After 30 years or so helping dozens of UMass Memorial Healthcare employees better understand their retirement options, I thought I would share the three most common concerns I hear from many of them and hopefully by doing so, if you have these same or similar concerns, you will get a better understanding of how to address them.
As an employee of UMass Memorial Healthcare, a variety of retirement benefits are available to you. From a 401(k) plan with employer matching to monthly and lump sum pension options, choosing the right option based on your retirement income goals, and other factors is critical in ensuring you enjoy the retirement lifestyle you envision.
Retirement planning is a complex undertaking, and less than 40% or working adults think their retirement savings are on track according to the Federal Reserve. To figure out the right plan for you, understanding your options and how each will impact your life now and in the future is a good first step.
If your getting close to retiring, review these top three concerns many other UMass Memorial Healthcare employees I have worked with have shared with me to see how they may impact your situation.
How do I know which pension option to choose?
While UMass Memorial provides several pension options to help you get the most out of retirement, selecting the most appropriate option for your specific retirement planning needs can be tricky. Should I choose a Single Life Annuity? A Lump Sum? Which is better for my situation a 66 2/3 Joint & Survivor Annuity (J&S)? 75%? 100%? What are the pros and cons of choosing a 5 or 10 years Certain and Continuous Annuity versus a J&S Annuity if I am married?
One of the biggest mistakes I see is choosing a pension option without first determining how the various pension alternatives will integrate with your, and if your married, your spouse’s social security claiming strategy, other available retirement income sources, potential retiree healthcare costs, your desired retirement lifestyle, and your current health status.
And if that wasn’t enough pressure, your pension option decision is irreversible. That means you’re stuck with the choice you make throughout your retirement even if your circumstances change.
Normally, seeking guidance from the human resources department can help clear up any confusion about your employee benefits. But that won’t’ work for retirement benefits because human resources staff can’t give out financial advice or help you decide what’s best for your specific financial situation and retirement goals.
To help determine which pension option might be right for you, in addition to the factors I mentioned earlier, here are a few others that come into play:
- Your family situation and if you will have dependents in retirement
- Your estimated retirement expenses based on the retirement lifestyle you desire
- What health insurance options are available to you
- The impact of taxes on your retirement income
- The potential impact on your and your spouses (if married) financial situation and retirement income and assets if one of you were to lose your health in retirement
- Where you plan on living in retirement
- Any unique estate planning considerations you may have (blended families, disabled children or grandchildren)
I Wish I Understood My Options Better
A retiring nurse from UMass Memorial, who we will refer to as Alice, called my office recently seemingly distressed about the pension option she recently selected. Alice, a widower, recently retired and after reviewing the pension options available with HR, chose a Single Life Pension which paid the highest monthly benefit. As with all HR departments they were able to provide her general guidance but couldn’t provide her specific recommendations.
In chatting with Alice to learn what was causing her distress, she shared with me her goals of living a comfortable retirement while also wanting to leave a legacy behind for her heirs if possible. She now realized had she chosen a lump sum pension instead, she would have had the opportunity to both generate a monthly income for herself while also leaving behind any remaining balance to her heirs. A single life pension provides no benefits to her heirs regardless of her date of death.
Before choosing a pension option, always review your overall financial situation and retirement planning goals with a financial advisor, particularly one familiar with UMass Memorial Healthcare’s retirement plans. A financial advisor can take you through several “What If” scenarios to determine the potential pros & cons of various options, before making your irrevocable pension option selection.
When should I apply for social security benefits?
Taking Social Security benefits into account is a smart move when planning for your retirement as a UMass Memorial Healthcare employee. Although you shouldn’t rely on Social Security as your nest egg, knowing when to apply can have a significant impact on the amount of your monthly payment.
Although you can begin collecting your Social Security benefits as early as age 62, however, applying that early might not be in your best interest as doing so may result in a reduction of your monthly benefit by as much as 30% compared to waiting until you reach full retirement age.
But waiting until your full retirement age might not be right for your situation, either. To put yourself in the best financial position once you retire, you need to consider:
- Retirement distributions from your IRA or 401(k)
- Whether you qualify for spousal benefits
- If divorced spousal benefits are available to you
- If you qualify for survivor benefits
So, when should you apply?
