Meet Bob.
Bob has watched our first three videos: “Why Invest?”, “How to Invest”, and “401(k)
and IRA 101”, so he now understands exactly how to invest and manage retirement accounts.
However, he’s still confused about the process of retirement and wants to learn more.
What should he do?
Well, we’ve got him covered.
The first thing Bob needs to understand about retirement is that it revolves around two
huge government programs, Medicare and Social Security.
Medicare is the government’s health insurance plan for individuals over 65, and it’s traditionally
made up of two parts: A, which covers inpatient expenses, like hospitals.
And B, which covers outpatient expenses, like doctor’s visits and lab tests.
However, because these plans don’t cover everything, and don’t cap out-of-pocket
expenses, three products have emerged to bridge this gap:
Medicare Part D, which covers prescription medication.
Medigap, which covers out-of-pocket costs.
And Medicare Part C or Medicare Advantage, which is actually a full private replacement
for Medicare, covering all parts, including D, and capping out-of-pocket expenses.
So what should should you choose?
Well, it depends, but as a rule of thumb, the Original Medicare, Part D, and Medigap
combo, has higher premiums, low out-of-pocket costs, and is accepted everywhere, whereas
Medicare Advantage is the opposite arrangement, especially because it’s limited to a specific
insurance network.
However, this is only a generalization, and Medicare is a complex beast at best.
That’s why, when it comes time to choose your plan, we highly recommend using our prefered
website, which makes it easy to speak with a licensed professional and select the best
plan for you.
So that’s Medicare.
The second major part of retirement is Social Security.
This a federal program that takes money automatically out of your paycheck when you’re young,
and then gives you money back once you reached retirement age.
As for how much you get back, it depends on three factors: your average career earnings,
your employment status during retirement, and the age at which you claim benefits, which
can be as early as 62 and as late as 70.
Not surprisingly, this decision has major consequences.
The earlier you claim your benefits, the smaller they’ll be, so unless you’re on your last
legs, it’s probably worth delaying as much as possible.
However, with that being said, this math goes often out the window when confronted Social
Security’s other wrinkle: spousal and survivorship benefits.
Spousal benefits allow the husband or wife to claim up to 50% of their living spouse’s
retirement benefits, whereas survivor’s benefits are similar, just with a higher percentage,
and a deceased spouse.
So what should you do?
Well, don't worry, we understand this math is confusing.
That’s why we recommend using our recommend calculator, which makes it easy to run the
necessary valuations and make a great retirement decision.
Bob is stunned by this, and excited to get started.
However, he probably shouldn’t be.
By the time Bob actually reaches retirement age, forty years from now, Social Security
will have likely changed dramatically and not for the better.
That’s why, when calculating how much to save for retirement, we recommend Bob ignore
Social Security, and instead focus on what’s called the safe withdrawal rate.
This is the amount of money that Bob can withdraw on the first year of his retirement, and then
adjust for inflation every year after, without going bankrupt under almost any scenario,
even the Great Depression!
Historically, this bulletproof rate was 4%.
However, because it doesn’t include taxes or investment fees, we now recommend a 3%
withdrawal rate, just to be extra safe.
Helpfully, this translates into a simple rule of thumb.
Once you have 33 times your annual expenses saved up, you can safely retire at any age,
no matter what Social Security is doing!
In fact, if you can get to this 33 times number unusually quickly, either by increasing your
savings rate or decreasing your expenses, you could retire as early as 30 or 40!
For more details on this, be sure to check out our recommended calculator, and remember,
no matter what your situation, saving 10-15% of your paycheck for retirement remains a
great rule of thumb.
Finally, before we conclude this video, we just have three more things to say:
One: Although long-term care insurance sounds great, as it covers things that aren't well
covered by Medicare, like nursing homes, it's generally too expensive to be worth the cost.
Two: At some point during your retirement, you’ll probably be offered annuities, which
are contracts with insurers that guarantee you a fixed stream of income over a set period
of time.
While that consistency may sound tempting, especially to retirees, just know that the
cons of annuities, namely their high fees, extreme complexity, and limited cash-out options,
generally outweighs any of their pros, especially if you’ve been investing with a robo-advisor,
detailed in our video “How to Invest.”
Three and Finally: If you’re married, have kids, or possess significant wealth, don't
delay, hire a lawyer to create an estate plan, as detailed in our video, “Estate Planning
101”.
Congratulations!
You have finished the retirement basics curriculum!
If you want to see great robo-advisors, retirement calculators, or just more educational content,
be sure to check out our website.