Retirement Checklist: 6 Things to Know Before Leaving the Workforce

Retirement planning can be equal parts stressful and exciting.

You finally get to sleep in on Mondays, enjoy your hobbies, travel and spend more time with family.

But creating a retirement plan is tricky. There are many moving parts to consider, from Social Security and Medicare to taxes and investments.

It can seem daunting, but the sooner you make a retirement plan, the better.

If retirement is on your radar in the next year or so, here’s a checklist of things to know and do before leaving the workforce.

6 Essential Things to Put on Your Retirement Checklist

Retirement is calling your name — but can your budget handle it?

Check out these tips to avoid financial stress and worry during your golden years.

• Figure out how much you need and how much you have
• Know your full Social Security retirement age
• Learn How to Maximize Your Social Security Benefit
• Plan on Working in Retirement? Know the Social Security Earning Limits
• Get Familiar With Your Health Care Options
• Understand How Your Social Security Benefits Are Taxed

1. Figure Out How Much You Need and How Much You Have

It’s important to have a ballpark figure of how much money you’ll need in retirement before you exit stage left.

Several well-known formulas and guidelines attempt to help you figure out how much you need to retire.

Two of the most popular are:

• 25x Rule: Take your annual expenses and multiply them by 25.
• 70%-80% Rule: Many experts say you will need about 70% to 80% of your average income during your working years annually to fund your retirement.

While it’s nice to keep these numbers in mind, creating your own retirement budget will yield the most personalized estimate of your retirement income and expenses.

If you don’t already have a budget or track your spending, pull out a few months of bank and credit card statements to get a handle on where the money is going.

You’ll want to review information from all your retirement accounts, too.

It’s important to consider how your financial situation and expenses will change in retirement. You won’t spend as much money commuting to work, for example, but your health care costs will increase as you age.

Don’t forget about other financial obligations too, like caring for parents or supporting children.

Finally, try to eliminate as much debt as possible so it doesn’t eat up your retirement savings later.

2. Know Your Social Security Full Retirement Age

You can start collecting Social Security retirement benefits as early as age 62. But if you opt in early, your monthly benefits will be reduced significantly.

You aren’t eligible for full Social Security benefits until you reach what’s known as your full retirement age.

Full retirement age used to be 65, but that hasn’t been the case for a while.

The Social Security Administration now bases your full retirement age on the year you were born:

• If you were born between 1943 and 1954, your full retirement age is 66.
• If you were born between 1955 and 1960, your full retirement age increases gradually up to age 67.
• Anyone born since 1961 has a full retirement age of 67.

You get a larger monthly benefit by working past your full retirement age.

Your benefit amount increases for every month you do not accept Social Security benefits, although this added benefit maxes out at age 70.

Keeping these figures in mind can help you pick the right retirement date to fit your budget.

Pro Tip

Waiting until you reach age 70 can result in a monthly benefit that’s 77% higher than if you claimed at 62.

3. Learn How to Maximize Your Social Security Benefit

Like we mentioned above, you can increase your Social Security benefit by working past your full retirement age.

There are other ways to boost your monthly benefit, but unfortunately, there aren’t any quick fixes.

Nearly every strategy that might increase your Social Security check boils down to this: Work longer, earn more money and postpone your retirement date as long as possible.

Work at Least 35 Years

Social Security uses your 35 highest-earning years to calculate your benefit, so it’s wise to stay in the workforce at least that long.

Working more than 35 years can really pay off, especially if you’re making significantly more money than you were in your early career because you get to replace some of those low-earning years with higher wages.

Report All Your Earnings

Make sure to report earnings you make from tips, freelancing and self-employment throughout your career. Failing to report these earnings could reduce the amount of Social Security you get later on.

Marriage and Divorce Make a Difference

How much you receive from Social Security also depends on your marital status.

For example, if you’re divorced and not remarried, you might be eligible to claim benefits based on your ex’s work record (provided that your marriage lasted at least 10 years). Doing so won’t impact their benefits.

Or if your current or ex-spouse dies, you could qualify for 100% of their benefit if you meet certain requirements.

4. Plan on Working in Retirement? Know the Social Security Earning Limits

Yes, you can work and collect Social Security at the same time.

But if you make more than $19,560 a year in 2022, your Social Security benefits will go down.

