How to Prepare for Life on Social Security - dummies

How to Prepare for Life on Social Security

By Jonathan Peterson

Copyright © 2015 AARP

As the time to collect your Social Security benefits approaches, you face an array of strategic decisions. The same answers don’t work for everyone. But the issues are clear, and it helps to think them through — early.

Purchasing an annuity

An annuity is a type of insurance contract that can turn your savings into a stream of income, potentially for the rest of your life.

Many annuities have fees that are hard to see and features that are hard to understand. If you have only modest savings, or if Social Security will already replace a significant share of your working income, you probably want to steer clear of annuities.

An immediate annuity begins payments right after you purchase it. Such annuities often are the choice of people already retired. A deferred annuity pays off in the future. In each case, annuities may pay returns that are fixed or variable:

  • Fixed annuity: This type of annuity pays a steady amount for a prescribed number of years.

  • Variable annuity: This type of annuity pays you a shifting amount based on the performance of underlying investments. Variable annuities have been widely criticized for high fees and lack of transparency, and many experts consider them unsuitable for retirees.

Annuities can be a complex topic. Do your homework and check out information on annuities before committing money.

Signing up for Medicare

The healthcare program has four parts — A, B, C, and D.

If you’re collecting Social Security, the Social Security Administration (SSA) automatically enrolls you for Medicare Parts A and B when you reach 65. If you aren’t getting benefits, you need to apply.

Here are some tips to keep in mind about each part of Medicare:

  • Part A (hospital insurance): This part is important coverage for hospital stays, temporary rehabilitation in a skilled‐nursing facility, hospice care, and some home health services.

  • Part B (medical insurance): This part covers doctors’ services, outpatient care, and medical equipment.

  • Part C (Medicare Advantage): Unlike traditional Medicare, Medicare Advantage plans are run by private insurance companies. They usually have lower costs and may offer some extra benefits. You have to decide whether to choose one of these plans, based on the choices available to you locally. You must be enrolled in Parts A and B to enroll in a Medicare Advantage plan.

  • Part D (prescription drugs): To get Medicare drug coverage, you must have Part A and/or Part B. You also need to enroll in a private Part D prescription drug plan. You face late penalties if you delay signing up for Part D, unless you have drug coverage from another source that is considered creditable.

Handling home equity

Many people derive great security from owning their homes. That said, selling a home can provide options. You can downsize and have money left over for other purposes. You can move to a cheaper part of the country. You also have the option of renting your home for income. If you can, paying off your mortgage is smart.

Other, possibly less desirable options include home equity loans and reverse mortgages. With a home equity loan, you use your home as collateral to borrow money that you have to repay within a certain time frame. With a reverse mortgage, you use your home equity to get monthly payments, a lump sum, or a credit line without having to make monthly repayments as long as you live there.

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Seeing how Social Security interacts with private pensions

Workers fortunate enough to qualify for private pensions may be in for an unpleasant surprise when the time comes to collect. In many cases — affecting perhaps three out of ten covered workers — private pension plans are designed to reduce your benefit, based on your Social Security benefit. This offset can potentially reduce your private pension by thousands of dollars per year.

If you qualify for a pension, you should find out in advance whether this provision applies to you. If so, someone who handles pensions for your company can guide you on what Social Security integration may mean for you, so you can plan accurately for your retirement income.

Managing your investments

Here are a few things to keep in mind when it comes to taking care of your investments:

  • Know your goals. Do you want to preserve a lot of your savings and leave an inheritance for your children and grandchildren or spend your money on yourself?

  • Choose your risk level. This decision is a personal one, and it goes right to your peace of mind. But generally, reducing risk as you get older is a good idea.

  • Mix it up. Avoid overexposure to any one investment.

  • Set a time frame. Think ahead about when you’ll want to withdraw the money.

  • Review and rebalance. Periodically look at how your accounts have changed in value, and make sure that your overall portfolio is balanced the way you want.

  • Limit fees. Miscellaneous charges, such as fees and sales commissions, can soak up thousands of dollars (potentially many thousands) over time. Some of the fees may be hard to see unless you ask about them or do extra homework. You can get an idea how your 401(k) plan shapes up by going to BrightScope.