Unfortunately, it’s different for everyone, and there isn’t a one-size-fits-all answer. If you’re still working in retirement, Social Security limits how much you can earn while still receiving your benefits. Collecting your Social Security Benefits early while continuing to work can trigger a “tax torpedo”, resulting in your need to pay taxes on 50 to 85% of your Social Security income.
Factoring in your retirement goals, financial situation, other retirement income sources and assets, and your physical health, should all be considered in deciding when to apply for Social Security.
How Do I Invest my 401(K) After Retirement to Create a Monthly Income to Supplement my Pension and Social Security?
UMass Memorial Health Care’s 401(k) plan is a defined contribution plan with a profit-sharing component and 401(k) feature. While you are still employed, choosing and maintaining the right investment allocation for your 401(k) is important in helping to ensure you can accumulate the funds you will need to support your future retirement plans.
Once retired, and the paychecks stop rolling in, learning to live the retirement lifestyle you want with your pension, social security and retirement savings can take some careful planning. Investing too aggressively with your 401(k) assets in retirement could lead to your being one bear market away from running out of money, to conservatively, and your investments may not keep pace with inflation and be able to sustain you throughout your retirement years.
The investment allocation you used in your 401(k) during your accumulation years is often not the same allocation you will want in your distribution years
Now What Do I Do?
Not that long ago I met with a UMass Memorial retiree who we will call Bob, that told me he had selected the lump-sum pension option back in 2007, but was quite embarrassed to tell me very little of it was left and he wasn’t sure what to do when the remaining balance ran out. Bob said he felt he could manage his own funds after retiring and things started off Ok early on, but when the bear market of 2008-2013 hit, due to poor investment choices combined with his needing to take an income from his 401(k), his account was now nearly depleted.
Although we helped him create an alternative retirement income strategy, one of Bob’s comments during our discussions stuck with me: “Almost anyone can make their money last in a bull market, but let’s see how they do on their own in a bear market”.
Knowing what investment options to choose as you go from the accumulation phase to the distribution phase with your 401(k) plan is one of the biggest concerns I hear from retiring UMass Memorial Healthcare employees. And rightly so. It’s not typically one of those “do-it-yourself” projects, or something that should be left up to the 401(K) plans 1-800 number customer service reps, no matter how friendly and knowledgeable they seem to be.
Choosing how to invest your 401(k) funds in retirement involves careful consideration of several factors, unique to your specific needs, including:
- Your overall financial situation
- Your tolerance for risk
- When you want to begin accessing your 401(k) funds
- How much income you need your 401(K) funds to generate
- The current economic environment and stage of the business cycle we are in
- Your retirement income sources and other retirement savings
Two of the biggest mistakes I have seen over the years are retirees not paying attention to, or properly understanding, the level of risk they may be taking with their underlying 401(k) investment choices. This is often caused by using a hands-off or passive approach to managing one’s retirement assets. A dangerous thing indeed when you consider the potential consequences.
Not many of us, including Bob, will ever forget the financial crisis of 2007-2008 that caused what became known as the “great recession” that lasted until 2012. For those retiring just before or during this period, many were shocked to learn their 401(k) funds could drop as far and as fast as they did in just a short period. This was a hard lesson to learn, and at an inopportune time of how important it is always to understand what investments you own, their underlying risk level, and correlation with one another.
What investments worked well in one phase of the economic cycle, are not necessarily the same investments you will want to own as the economic cycle changes, sometimes abruptly. Knowing what you should or shouldn’t be doing with your 401K) plan investments are not only important in your working years, but is even more important in your retirement years as time is no longer on your side if you make a mistake, or we head into a prolonged economic downturn.
A fee-based Financial Advisor familiar with the UMass Memorial Healthcare retirement plan options can better help you make the right choices for your specific situation and retirement goals. You worked too hard to leave the enjoyment of your retirement years to chance and circumstance. I can help. For a no obligation 401(k) portfolio review, or to schedule a time to discuss your specific retirement planning needs, call me directly at (508)870-0440 extension 123 or email me at sjohnson@finivi.com.
I look forward to helping you to live the retirement lifestyle you deserve.
