Aside from signing up for Medicare, matching your future costs to income is the most important step in the run-up to retirement.
Start by identifying fixed expenses — say, for food, housing, insurance and taxes — along with more-flexible expenses, such as clothing and gifts. Don’t ignore big, occasional costs, says Lauren Klein, a certified financial planner (CFP) in Newport Beach, California. “Eventually, you’re going to need a new roof or you’ll have to replace your car,” she says.
In a separate column, list discretionary expenses, for costs such as travel, entertaining and dining out. Note that some expenses will go down or disappear when you’re no longer working — your wardrobe will cost less when every day is casual Friday — but some expenses, such as travel and health care, could go up.
Once you’ve identified your fixed, essential expenses, match them to your resources. Ideally, guaranteed income — Social Security and maybe a pension or an annuity — will cover the basics. If not, you’ll have to use your retirement savings to close the gap, as well as to cover the nonessentials.
If your nest egg seems too skimpy to go the distance, consider working longer. You can continue to save for retirement, and you’ll have fewer years in retirement to finance.
You can sign up for benefits as early as age 62 (full retirement age is 66 for people born between 1943 and 1954). But by claiming early, your benefits will be reduced by about 25 percent to 30 percent of the amount you’d get at full retirement age. For every year you postpone taking benefits after full retirement age until you hit age 70, you get an 8-percent boost.
If you think you have a less-than-average life expectancy (83 for 65-year-old men; 85 for 65-year-old women), or if you know you’ll need the income to make ends meet, you’ll probably take the money when you reach full retirement age. But if you have reason to think you’ll live longer and that your savings could fall short, do whatever you have to do to get that 8-percent increase.
Couples have more claiming options than singles. You can take your own benefit as early as age 62, or you can claim a benefit equal to at least 50 percent of your spouse’s benefit if it’s higher and your spouse has already claimed. Either way, you’ll get a lower benefit if you claim before full retirement age. If you’re divorced or widowed, you may also have access to benefits based on your spouse’s earnings, which may be a better deal than your own.