With retirement around the corner now is the time to plan for your financial needs

Your passive income and nest egg/emergency funds assets are the foundation blocks on which you can build a more secure retirement. The three major elements of your retirement income picture are:

• Benefits from pensions,
• Savings and investments, and
• Social Security benefits.

A major factor for navigating the Retirement Income Transition is the security added with a nest egg or emergency fund to provide for those lump sum expenses that may not fit your budget--things like buying a new roof or other such major home repair expenses, purchase of an automobile, or medical or care expenses not covered by Medicare. 

The other major expense factor that many people don't really think much about is future taxation on benefits. This needs to be considered, especially because when most people began saving on a tax-deferred basis in their working years (401(k)s, IRAs, etc.), the assumption was that we would enjoy the current income tax deduction while we were working and in a higher tax bracket, and our  accumulation and subsequent growth wouldn't be taxed until distribution, which would occur after our careers are over and our lower income then would insure that we'd be in a lower tax bracket.

That used to be true, but not any longer. One of the greatest financial risks we face is legislative risk--increasing taxation and higher brackets. It's especially damaging because that occurs at a time when many people are on a fixed income. And this risk occurs in addition to the usual market volatility and inflation risk we all face.

Most financial advisors say you'll need about a minimum of 70% of your pre-retirement earnings to comfortably maintain your pre-retirement standard of living. If you have average earnings, your Social Security retirement benefits will replace only about 40%. The percentage is lower for people in the upper income brackets and higher for people with low incomes. You'll need to supplement your benefits with a pension, savings or investments.

To help you plan for retirement, the Social Security website includes a Retirement Estimator that lets you get a retirement benefit estimate based on current law and real time access to your earnings record. It also provides a Benefits Planner to help in the event of disability or loss of your family's wage earner.

Factors that may affect your retirement benefits

Your benefit amount is based on your earnings averaged over most of your working career. Higher lifetime earnings result in higher benefits. If you have some years of no earnings or low earnings, your benefit amount may be lower than if you had worked steadily.

Your benefit amount also is affected by your age at the time you start receiving benefits. If you start your retirement benefits at age 62 (the earliest possible retirement age) your benefit will be lower than if you wait until your full retirement age. If you start your retirement benefits after full retirement age, the monthly benefit may be higher due to delayed retirement credits.

If you are self-employed

Self-employed people must report their earnings and pay the taxes directly to the IRS. You are self-employed if you operate a trade, business or profession, either by yourself or as a partner.

You report your earnings for Social Security when you file your federal income tax return. If your net earnings are $400 or more in a year, you must report your earnings on IRS Schedule SE for Social Security purposes, in addition to the other tax forms you must file.

If you work for a federal, state or local government

If you work for a federal, state or local government where you do not pay Social Security taxes, the pension you receive from that agency may reduce any Social Security benefits for which you are qualified. There are two factors that may reduce your benefits.

• The first factor affects the way your Social Security retirement or disability benefits are figured. The Windfall Elimination Provision fact sheet provides answers to questions you may have about this provision.
• The second factor affects Social Security benefits you receive as a spouse or widow/widower. The Government Pension Offset fact sheet provides answers to questions you may have about this provision.

You can get more information on the website for Federal, State & Local Government Employees.

If you work outside the United States

If you work outside the United States (U.S.) for an American company or, in some cases, an affiliate company of an American company, you and your employer may have to pay Social Security taxes on the same earnings to both the U.S. and the foreign country. But, if you work in one of the agreement countries shown in our fact sheet, How International Agreements Can Help You:

• Your Social Security coverage will be assigned to either the U.S. or the foreign country, and
• You and your employer don't have to pay taxes to both countries.

You can get more information about work outside the U.S. on our International Programs http://www.ssa.gov/international/ website.

Prepare for your medical needs

Medicare is a health insurance plan for people who are 65 or older and people who are disabled or have permanent kidney failure. Medicare has three parts—hospital insurance, medical insurance and prescription drug coverage. Most people have all three parts.

• Hospital insurance, sometimes called Part A, covers inpatient hospital care and certain follow-up care. You already paid for it as part of your Social Security taxes while you were working.
• Medical insurance, sometimes called Part B, pays for physicians' services and some other services not covered by hospital insurance. Medical insurance is optional, and you must pay monthly premiums.
• Prescription drug coverage, sometimes called Part D, pays for prescription drugs. Prescription drug coverage is optional, and you must pay monthly premiums. However, you also may be able to get extra help paying the monthly premiums, annual deductible and prescription co-payments.
• If you are already getting Social Security benefits when you turn 65, your Medicare (Part A) starts automatically. If you are not getting Social Security, you should sign up for Medicare close to your 65th birthday, even if you aren't ready to retire.

If you are already receiving disability or survivors benefits when you apply for retirement

If you are receiving disability benefits when you reach full retirement age, nothing will change, except that your benefits will be called retirement benefits instead of disability benefits. If you are receiving survivor's benefits and you also are eligible for your own higher retirement benefits, you can switch from survivors to retirement benefits as early as age 62 or as late as age 70. In many cases, widows/widowers begin receiving one benefit at a reduced rate and switch to the other benefit at an unreduced rate at full retirement age. However, if you switch, you will be paid only the higher of the two benefits, not both.