At UWM, we prefer to use the term "3rd Act" instead of "Retirement." Why? Because we've observed that folks are super busy once they stop working full time. Often times, they are volunteering or have established a consulting business. Or they are traveling — ahhh, well maybe not now — and/or are spending time with and caring for family members. Bottom line: they are in the 3rd stage of their lives. However, for folks planning to move to their 3rd Act within the next 3 to 5 years, the planning directives need to be tweaked. Here are some reasons why:
1. Layoffs, Furloughs, or Income Reduction: Early Stage Exits
For many people, their 3rd Act popped up unexpectedly and much earlier than planned for. Some employers have begun offering early retirement packages as an alternative to being laid off. The good news is that you are not being laid off — but the challenging news is that although you might have planned to exit full time work in 3 to 5 years, you are now being offered a severance package. While the terms might initially seem attractive, it is extremely important to review and have an in-depth understanding of the conditions and offerings. Once you select YES, you might not have the option to change the terms at a later date.
2. When and How to Apply for Pension and Social Security Benefits
If you are a Lucky Duck and have a pension plan, it’s extremely important to understand the terms and conditions. For example, the highest pension payout option is the "lifetime only" payment plan — but when one passes away, nothing is left payable to spouse or beneficiaries. It is also extremely important to understand the terms of when to apply for Social Security benefits. One can apply for Social Security benefits as early as age 62; however, the income will be reduced by approximately 30% over the rest of one's life compared with waiting for FRA (Full Retirement Age). It’s extremely important to review your Social Security statement, and the best way to do so is to establish your Social Security account online at SSA.gov. This will be extremely helpful when it comes to understanding the terms and conditions and it also assists in applying for Medicare coverage.
3. Insurance Planning: Huge Directive
This pandemic has led to a surge in concern about protecting one’s own life as well as one's families. This is an extremely important time to do a few things. First, review your disability/income protection benefits. If you are unable to work, make sure that your disability coverages — offered through your employer, your state and/or your personal disability plan — are sufficient to cover your basic expenses. Next: life insurance. (Ugh!) Should you pass away, is your coverage sufficient to provide forward care for your family? And lastly: long term care. Perhaps you need long-term care coverage for in-home care or an assisted-living facility — not just for this pandemic but for future needs. Get it and keep it.
4. Creating a Bucket Income Strategy Earlier than Planned
If you are one of those people who have accepted a severance or early retirement package, you might be facing a reduced income earlier than you expected. In this situation, now is a good time to adopt a "Bucket" strategy in setting up your investments. Break up your investment assets to support your income needs — whether it is now or in the future. Incorporating a strategy where your investable assets are set up into different accounts will help support your current and future growth and income needs, as well as reduce stress about current income/investment directives and needs.
5. Tax Planning
Tax planning! There have been three major tax law changes during this current administration — two of which have occurred since January 2020. Understanding the TCJA, SECURE, and CARES Act tax law changes are extremely important when reviewing and creating tax planning strategies. For example, the CARES Act (which expires at the end of this year) allows individuals to take out a larger loan from their employer provided retirement plan than has been allowed in the past: $100,000 vs. $50,000. Additionally, one can withdraw funds from a retirement account, whether it's your employer-provided plan or your own IRA, and have up to 3 years to repay the funds. One third of that distribution is reportable as income — unless you decide on a different strategy.
At the end of the day, it is extremely important to work with financial and tax professionals who will provide you with advice and directions about what and how to navigate during this challenging time. We are here for you and happy to help!