Getting ready for retirement

time to retireAre you “retirement-ready”? Many people dream of a retirement filled with time spent traveling, enjoying hobbies and making lasting memories with family. However, the realities of retirement can be far more challenging.

Between the emotional issues and financial constraints, retirement can be one of the most difficult transitions for people to make. These challenges, coupled with the current economic environment, have forced many to unexpectedly postpone their retirement dreams.

In fact, according to the Insured Retirement Institute, 35 percent of Americans plan to work after age 66, with 23 percent expecting to work after age 70.

The misconceptions noted below highlight a few of the inaccurate assumptions that have forced many retirees to adjust their plans.

•I will spend less after retirement.

People often assume that retirees will need 70 to 80 percent of what they currently spend during retirement. While some savings will be realized from a lack of commuting costs and the possible downsizing of a home, the reality is that retirement expenses are often nearly 90 to 105 percent of their expenses before retirement. This is partially due to the desire to spend more time on hobbies and traveling during the early years of retirement when many retirees are at their healthiest. In addition, health care costs can also take a huge unexpected bite out of the budget, further increasing expenses.

•Basic Medicare will cover all my health care expenses.

According to Fidelity Investments, the average 65-year-old couple will spend about $400,000 out-of-pocket on health care throughout retirement until age 92, not including long-term-care costs. The complexities of these costs have made it difficult for many savers to accurately estimate their effect on expenses after retirement. In addition, many retirees inaccurately assume that basic Medicare will cover the majority of their needs.

Medicare Part A covers hospital benefits and is usually provided at no additional cost. However, the outpatient services provided by Medicare Part B and the prescription-drug coverage offered by Medicare Part D have additional charges associated with them. Also, remember that it is often necessary for retirees to choose a private Medigap policy that can help cover the costs that Medicare doesn’t cover. So, many retirees end up spending significantly more than they had planned.

•Social Security benefits are tax-free.

Social Security benefits may be taxable if you file a federal tax return as an individual and your total income is more than $25,000. If you file a joint return, your benefit may be taxable if you and your spouse have a total income of more than $32,000.

Generally, 50 percent of your Social Security benefit will be taxable if your income exceeds the thresholds. However, when income exceeds $34,000 for single taxpayers and $44,000 for joint filers, up to 85 percent of your benefit could be taxable.

In addition, Social Security benefits are reduced $1 for every $2 you earn over $14,640 if you haven’t reached your normal retirement age yet. In the year you reach normal retirement age, your benefit will be reduced $1 for every $3 for the months leading up to your normal retirement age. For more information, consider speaking to your tax adviser and visiting

•Social Security will keep up with inflation.

According to the Social Security Administration, the purpose of the cost-of-living adjustment is to ensure that the purchasing power of Social Security benefits is not eroded by inflation. However, many seniors have realized that Social Security does not always reflect the inflation they experience. For example, Social Security did not provide any cost-of-living adjustment in 2009 and 2010.

Despite no increase in benefits, costs associated with health care, food, fuel and utilities were not stable during that period. In addition, some politicians have discussed changing how the cost-of-living adjustment will be calculated for future years so that retirees experience lower inflation adjustments in an effort to reduce the financial burden on the system.

•I will be in a lower tax bracket at retirement.

While people who rely solely on Social Security as their primary income may find themselves in a lower tax bracket, retirees with supplemental income sources may experience something very different. Remember, withdrawals from 401(k)s, traditional IRAs, and other qualified accounts are taxable as ordinary income. Factor in any additional pension income, and you are suddenly in a tax bracket that is not unlike the bracket you were in when you were working.

More often than not, a comprehensive game plan may help provide clarity and eliminate some of the inaccurate assumptions about retirement so that more time can be spent on doing what retirement means to you.


Kurt J. Rossi, MBA, is a Certified Financial Planner Practitioner. He can be reached for questions at (732) 280-7550 or LPL Financial Member FINRA/SIPC.