The Top 3 Pivotal Decisions Retirees Face

Retirees and retirees-to-be face many decisions that affect their ability to live a comfortable retirement. However, there are three that are perhaps the most pivotal for most of us to face as we age: When to claim Social Security, how to manage Required Minimum Distributions (RMDs) from retirement accounts, and when or how to downsize.

Social Security

Workers in the US, whether citizens or residents, accumulate credits toward Social Security as they work and pay into the US retirement system. Once the minimum requirements have been satisfied, a worker can claim Social Security benefits as early as sixty-two (younger if they become disabled) or as late as seventy.

But when should you claim Social Security if the age band varies? It depends.

For those with a family history of early mortality before their seventies or mid-seventies, claiming at age sixty-two could make sense, even with the 30% reduction in benefit payments, since they may not live long enough to offset the opportunity cost of waiting until the standard retirement age or the maximum age of seventy.

For others, claiming at the standard retirement age of sixty-seven is the most logical option, since they will already be retired or retiring and will need the income to supplement their retirement savings that otherwise would not provide enough income.

For a smaller subset who are either planning to work longer, have the means to delay Social Security, or have minimal early mortality concerns, waiting until 70 can yield a higher benefit amount than the standard payout, making waiting worthwhile.

Each worker's situation is different, and therefore, many options exist for claiming this valuable retirement benefit.

Required Minimum Distributions (RMDs)

In addition to Social Security benefits, another age-dependent situation that applies to US workers is Required Minimum Distributions, also known as RMDs. These withdrawals are mandated for qualified pre-tax retirement accounts, such as 401(k)s, IRAs, SIMPLEs, and SEP-IRAs. While the earliest age at which one can usually withdraw from a qualified pre-tax retirement account is fifty-nine-and-a-half, the government mandates withdrawals of a certain amount based on life expectancy and the account's value once most people reach seventy-three years of age.

While those at RMD age can defer their first RMD until April 1st of the following year, these distributions can quickly add up for those who diligently saved and invested prior to retirement, potentially impacting other retirement benefits if their income exceeds a certain threshold.

Therefore, many pre-retirees and retirees are increasingly considering Roth conversions of pre-tax qualified monies to help lower their future tax bills as they progress into their later years.

Whether Roth conversions make sense depends on an individual's situation, but they are increasingly an important part of retirement planning.

Downsizing

As retirement approaches or stretches on, another decision many face for economic reasons is downsizing. During working years, many Americans with children have larger homes or choose locations closer to work, which cost more than smaller homes or those farther from a city center. But as children move out of the house or there is no longer a need to be near a former employer, downsizing to recoup some of our equity and move into a more managable-sized house during retirement becomes an important conversation.

For each individual or family, this conversation will look different, but for many Americans, the majority of their wealth is tied up in home equity. Thus, downsizing is the third major decision retirees face.

Taking Action

Planning for and properly managing one's retirement takes diligent effort due to the many competing priorities we each face in life. However, when to claim Social Security, how to manage RMDs, and whether or not to downsize are the three most pivotal.

If you are nearing retirement or already retired and trying to determine how to navigate one or more of these decisions, we are here to help.

At Lundeen Abrams Advisors, we have helped and continue to help a wide range of clients nearing or enjoying retirement, and we would like to help you with yours. Please give us a call today so we can discuss which issues are most important to you and how we can help.