15 Things Pilots Approaching Retirement Should Know
By ALPA Staff
Are you getting ready for retirement? According to ALPA’s database, roughly 18,500 ALPA members are age 55 or older. Preparation for retirement starts as early as your first day on the job and lasts your entire career. However, the years approaching retirement age become increasingly crucial. ALPA’s Retirement & Insurance Team has compiled several general guidelines applicable to both U.S. and Canadian members. For specific financial advice, ALPA recommends that you contact a tax or financial planner.
1. Retirement Budgeting
If you haven’t yet constructed a budget for your retirement years, it’s not too late. A good rule is to target replacing 70 percent of your preretirement income using income from all retirement sources. These sources include U.S. social security or Canada’s Canada Pension Plan/Québec Pension Plan (CPP/QPP), any pension plan payments, annuities, defined-contribution assets, personal savings, checking and money market accounts, any inheritance, and other sources that you might have.
Income during your active employment years earmarked toward savings likely won’t be the case in retirement. Income during your active years may also have been spent on various types of debt like a home mortgage or cars, which may decrease in retirement. However, some expenses may actually increase in retirement, such as travel or health care. If you decide to relocate, a change in cost of living could dramatically alter your expenses (higher or lower).
Financial planners have generally recommended that retirees withdraw about 4 percent of their assets each year to fund expenses in retirement, although every situation is different. If your expected cash inflows aren’t enough to sustain your cash outflows, consider doing what you can now to adjust accordingly, perhaps by paying off debt to eliminate monthly payments in retirement or making lifestyle changes.
2. Be Aware of New Rules
There have been several changes to retirement laws in the United States in recent years. The SECURE Act passed in late 2019 raised the age for starting required minimum distributions (RMDs) from 70½ to 72, making it easier to offer annuities in 401(k) plans, and eliminated “stretch” Individual Retirement Accounts (IRAs) among other changes. In late December 2022, another round of changes was implemented in SECURE 2.0 that included a further increase in the age for RMDs to age 73 (increasing to age 75 in 2033), higher 401(k) catch-up contributions of $10,000 annually for ages 60–63 starting in 2025, and the ability for 401(k) plans to offer emergency savings accounts that can be accessed without penalty. Additionally, 401(k) and Health Savings Account (HSA) contribution limits are updated annually by the IRS. These changes could impact how and when you fund your retirement. Consider adjusting your retirement planning based on all these recent changes.
3. Look at Your Social Security or My Service Canada Account
Hopefully you’ve been reviewing your statements from the Social Security Administration or Service Canada throughout your career, but if you haven’t you should start doing so at the SSA or Service Canada website.
You can determine your monthly benefit estimate based on when you begin receiving your benefit. In the United States, there are three options to start your claim: “early” (age 62), “full” (age 67 for those born in 1960 and later), or “delayed” (age 70). Your Social Security benefit depends on how much you earned throughout your working career and on when you begin benefits. If you turn age 62 in 2023, your benefit would be about 30 percent lower than it would be at your full Social Security retirement age. If you delay receiving Social Security benefits until age 70, your benefit will increase 8 percent for each full year you delay receiving Social Security benefits beyond full Social Security retirement age. Likewise, in Canada, your rate depends on whether you begin receiving benefits before or after age 65. If you begin before age 65, your payments will decrease by 0.6 percent each month—a maximum reduction of 36 percent if you start at age 60. If you begin after age 65, your payments will increase 0.7 percent each month, up to a maximum increase of 42 percent if you wait until you turn 70 (or after).
By waiting to claim, monthly benefits increase substantially, but you’ll receive fewer payments. If you have other assets that you can live off to delay claiming benefits, it may be prudent to do so. Additional planning may include building other accounts to tap into as a bridge to a later Social Security or CPP/QPP benefit or filing forms for an earlier benefit.
4. Tax Planning
Taxes play a major role in retirement. They can erode your budget due to careless planning, but there are many tax-favorable accounts that pilots may have at their disposal to minimize the impact. For U.S. pilots, there are traditional and Roth 401(k) contributions, IRAs, Health Reimbursement Accounts (HRAs), HSAs, and others. All of these accounts have limitations on contributions or the ability to accumulate assets in them, and having different types of assets to draw from can significantly reduce your tax bill in retirement. Having different buckets to draw from is often a winning strategy. To determine what’s right for you, review the benefits you have access to at your employer, evaluate where you may have insufficient resources, and perhaps consider meeting with a financial advisor or a tax professional for advice.
