If you are an educated retirement saver, then you are probably well aware of the 10% penalty you can get hit with if you take a withdrawal from your IRA or employer retirement plan before age 59 1/2. For many Americans–particularly those hit hard financially over the past 8 months–it can be tempting to take that early withdrawal to stay afloat. However, you’re a smart saver and you’ve most likely put yourself in a situation where you don’t need to hit your nest egg. That said, though, you should be aware of the exceptions to the 10% penalty. Now, I’ve mentioned these exceptions in the past, but I feel the need to mention them again as it’s been a while. There are a few exceptions, though, when you can take that early withdrawal and not have to worry about the 10% penalty. Buying your first home? Take that early withdrawal with no penalty. Want to help out a child with college tuition? Take that penalty free withdrawal. Lose your job and need help affording health insurance? Again, take the withdrawal and not worry about the penalty. These tend to be commonly used exceptions to the 10% early withdrawal penalty. Now, before you go taking huge early withdrawals from your retirement savings accounts, make sure it’s the right decision above all else. If you can get the funds you need from other places (ideally, an emergency savings account) that may be the wiser route to go. Remember, your retirement savings accounts should be an absolute last resort when it comes to taking early withdrawals. You should also meet with a certified financial planner or wealth manager to make sure you are making the best decision for you and your future and to ensure you take the proper steps when taking that early withdrawal.
Yes, your finances are a crucial part of your decision to retire. After all, you really can’t retire until you have enough saved up to support yourself. However, money shouldn’t be the sole reason you decide to retire. There are other aspects of retirement that need to be considered as well when deciding whether to retire. Such topics include what you plan on doing in retirement, whether you are socially prepared for retirement, and whether you have proper health insurance/medical care plans. These topics won’t overtake finances when it comes to being comfortable enough to retire, but they can have a big role in how long your nest egg lasts and how much you enjoy retirement. For example, if you don’t have plans for how you will cover your medical expenses in retirement, you could be putting your nest egg at risk as medical bills can really add up, especially as you age. Those bills could eat into your savings and leave you with a shortage in the future. The social aspect of retirement is also often overlooked. Leaving the social structure of an office environment can be a tough adjustment for retirees, particularly when the office is an important part of their social life. Make no mistake, retirement can be a lonely time without a good social network to enjoy it with. For retirees living far away from family, it can be even more difficult. Therefore, as you contemplate retirement, you should take time to think about more than just the financial aspects of it. Even if you find that you are financially ready for retirement, you may find that you’re not socially ready to do so or that you just don’t want to stop working.
If you work for a municipal or state government, you are probably well aware of the issues facing government pensions. Many states and cities are facing potentially huge shortfalls in pension plan funding that will most likely reach into the billions. While these shortfalls will have the biggest impact on workers who are far from retirement, they will also affect those already in retirement as well as those getting very close to retirement. The governments facing the biggest shortfalls are already discussing ways to make up for the shortfalls, including limiting benefit amounts, eliminating post-retirement health insurance, and cutting back on spousal benefits. So, if you are a state or municipal government employee, what can you do to protect yourself? Well, the easy answer is to save enough so that you don’t need to rely on a government pension. However, for many government employees, that’s not a possibility and furthermore, they’ve made contributions throughout their careers and thus should rightfully get some of that money back to help with retirement costs. If you are a government employee and unsure of whether your pension will be enough to help with retirement, you will want to strongly consider having a secondary source of income to help get you through retirement or balance out any changes that may occur with your pension in retirement. If you are years away from retirement, you will want to pay attention to any changes that occur to your pension and plan accordingly. Government pensions could be a big retirement talking point in the coming years and decade, so pay attention closely.
If you know anything about Medicare, then you are probably aware of the fact that there are choices to be made when it comes to selecting a plan that works for you. There’s a good chance that you, like many retirees, will rely on Medicare to help cover your medical costs in retirement, so you will want to know what your options are. If you are near retirement, you’re probably familiar with terms such as “Part B” or “Part D Prescription Coverage” already and, thus, know that you will have to make some decisions about your coverage. This means researching the plans that are offered and understanding what the advantages and disadvantages are to each choice. You will want to see what each option covers and doesn’t cover. Such things to pay attention to is whether a choice allows you options when it comes to choosing a doctor, whether certain treatments are covered, and what potential gaps in coverage may exist. Regardless of what option you choose for Medicare, keep in mind that Medicare changes fairly regularly, so you will want to review your coverage each time you enroll (most likely yearly). I understand that choosing a proper Medicare plan can be a bit overwhelming, however, it’s something you may have to do because you will need medical insurance in retirement. The good news is that there are lots of resources online that can help you break down the coverage options and which you can use to educate yourself about what your options are.
In the past, I’ve talked about reasons why you may want to have multiple retirement accounts and how you may end up having multiple places from which you draw your money in retirement. While I’ve mostly focused on IRAs and 401(k)–as well as other employer retirement accounts–I haven’t really talked about another important retirement account you will want to have, a Health Spending Account (HSA). You’re probably familiar with what an HSA is through your employer benefits as it is commonly offered by many employers as a part of health insurance benefits these days. HSAs allow you to save for future medical expenses as well as reduce your taxable income. If you are on the younger side, one of the biggest draws to an HSA is the tax advantages they offer; HSA contributions are tax-deductible, the money in the account grows tax free, and the money can come out tax free. Given that there are questions as to how long Social Security as well as how Medicare/Medicaid may look in the future, it’s important that you take steps to save for medical costs in the future, especially if you fall within the Generation X or Millennial age brackets. HSAs can be an efficient and effective way to do so. Furthermore, if you start and HSA, you should include it as part of your financial planning for retirement, along with any IRAs or 401(k)s you may have. If you don’t have an HSA, you may want to look into starting one during the next enrollment period for your health insurance benefits (that is if your company offers it). As for how it fits in with your retirement planning, you should speak with a certified financial planning expert if you have any specific questions.
Medical expenses are one of the biggest retirement savings killers. All it takes is one unplanned medical emergency or issue and the savings you worked so hard to build up can be decimated or your retirement plans left greatly altered. Thus, along with your finances, you should also be thinking about health insurance in retirement and how you plan to cover yourself once you stop working. This will require exploring Medicare options as well as possible employer options (i.e. if it is part of a retirement package or retirement benefits). As part of that process, you will want to determine what those insurance costs will be and how that factors into your retirement savings. If you have questions regarding saving for retirement, you should speak with a certified financial planner.