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Three key decisions to make before you retire

When to take Social Security, how to pay for health care, and how to generate income.

Key takeaways:

✔ The longer you can delay collecting Social Security, the higher your benefit.

✔ Plan for health care costs and figure out how you will pay for them.

✔ Match essential expenses like food, housing, and health care with guaranteed income.

As retirement nears, you will have three big decisions to make: when to take Social Security, how you will pay for health care, and how will you generate cash flow. The three are interconnected and will make a difference in your budget and lifestyle in retirement, and even on deciding when to retire.

1. How and when will you claim Social Security?

You can claim Social Security as early as age 62, but that may not be in your best interest financially. Why? Because Social Security payments increase if you delay claiming your benefits; your monthly benefit can go up until age 70. The difference between your check at 62 and 70 could be as much as 75%. For example, a monthly benefit of $1,500 if claimed at 62 could increase to more than $2,600 each month at age 70.1

Your Social Security benefit is guaranteed for as long as you live, and it will go up over time to keep up with inflation. So even though delaying means you would pass up some extra money in hand during your 60s, having a larger guaranteed source of inflation-protected monthly income for life is a big benefit for most people.

Of course, delaying isn’t always better—or always possible—for everyone, particularly for people with health issues, because it can take years to reach the breakeven point. Other families may need the Social Security income right away. But if you can defer until age 70, and you live a long life, you will collect more by waiting to start your benefits.

Figuring out when to collect benefits isn’t always as simple as deciding how long to wait. Married couples have a number of options to potentially boost their lifetime benefits by as much as $250,000, according to Fidelity research.

2. How will you pay for health care?

It probably won’t surprise you that health care costs tend to go up as you get older. What may be surprising is by just how much: Our research suggests that the average couple retiring in 2016 could expect to spend about $260,000 on out-of-pocket health care costs during their retirement.2

You probably can’t escape health care costs, but you can plan for them. That starts with the government’s retiree health care insurance program—Medicare. No matter when you claim Social Security, Medicare won’t kick in until 65. So if you retire early, you will need to buy health insurance privately.

While you are still working, you should also consider a health savings account (HSA), in conjunction with a high-deductible health plan, to save for health care costs in retirement. You may want to buy supplemental health insurance or long-term care insurance to pay for expenses not covered by Medicare. Finally, it pays to be a choosy consumer of health care services, ask a lot of questions about the cost and necessity of services, and compare prices from different providers.

3. How will you generate cash flow once you stop working?

In retirement, Social Security will likely just be one of several sources of income. Others may include your savings, pension, annuities, rental income, or working part time. So how do you come up with a plan to make sure your money lasts?

There are many approaches, but it starts with a budget that identifies your needs—essential expenses like food, housing, and health care—and your wants—discretionary expenses like travel, eating out, and entertainment. The definitions between needs and wants will be different for everyone, but once you have your list, it makes sense to match essential expenses with guaranteed income—money that you can’t outlive—like Social Security, pensions, and lifetime annuities (which let you convert savings into guaranteed income). Then use your other savings and income for discretionary expenses.

One practical test to see whether you are financially ready for retirement is to try living off your retirement budget before you retire. If it’s too tight, you still have time to make adjustments. For instance, you can work longer, use home equity, or find part-time work.

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