence we were able to rectify that situation BEFORE the first premium came due. It’s something you’ll want to get a jump on, as gathering the data/proof, getting it to Social Security—not to mention getting it to the attention of someone at Social Security—can be time consuming. For more information on that process, see https://www.ssa.gov/medicare/lower-irmaa or on the issue here.

The bottom line is that you want to start thinking about Medicare BEFORE you start filing for it. 

- Nevin E. Adams, JD

The Big Retirement Question

I’ve been honored with a lot of praise and congratulations over the past couple of months about my “retirement” (and not a little skepticism about my understanding of the term) — but in quiet moments, there’s been one question that keeps coming up.

That question — and it generally arises once topics like “what are your plans,” “are you going to move,” and “can your wife really stand having you around all the time” have been broached — is, quite simply, “how do you know when it’s time to retire?”

Honestly, it’s a complicated question, and one to which the answer is deeply, even intimately, personal.  For many it’s not their choice, of course. Surveys suggest that for significant minorities the timing is imposed on them by external factors; a job layoff, a physical impediment, or perhaps caretaking responsibilities. While none of those were factors in my decision, at the outset, it’s worth bearing in mind that the “when” is not always in your control.

For most people — including THIS person — the calendar plays a role. Sixty-five is one of those milestone markers to which folks (and plan documents) still “anchor” — I say “still” because full retirement age under Social Security for today’s retirees is no longer 65. You don’t actually have to be retired in order to claim Social Security — but as I eyed that decision point, I had Social Security’s marker in mind. The reality is that there remains a certain age range in which thoughts of retirement can be considered “normal.”

Regardless of age (or Social Security) considerations, a big focus of my retirement timing was about finances. More specifically, first knowing how much our monthly living costs (and that knowledge is a lot more accurate closer to actual retirement than it would have been 30 years ago). That said, it remains something of a moving target, what with surging gas prices, and the reemergence of inflation. We tend to live within the bounds of a known paycheck, one that often (though not always) makes an effort to keep pace with such things. As one contemplates the uncertain “certainties” of a more-or-less “fixed” income — well, when you’re looking out over a financial future that is likely to be twenty years — or more — even the most prescient crystal ball gets a little fuzzy.      

All that starts with a baseline, of course, and thanks to my wife’s spreadsheeting and budgeting skills, it was pretty easy to extrapolate what our baseline expenses would be once work-related expenses (including things like 401(k) contributions) were behind us, including a cushion of sorts for the travel we have in mind, and some “new” considerations for things like healthcare.[i]    

With that financial floor established, we then had “only” to see what regular sources of income[ii] we had to meet those expenses. In that regard, we were fortunate — able to structure regular streams of retirement income that exceeded our baseline expenses while still preserving the larger pools of retirement savings that we had set aside over our working careers for things beyond that baseline out into a distant future. 

At that point we had dealt with what for many is the big obstacle — knowing that we could afford to walk away from that regular paycheck, and that we could maintain our current lifestyle. Now, that wasn’t the first time we had run through those estimates — doing so had already helped us establish savings goals over the years — but the calendar provided a specific focus with regard to timing.

And then COVID hit. 

That turned out to be a mixed blessing. For all the awful, scary things that came with the pandemic, it gave me and my wife of (then) 35 years an extended period of time together in close quarters. Our nest was empty, but for two four-legged children — and it affirmed not only our relationship, but the comfort of knowing that I could be not only content, but happy being at home. Make no mistake, if there’s one big regret that one hears retirees express, it’s that they weren’t ready for the shift to a home focus (not to mention their spouses). COVID provided me with a real-world preview of that experience — and even with the interruptions of incessant Zoom and Teams calls (or perhaps because of them?) — I could tell I was … ready.

So, how do you know when it’s time to retire? Well, for my money (literally), you need to have the interest — the motivation — to seek less of the “what you have to do” so that you have more time for the things you want to do. That needn’t be age-related, of course — but life’s ongoing obligations sometimes require a deferral of the latter in the interests of the former. 

To that point you also need to have the money figured out — because the things you want to do may not put food on your table or a roof over your head. That said, you might find that you can live more simply, or live elsewhere — and enjoy life more with…less. It’s easy to get caught up in the pace of work and life — and to push off for another time the opportunity to “smell the roses” — all the more so if you love and enjoy your work.     

Finally, it’s really important to have the right mindset to be ready to step outside the confines of a W-2 employment structure — that you have people or interests or hobbies that can (continue to) provide meaning, fulfillment, and joy in this next chapter of life.