5. Estate Planning
It’s not uncommon for pilots to have larger estates than the typical individual, and other factors may also be present, such as different types of financial accounts, complicated family trees, assets spread across different states, and unique wishes such as charitable giving. If you die without a will, your state will determine who inherits your property. This may not be compatible with your wishes. Consider meeting with an estate-planning attorney and developing an estate plan so you control who inherits your property.
6. 401(k) and RRSP Distribution Options
If your 401(k) plan or Registered Retirement Savings Plan (RRSP) permits it, and you’re content with the plan’s investment options, leaving your funds in your 401(k) or RRSP can be a great option in retirement as it may mean lower costs. Many plans allow for the full balance to remain invested until you’re required to start minimum distributions at age 73 in the U.S. (increasing to age 75 in 2033) and age 71 in Canada.
If you’re in Canada, you must convert or withdraw the funds in your RRSP by December 31 of the year you turn 71. You can choose one or more of the following three options:
- Convert the RRSP to a Registered Retirement Income Fund (RRIF).
- Convert the RRSP to a payout annuity.
- Withdraw all your RRSP funds (note that the funds would be subject to withholding tax).
In the United States, you must generally start taking withdrawals from an IRA and 401(k) plan on April 1 of the year following the calendar year in which you reach age 72 (73 if you reach age 72 after Dec. 31, 2022). Roth IRAs don’t require withdrawals until after the death of the owner; however, beneficiaries of a Roth IRA are subject to the RMD rules. The RMD is the minimum amount you must withdraw from your account each year; you can always withdraw more than the minimum amount. Each year after your required beginning date, you must withdraw your RMD by December 31.
In the United States, you can roll over your 401(k) distributions to an IRA. However, RMD distributions can’t be rolled over. Keep in mind that 401(k) plans typically have lower fees. Receiving your 401(k) distributions as a lump sum is always an option in a 401(k) plan. However, if the lump-sum distribution isn’t transferred directly to another qualified retirement plan or IRA, it will be taxable at the time of distribution. In addition to a lump-sum option, many 401(k) plans also have distribution options for partial distributions and periodic distributions so you can set up your own payment schedule.
For both countries, make sure to act on time, as a default choice may be selected for you if you don’t meet the required deadline.
7. Annuities and RRIFs
You may also consider purchasing an annuity with your retirement funds. Annuities protect participants from market risks and longevity risks by providing guaranteed income payments for the remainder of the participant’s life. However, annuities can have high fees, low liquidity, and may lack flexibility if you need to access funds. Annuities can be very complex since they’re customizable. Additionally, the guaranteed annuity payments are generally not adjusted for inflation. Careful consideration should be given to whether the benefit of a guaranteed income outweighs these drawbacks.
Rolling your RRSP into a RRIF in Canada means your money can continue to grow—even while you’re using some of it for income. By law, however, you must withdraw a minimum percentage of your RRIF each year, and that percentage keeps increasing. An RRIF gives you the flexibility to take out more income when you need it, but you must be careful to ensure that your RRIF lasts as long as you need it.
Additionally, you can pass on your RRIF to a spouse or common-law partner after your death—without receiving a tax bill—by making them the successor annuitant. And if that spouse or common-law partner is younger than you, you can make your RRIF last longer by basing your minimum withdrawals on their age instead of your own.
8. HSAs and Medicare
You or your employer’s eligibility to make HSA contributions under an HSA-eligible High Deductible Health Plan (HDHP) ends once you’re enrolled in Medicare—including Part A. To avoid a tax penalty, the last contribution to your HSA from you or your employer should be made the month before turning 65 or, if later, the month before you enroll in any part of Medicare.
While you’re no longer eligible to make HSA contributions once you’re on Medicare, you may continue to use your HSA funds to pay out-of-pocket health-care costs on a tax-free basis. After age 65, you may also use HSA funds penalty free for any purpose; however, the distributions only remain tax-fee for health-care expenses as outlined by the IRS.
9. Retiree HRA VEBA
Some pilot groups have negotiated retiree Health Reimbursement Arrangements (HRAs) to assist with health-care costs in retirement. These funds are held in a Voluntary Employees’ Beneficiary Association (VEBA) Trust and invested collectively, and contributions and investment earnings aren’t taxable. HRA VEBAs reimburse the retired pilot, spouse, and children under age 26 for qualified medical expenses on a tax-free basis. If you die before spending all your HRA VEBA funds, qualified medical expenses of the surviving spouse and eligible children would continue to be reimbursed. Without eligible survivors, the remaining funds aren’t included in your estate and therefore are forfeited. You should reimburse medical expenses from the HRA VEBA account first, prior to using HSA funds, as HSA funds aren’t forfeitable and may ultimately be used for other purposes subject to applicable taxes and penalties. Not every pilot group has an HRA VEBA, so review your benefits to determine if this information is applicable to you.
