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I’VE BEEN EMPLOYED fulltime for nearly three decades—and retirement is now on the horizon. That means I’m spending more time trying to figure out how best to generate retirement income.
One obstacle: I keep getting bogged down by the seemingly endless choices. Despite knowing how critical these decisions are, I often find myself throwing up my hands in frustration and opting to do nothing. My experience isn’t uncommon. Welcome to the paradox of choice: When faced with a host of options, often we simply avoid making any decision at all.
That brings me to my retirement plan. Fortunately, of the six key components, three come mostly choice-free:
Spousal income. My husband is already retired and receiving a pension, Social Security benefits and income from a rental property. The pension and Social Security are fixed monthly payments, while the rental income varies from month to month. These payments will continue for the rest of his life.
Health insurance. My spouse and I are covered by a plan through my current employer. Once I turn age 55, I can opt into an early retiree program allowing us to continue with the same coverage we have now until I reach age 65, when I’ll be eligible for Medicare. After that, we’ll receive a monthly benefit to cover the cost of a Medigap policy. This benefit will continue for both my husband and me for the rest of our lives.
Housing. When I retire, we’ll sell our current home and use the proceeds to pay down the mortgage on our retirement home. The only choice we’ll need to make at that point: Will we recast the mortgage and reduce our monthly payment or, instead, make one large payment toward the loan’s principal balance and keep our monthly payment the same?
The other three components of my retirement plan, meanwhile, come with a host of options:
Pension. I have a small pension from the first fulltime job I ever held. There are no choices for me to make regarding how my money is invested and I’m guaranteed to earn a 7.5% rate of return for as long as I have money in the account. What I need to decide is how and when to withdraw the money. I can take a lifetime monthly payment, a lump sum payout or a combination of the two.
The age at which I take the money out, and whether I opt for the lump sum, could be influenced by my health. If I were to die before taking any form of payment, my husband—as beneficiary—would only receive an amount equal to about 45% of the overall account value. As such, we’ve decided to prepare the paperwork for a lump-sum distribution option, but file it only if I find myself seriously ill. That would guarantee my husband would receive the account’s full value.
Social Security. Like most people, I’ll need to choose the age at which to begin Social Security benefits. This will partly hinge on what will trigger the biggest payout: I could receive benefits based on my own work record or, alternatively, I could get spousal benefits based on my husband’s earnings record. I would receive a larger monthly check based on my own earnings record if I delay benefits until age 70. But that’s not true of spousal benefits. They stop increasing as of your full Social Security retirement age—67 for me.
My 403(b). Within my current employer’s 403(b) plan, there are no fewer than 50 different managed funds that I can invest in. The accounts range from highly conservative to highly volatile and I can divvy up my money amongst them however I want. When I retire, I’ll need to decide whether to leave my money where it is or roll it over to an IRA. Each of those options comes with its own set of choices and tradeoffs.
If I leave my money where it’s at, I’ll have the option to invest a percentage of it in an annuity with a guaranteed rate of return. I can also access the funds if I leave my employer at age 55 or later, without incurring the usual 10% early withdrawal penalty. On the other hand, if I roll the money into an IRA, I’ll have the freedom to put it into a wider variety of investment options. I could also choose to convert some of the funds to a Roth IRA. I would, however, likely be forced to wait until age 59½ before I could access the money penalty-free.
Kristine Hayes is a departmental manager at a small, liberal arts college. Her previous articles include Day by Day, Did It Myself and While at Home. Kristine enjoys competitive pistol shooting and hanging out with her husband and their dogs.
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Good points! I know that the terms of whatever deal I may have now could very well change. I hope the health care coverage will be a benefit the college can continue to offer but with many higher education institutions struggling financially, I’ve accepted it may be a limited-time offer. The idea of have the funds frozen in the event of bankruptcy is an interesting scenario I hadn’t considered.
That’s a good point about bankruptcy. I love my 401k – super low cost, lots of investment choices, and a stable value fund that’s giving me close to 3%. I had intended to leave the 401K as is, but maybe I need to think a bit more on that.
Kristine your spousal benefit on Social Security would be limited to your current husband. I think you are confusing that with survivor benefits which would be available for former spouses (assuming marriage lasted over 10 years) if you didn’t re-marry before age 60.
James. Thanks for the clarification! When it comes to Social Security, I definitely get confused about what benefits I may, or may not, be entitled to. Having the Humble Dollar community around is very helpful when it comes to figuring it all out.
You are indeed right. My bad. I fixed the story.