It’s still early days for me in this new chapter — and I’ll concede that by most outward appearances I haven’t retired at all. Trust me, like any new “job” there’s a learning curve. And I’m working on it.

- Nevin E. Adams, JD

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[i] We didn’t appreciate it initially, but to date Medicare planning has proven to be the most stressful because, while the coverage is surprisingly good, premiums are income-based — and Medicare starts with the last official income number it has — your 1040 AGI…FROM TWO YEARS AGO. Perhaps needless to say (except to Medicare), my post-retirement income is less than it was two years ago — but, fortunately, we were successful in making our case on that point.

[ii] I (finally) consolidated my 401(k)s. I’m happy to say that the depositing of those savings has gotten a LOT more efficient over the years. However, I’m disappointed to say that getting those funds OUT is about as tedious as it has always been (one of the reasons I had put off consolidation) — and EVERYONE, it seems still insists on doing so via a hardcopy check that has to get to you via the U.S. mail (though you CAN pay a ridiculous premium to expedite that delivery) — UNLESS you’re rolling it over to an IRA on their platform. Gee, I wonder why… 

A Moving Target

Trying to figure out how much money an individual or couple needs to live on in retirement is, to put it mildly, a complicated business. Among other factors, it depends on the age at which he or she retires, where they live, and how they live. It can be affected by marital status, their health, and the markets, both before and after retirement.

And, as a recent EBRI Notes article (see “Savings Needed for Health Expenses for People Eligible for Medicare: Some Rare Good News”) explains, it can also be affected by the availability and source of health insurance coverage after retirement to supplement Medicare, and the rate at which health care costs increase.

Additionally, public policy that changes any of the above factors will also affect spending on health care in retirement. Consequently, trying to hit that target can feel like aiming at a bulls-eye that is not only moving, but moving fast, and zig-zagging away from the bouncing, moving vehicle in which you find yourself.

We’re often asked to come up with a single number that individuals can use to set their retirement savings goals—and while it’s certainly possible to do so (and others have), what’s often glossed over is that while that approach appears to offer clarity, a single number based on averages will be wrong for the vast majority of the population.¹ Moreover, frequently overlooked in the generalizations about retirement spending levels is the very real (and potentially huge) financial impact of post-retirement health care expenses.

Individuals will be responsible for saving for health insurance premiums and out-of-pocket expenses in retirement for a number of reasons. Medicare generally covers only about 60 percent of the cost of health care services for Medicare beneficiaries ages 65 and older, while out-of-pocket spending accounts for 13 percent. The percentage of employers offering retiree health benefits has been falling, even in the public sector, and even when offered, those benefits are becoming less generous and more expensive to the retiree.

Using a simulation model, we recently estimated the amount of savings needed to cover health insurance premiums and out-of-pocket health care expenses (excluding long-term care) in retirement. The EBRI article presents estimates for people who supplement Medicare with a combination of individual health insurance through Plan F Medigap coverage and Medicare Part D for outpatient-prescription-drug coverage. For each source of supplemental coverage, the model simulates 100,000 observations to allow for the uncertainty related to individual mortality and rates of return on assets in retirement, and computes the present value of the savings needed to cover health insurance premiums and out-of-pocket expenses in retirement at age 65. From those observations, the analysis determined asset targets for having adequate savings to cover retiree health costs 50 percent, 75 percent, and 90 percent of the time, both for individuals,² and for a stylized couple, both of whom are assumed to retire simultaneously at age 65.³

Of course, some will need more money than the amounts cited in the report, which did not factor in the savings needed to cover long-term care expenses, nor the reality that many individuals retire prior to becoming eligible for Medicare. Some will need to save less than projected if they choose to work during retirement.

Still, as hard as it can be to hit a moving target, it’s even harder to hit a target you can’t see.

- Nevin E. Adams, JD

¹ For more on the shortcomings of this approach, see “Single Best Answer.”

² Separate estimates are presented for men, women, and married couples. Because women have longer life expectancies than men, women will generally have larger expenses than men to cover health insurance premiums and health care expenses in retirement, regardless of the savings target.

³ Our analysis found a 1–2 percent reduction in needed savings among individuals with median drug use and 4-5 percent reductions in needed savings among individuals at the 90th percentile in drug use since EBRI’s 2011 analysis (see “Savings Needed for Health Expenses for People Eligible for Medicare: Some Rare Good News”).