10. Enrolling in Medicare or Supplemental Health Insurance
Canadians have a public health-care system that includes coverage for many basic medical services starting at birth. Retiring doesn’t change that; most provinces offer seniors extra coverage. However, you may want to consider supplemental health insurance available to seniors.
As an ALPA Canada member, you have a pilots-only insurance marketplace available to you called MyFuture. MyFuture features a wide range of competitive medical, travel, dental, and life insurance plans designed specifically for ALPA retirees who no longer qualify for benefits through their employer-sponsored program. It also allows you to compare products between providers to find the one that best meets your needs. Go to memberinsurance.alpa.org and click on Canadian Coverage for more information.
The initial enrollment period for Medicare in the United States lasts seven months, starting three months before your 65th birthday and extending through your birthday month and the following three months. For example, if you were born in April, your enrollment period will open in January and close in July. Part A provides hospital coverage, Part B provides medical coverage, and Part D provides prescription drug coverage. Unless you have other employer-sponsored coverage, you’ll get ongoing late-enrollment penalties if you don’t enroll in Part B coverage by age 65. There’s no similar penalty for Part A, but note that you’ll be automatically enrolled once you begin to receive Social Security benefits.
You may also want to consider Part C, Medicare Advantage Programs, which bundle Part A, B, and D coverage and are provided by employers, associations, or private companies. Part C plans often cover additional medical services outside of original Medicare and provide lower out-of-pocket costs. ALPA offers retired members two Medicare Advantage Programs options through Aetna. Visit memberinsurance.alpa.org for more information.
11. Rebalancing Your Assets Going into Retirement
It’s a good idea to review the assets in your portfolio at least annually as volatile markets can alter your original allocations over time. It’s also usually a good idea to reduce risk in your portfolio as you age, and especially as you near the time when you’ll need to begin drawing on those assets for retirement. However, also consider that retirement doesn’t mean death. Many individuals can reasonably expect to live at least another 20 to 30 years after they retire. The U.S. Census Bureau estimates that by 2060 the U.S. will add a half million centenarians (those currently in their early 60s and looking at retirement). Most retirees will want to keep some high- or moderate-risk assets in their portfolio to continue some degree of investment growth during retirement. If you need assistance, consider meeting with a financial advisor.
12. Continued Access to ALPA Insurance
Retired ALPA members in the United States can continue to purchase ALPA insurance products, including Medicare Advantage plans, accidental death & dismemberment, long-term care, identity theft, and dental. Retired Canadian members can purchase home and auto insurance, can extend their critical-illness coverage through Industrial Alliance, and can extend their ALPA optional life insurance coverage—if it was obtained prior to retirement.
13. Other ALPA Benefits Available in Retirement
Retired U.S. members receive a 20 percent discount on FAA medical advisory services through the Aviation Medicine Advisory Service, ALPA’s Aeromedical Office. Retired ALPA members are eligible to apply for a Pilots for Pilots grant should they be affected by a widespread natural disaster. U.S. retirees are entitled to discounts on insurance, wireless phones, moving services, and more through Union Plus, and Canadian retirees can visit Union Savings for a similar list of offerings. All retirees in good standing maintain a subscription to Air Line Pilot.
14. Looking to Continue Volunteering?
Thanks to a resolution passed at the May 2022 Executive Board, retired members who served as Pilot Assistance volunteers while active can now continue performing those same duties in retirement, pending certain conditions and permissions. That means you can volunteer now and undergo training so you can continue giving back to your fellow pilots long after retirement. And while many Pilot Assistance programs aren’t applicable after retirement, ALPA has opened the Pilot Peer Support program to retired members who are struggling with stress from any source and need someone to talk with.
15. Your Final Flight
Don’t look now, but that final flight will be here sooner than you can imagine. Have you always wanted to end your career with a classic water cannon salute? Those don’t just happen. Procedures vary by airline, so call your base’s Chief Pilot’s Office for details. Start thinking about whether you’d like a particular first officer or flight crew along with you and how it might or might not be possible at your airline; the more time you can give others to plan, the greater the chance they can meet your request and match your schedule. Blue skies and tailwinds!
Editor’s note: ALPA doesn’t provide individual tax or financial planning advice, nor does it endorse any investment company, financial product, or service or any estate-planning or investment strategy. These matters are individual decisions that must be made after careful consideration by each pilot and their families.
Personal Financial Guidance
ALPA’s partnership with Charles Schwab provides unique benefits and pilot-specific knowledge to U.S. ALPA members. For more information, visit schwab.com/alpa or call Schwab’s dedicated ALPA number at 1-877-648-4719 and identify yourself as an ALPA member.