Full Text
THE ROAD TO RETIREMENT In preparation for retirement, employees must decide when it is time to retire and begin a new phase in life. There is no easy answer as to when but having a plan for retirement is important. Historically, the planning road begins around five years out from the target retirement date. Phase I – Five Years Out Plan the road trip to retirement. Draw yourself a map and ask yourself the following questions: Am I deferring enough in my 457 account – should I be increasing the amount with each annual COLA (Cost of Living Allowance)? Do not forget you must defer 8% to receive the county maximum match of Experts recommend that everyone needs about 80% of their salary in retirement income. It all depends on individual assets and needs. In retirement, retirees can use the three-legged stool model —retirement funds, individual savings, and Social Security income. In recent times however, retirees are now using the four-legged stool model— retirement funds, individual savings, Social Security income, and part-time work. Do I have a ROTH IRA? A ROTH is an individual post-tax retirement account. The amount that can be saved each year changes with IRS regulations. In 2024 that amount will be $7,000. If you are over the age of 50, the maximum amount is $8,000. If you take a distribution of Roth IRA earnings before you reach age 59 ½ and before the account is five years old, the earnings may be subject to taxes and penalties. ---PAGE BREAK--- The Road to Retirement 2 Do I have a substantial amount of debt that I can pay down or eliminate prior to retirement? Having substantial debt is oftentimes difficult to manage in retirement. Phase II – Three Years Out Review your retirement accounts and consider transitioning away from extremely aggressive stocks and using more moderate funds. Review deferral amounts and have a ROTH IRA. Do I have life insurance outside the county? The county life insurance can be converted to a “whole life” policy, or “ported” to a term life. The premium rates for ported coverage increase with age and are not guaranteed. The premium to continue the life insurance with the county is approximately 35-40% higher than rates for employed individuals. An individual wanting to continue the insurance must complete an application to New York Life (formerly CIGNA) within 31 days of separation from service. An option, other than using life insurance, is to set up a separate financial account for any final expenses. Do I have Long Term Care insurance? Statistically speaking over 70% of adults aged 65 years and older will require long-term care at some point. The average length of stay in long-term care is 3.2 years. Just over 20% of residents will require care for 5 years or longer. Americans spend approximately $475.1 billion annually on long-term care. The average facility that has quality care costs approximately $7,000 per month. Long-term care insurance should be considered in your 50’s to early 60’s. Carriers that sell long-term care policies include the following: Mass Mutual, AARP, Mutual of Omaha, and John Hancock. There are more but, these are just examples. It is costly but the benefits often outweigh the cost. Once someone is diagnosed with a serious illness, the odds of being able to procure a long-term care policy are significantly reduced. Also, consider an inflation rider on the policy which will keep up with the national inflation rate. This increases the daily room allowance or in-home care amount and is analyzed annually. Without a long-term care policy, costs will have to be paid from any available income or savings. Medicare and regular health insurance policies have limited or no coverage for long-term care. To recap three years out look at the following: o Shift retirement funds to a less aggressive strategy. Contact the MissionSquare Retirement representative to assist you. Also, review the MissionSquare Retirement website www.missionsq.org to monitor your accounts. o Review and procure life insurance outside of the county or set up a separate account to fund final expenses. o Explore long-term care policy options sooner than later. ---PAGE BREAK--- The Road to Retirement 3 Phase III – Two Years Out! Focus on your retirement accounts and rebalancing, if necessary. Again, continue to explore life insurance and long-term care policies. Review Social Security and the year you will become eligible. Please visit the www.ssa.gov website. You can receive Social Security retirement benefits as early as age 62. However, the benefits will be reduced permanently if you start receiving benefits before your full retirement age. For example, if you turn age 62 in 2023, your benefit would be about 30% lower than it would be at your full retirement age of 67. The benefit will be higher the longer you wait to start receiving benefits. For anyone born in 1960 the full retirement benefit eligibility is 66 years and 8 months. Anyone born after 1960 will have full retirement at age 67. The average Social Security check across all populations is $1,781.63. The maximum Social Security check you could receive in 2023 is $3,627 at full retirement age. The amount of the check increases with higher salaried individuals. Social Security is taxed when you file your annual tax return. Under current law, 85% of total Social Security income is taxed. It may be a good idea to withhold federal tax from each check. If you are less than full retirement age (67) you can work and earn a maximum of $22,320 in 2024. If you earn more than this amount, you can expect to have $1 withheld from your Social Security benefit for every $2 earned above the limit. The earnings limit is adjusted annually based on national changes in average wages. Once you attain full retirement age you can work and earn any amount of money. An individual must work at least 10 years and have acquired a total of 40 credits to be eligible for Social Security. You can earn up to a maximum of four credits per year. You should check your Social Security statements periodically to see what your estimated payment will be. Social Security replaces about 40 percent of annual preretirement earnings. Phase IV – 1 Year Out Retirement is becoming a reality. What am I going to do about health insurance and Medicare? If you are employed and have a Catastrophic Leave balance and meet the eligibility criteria as outlined in Policy 236.l Section V of the Comprehensive Policy Manual, you will be eligible for the Catastrophic Leave Incentive. ---PAGE BREAK--- The Road to Retirement 4 Employees who reach age sixty-five (65) with fifteen (15) years or more creditable County service and employees with no defined age with twenty (20) years or more creditable County service will be eligible for the Catastrophic Leave Incentive. You can use one-half of the fund to pay for health care continuation until you reach age 65. Once a retiree reaches age 65, they must go on Medicare. The RHS Trust will reimburse medical and dental expenses, and any other expenses approved under the IRS code. To demonstrate how the RHS (Retirement Health Savings) Trust works, John Smith is 63 and has 1056 hours in his Catastrophic Leave account with a value of $40,000. One-half of the account is paid in a check which is taxable, and the other half is placed in an RHS (Retirement Health Savings) Trust which is non- taxable. A retiree’s medical insurance for both the employee and spouse is $1000 per month. Based on the information in the scenario, the $20,000 in the RHS Trust will last approximately 20 months. o This is a reimbursement type account. One-half of the Catastrophic funds are deposited into the RHS Trust account and sent to MissionSquare Retirement. From there, Meritain Company (third party carrier) reimburses the participant for approved expenses. There is also a feature that allows automatic payments for medical and dental to come directly from Meritain to Columbia County for payment of the continued benefits. o Human Resources will meet with the employees and prepare all RHS Trust documents. Phase V – Actions 3 Months Out Medicare begins at age 65. The following steps can be taken anytime an individual is approaching 65. Medicare requires you to enroll in Part A (Hospital Insurance) within three months of your 65th birthday. Contact www.medicare.gov for further information. Part A (Hospital Insurance) costs $0 for most individuals because they paid Medicare taxes long enough while working —generally at least 10 years. If an individual is still working at age 65, they can delay taking Part B of Medicare and keep the county’s coverage. Part B covers 80% of medical costs and includes costs for doctors, procedures, testing, etc. In 2024 Part B will cost $174.70 per individual. There would still be a gap of 20% of medical costs not covered under Part B. Part C is referred to as a Medicare Advantage plan. Medicare Advantage plans have low or $0 premiums but have deductibles, copayments, and coinsurance amounts. An alternative is Medigap Plan G which has higher premiums but covers most of the out-of-pocket costs for services approved under Parts A and B. Different Medicare plans cover various levels of care. Currently, Plan G covers the most costs. Whether you choose the Medicare Advantage plan or the Medigap Plan G they cover the 20% not covered under Part B. Part D is also known as Medicare’s prescription drug coverage. It helps pay for medications not covered under Parts A and B. Although the Federal government pays 75 percent of medication costs for Part D, covered individuals must pay premiums, copays, and deductibles. There is a cost to belong to a plan and then a cost for the drugs. The average Part D plan premium in 2023 is approximately $43 per month. ---PAGE BREAK--- The Road to Retirement 5 Costs for all parts of Medicare can run several thousand dollars annually for individuals and spouses. Phase VI – Final Decisions Now is the time to plan for retirement day. The date is set and the letter stating the final workday has been given to the Department Manager and HR has been notified. If possible, one month out meet with HR regarding benefits and payout of retirement. Meeting with HR should include a discussion of benefits and retirement and if applicable, the setup of the RHS Trust account. o The RHS Trust account is paid one-half in a check which is taxed and one-half is placed in the trust account which is non-taxable. o Will the individual continue medical until reaching age 65? If an individual is already age 65 and retiring, they will need to meet with a broker/agent or apply for Part B on the Medicare website. A broker/agent will have to assist in providing the supplement and Part D drug card. o Employees meeting the eligibility of years of service can continue the dental coverage for as long as they desire. They will pay 100% of the cost of the coverage at the current rates. The dental carrier issues any subsequent rate changes. o HR will work with the employee to set up the RHS Trust account. If an individual has an RHS Trust account and passes away, the funds left in the account will only pass to the spouse or a disabled child. The disabled child must be deemed disabled by the Social Security Administration. If the spouse passes away after the death of the retiree, any remaining funds must be returned to Columbia County. o A decision will need to be made regarding the retirement funds with MissionSquare (MSQ). There are several scenarios as follows: Leave all money with (MSQ) Take a lump sum distribution which is taxed at 20% of entire balances. Transfer assets to another provider into a “like” 401 account to avoid funds becoming taxable. Any money not transferred directly to another provider will become taxable to the individual. Pre-tax funds cannot be transferred to a post-tax fund without sustaining taxation. An individual can take a portion of the funds in a one-time distribution with 20% taxes applied. A retirement distribution can be taken. Any funds paid out by MSQ will be gross less 20% taxes. If the retirement fund balances indicate they will last at least ten (10) years, taxation can be directed by the participant and can be less than the standard 20%. It is suggested that retirement checks be directly deposited into their bank accounts. When paperwork is completed, it is a requirement that individuals provide a voided check to MSQ. ---PAGE BREAK--- The Road to Retirement 6 It is advised when an individual retires, MSQ rolls the 401a and 457 into one fund so that individuals continue to get retirement checks even if one of the funds becomes depleted. Individuals need to monitor their accounts to ensure timely checks. The road to retirement is easier with a defined plan of action. It is never too early to plan for the long term. Please reach out to the Columbia County Human Resources office to answer any questions you may have. Disclaimer: Please note the information and statistical data presented in this document is based on actual current data and is subject to change. This document is provided for informational purposes and general guidance only and should not be relied upon or construed as financial, medical, or legal advice.