Here’s how it works:

• Once you hit full retirement age, working doesn’t impact your Social Security benefits — no matter how much you earn.
• If you’re not yet at full retirement age but receive Social Security benefits, you can make up to $19,560 a year without penalty. (For context, that’s $1,630 a month, or $376 a week).
• After that, your benefits are reduced by $1 for every $2 you make over $19,560.

Here’s an example. 

Let’s say you started collecting Social Security at 62 and receive $1,200 a month.

A couple years later, you go back to work and earn $30,000 in a calendar year.

That’s $10,440 over the limit, so your yearly Social Security benefits would be reduced by $5,520, or $460 a month.

In other words, making $30,000 during a year that falls between 62 and your full retirement age reduces your $1,200 monthly check to $740.

But — and this is really important — that money isn’t gone forever.

Once you reach full retirement age, Social Security will recalculate your monthly benefit amount and give you credit for the months they reduced your payment.

5. Get Familiar with Your Health Care Options

Health care will likely be one of your biggest costs in retirement.

Even if you’re in good health now, it’s important to plan ahead and understand your health care options.

1. If you retire before age 65, you’ll likely lose health coverage at work and need to find your own health care.
2. At 65, you’re eligible for Medicare.

Early retirees can find themselves in a tough health care situation.

You might be able to get coverage through a spouse’s plan, assuming you’re married to someone with workplace health coverage. (If they’re on Medicare, they can’t add you to their plan).

Another option is to extend your employer’s insurance benefits through COBRA for 18 months. But at an average cost of $400 to $700 per person per month, it’s a pricey option.

Health Insurance Options for Early Retirees

• Try to find a part-time job that offers health care coverage. Just be mindful of those Social Security earning limits.
• Find an insurance plan on the Health Insurance Marketplace. Losing health coverage at work qualifies you for a 60-day special enrollment period on the marketplace — the federal government’s health care shopping and enrollment service for uninsured Americans.
• See if you qualify for Medicaid in your state. Especially if you know your income in retirement will be small.
• Get a private health insurance plan on your own. This can be complex and costly, especially if you’re in poor health or on a limited income.

What You Need to Know about Medicare

We’d love to say things get easier when you turn 65 and enroll in Medicare, but that’s not always the case.

Contrary to popular belief, this federal health insurance program isn’t free and it doesn’t cover all your health care costs.

There’s a lot to know about Medicare — much more than we can cover here.

But here are a few important guidelines about Medicare:

• You may be automatically enrolled: If you’re already receiving Social Security benefits when you turn 65, you’ll be automatically enrolled. You don’t need to do anything else.
• You’re required to enroll: If you have coverage through a marketplace plan, COBRA through a past employer or TRICARE for retired military members, you’re required to enroll in Medicare when you turn 65.
• You may still be covered: You may not need to sign up for Medicare right away if you’re still working and enrolled in your employer’s group health plan or if your spouse is still working and you’re covered under their plan. But be sure to check with your employer.
• You’re eligible at 65: Otherwise, your Medicare eligibility begins around your 65th birthday, and you have a seven-month window to sign up. Otherwise, you’ll pay some stiff penalties for late enrollment.

You can only qualify for Medicare before age 65 if you’ve been on Social Security disability for at least 24 months. People diagnosed with end-stage renal disease or ALS also qualify.

6. Understand How Your Social Security Benefits Are Taxed

Your Social Security benefits are technically income. So do you owe taxes on Social Security?

In some cases, yes.

If you have additional income, whether it’s from a job or investments, there’s a good chance at least part of your Social Security will be taxed.

Retirees must pay federal income taxes on their Social Security benefits if:

• Half of their yearly Social Security benefits + other income = more than $25,000 for single filers or $32,000 for married couples filing jointly.

The IRS won’t tax your entire Social Security income, even if you exceed those thresholds. Instead:

50% of your Social Security benefits are taxable if:

• Half of your benefits + other income = $25,000 to $34,000 for individuals or $32,000 to $44,000 for married couples filing jointly.

85% of your Social Security benefits are taxable if:

• Half of your benefits + other income = $34,000 and up for individuals or $44,000 and up for married couples filing jointly

Keep in mind that while 50% or 85% of your Social Security benefits may be taxable, they will be taxed at your ordinary income rate.

Here’s a table of the 2021-2022 tax brackets for reference.

Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.