I hope the “for life” retirement benefit promises work out for you but don’t count on it. I not only worked for the same company for fifty years, I managed the benefits and negotiated union contracts for most of that time. We negotiated retiree medical benefits with the promise that the company would pay a certain percentage of premiums for life. During negotiations workers made tradeoffs. In other words, they paid for their future retirement benefits.
I and my staff communicated these benefits for years to thousands of employees. Last year the company announced it was changing everything promises. Dental insurance was eliminated, prescription coverage eliminated and all retirees eligible for Medicare must select a Medigap plan in place of the company plan. The promise to pay a percentage of premiums was ignored and instead a lump sum is being placed in a HRA to cover everything.
Here’s the kicker. The HRA contribution will increase by only 1.5% a year. We all know health care costs and premiums increase at a faster rate. So, the earned promise is ignored and the future cost increases are shifted to retirees … and the company reduces its retiree medical liability by $500 million. Once a person is retired they are at serious risk even to some extent if the pension is underfunded. Union contracts mean nothing.
I’m definitely hoping (not planning on) the retirement health care benefit covering us for the rest of our lives. Considering that my grandmother just turned 99, I could easily spend 44 years (or more) in retirement. This year has been financially problematic for colleges and universities which makes me wonder how long the health care benefit will continue into the future. On the plus side, I’m fortunate that the college I work for is generally ranked as one of the top for ‘financial fitness’.
My wife and I have also have Medigap coverage from her former employer as well as reimbursement for both of our Medicare B premiums. In our case I will lose these benefits if she predeceases me. Perhaps your coverage is different and your husband will still receive Medigap coverage if you predecease him.
It’s funny you would mention that particular benefit. I’ve been attending the ‘Plan for Retirement’ seminars that my employer offers for a number of years now. They go over the same subjects each year, but there’s always something new I learn each time I go. Last year I learned that the health care benefit will continue for my husband even if I pass away first. It’s quite a benefit and, for probably obvious reasons, one that my employer stopped offering several years ago.
Hi Kristine – I know Jonathan well, am a fan of his work and he’s been on our podcast. I’m the founder of https://www.newretirement.com/ – we offer the most comprehensive direct to consumer planning tool available, and I think it would help you create a baseline along with scenarios to explore your big decisions. Pretty much everything you described is covered. If you try it let me know – I’d love your feedback. The core tool is free and we have a 14 day free trial for the advanced features.
Hi Steve. Thanks for the information. I’d be very interested in checking out the planning tool. I often feel overwhelmed by the number of choices I’ll need to make in the near future.
Retirement planning comes down to several things: 1)what is your expected monthly expenses and what part of those expenses are fixed and what are discretionary? This implies that you must determine how much of your fixed expenses can be covered by things like SS and pensions. If there is a large gap consider an annuity to fill that difference. Covering that gap with an annuity will cost less in terms of total funds invested upfront as opposed to buying bond funds to be able to derive the needed additional income, 2) you are very fortunate in that your health care insurance are being covered thru a Medigap policy that your employer will pay for, 3) each spouse should buy a life insurance policy so that the surviving spouse can reap some funds to offset the financial hit that often occurs when the first spouse dies. A spouse dying can have a significant impact on household net worth, 4) remaining investable funds should be invested simply in index funds with no more than 50 or 60% allocation to stock. The allocation should reflect your risk tolerance which is derived from how much you need to remove from investable assets each year to cover discretionary expenses. If you need only, say 2% a year, it makes no sense whatsoever to allocate 70 or 80% to stocks if your asset base is upwards of $500K and up and 5)if it is not too expensive buy a LTC policy. They are more expensive as you age. Buy a policy linked to your state like a NY Partnership policy which allows you keeps more of your assets than would normally be allowed buying a traditional LTC policy.
Thanks for this article Kristine. I am approaching retirement having worked at that medical school across the river from you for about 25 years. So, pension Tier 1 also. So many choices for sure and so overwhelming! I just discovered humbledollar a few weeks ago and it is certainly helping me understand more.
You along with others have mentioned mentioned concern re: pension and how stable it is likely to be long term. There are concerns for sure. However, I have spoken with quite a few people about this issue including a former state legislator, and i do feel somewhat comforted that at least from a legal perspective we are pretty well protected. From a fund solvency perspective about all I could manage to ascertain is that Oregon’s fund is pretty well managed compared to many, and of course, our pension is insured which will offer some protection in the event of a catastrophy. But of course, nothing is a sure thing!