Many of you reading this article on the AgingOptions Blog probably think you have everything figured out when it comes to retirement. After all, your house is almost paid for, and your other debts seem to be under control. You have a well-diversified portfolio which you hope will carry you through a retirement that might last 15, maybe 20 years at most. Hey, what could go wrong?
The fact is that plenty of things might happen – some of them bad, some actually pretty good – that can upend your retirement plans. As this recent article from Forbes points out, it’s important to make careful retirement plans, but it’s equally important to remember that LIFE happens. Why “LIFE” in all capital letters? It’s because, in this article written by Erik Carter, senior financial planner with Financial Finesse, based in Southern California, “LIFE” represents an acronym. Each letter stands for a different aspect of living that together or separately have the power to knock your plans off track.
After explaining the meaning of LIFE (so to speak), Carter gives some helpful advice on how to be better prepared to respond to whatever comes your way. Let’s take a look.
The Best Laid Plans
Carter begins his Forbes article with the famous line from legendary boxer Mike Tyson: “Everyone has a plan until they get punched in the mouth.”
We all know that this saying isn’t just for boxers. It can be true for retirees as well. In Carter’s words, “Here are some ways LIFE can get in the way of even the best laid plans and what you can do about it.”
L is for longevity. How long is your lifespan? And will your savings stretch that far?
According to a recent report by the Society of Actuaries, a majority of Americans underestimate their life expectancy. But even the idea of basing your retirement planning on life expectancy isn’t perfect. Carter explains, “First, by definition, about half of people will live longer than average. If you’re in good health, your odds are greater. Second, advances in biomedical technology could mean rising life expectancies. In fact, some experts even recommend planning to live to 120 or older.” How’s that for a ripe old age?
I is for inflation. Everything gets a bit more expensive every year, and this needs to be part of your calculations. Carter writes, “The second challenge is that the cost of almost everything we buy will likely be increasing over time, reducing the real value of our wealth and income. We’ve seen the inflation rate pick up recently and some experts warn higher inflation could be here to stay.”
F is for fluctuation. “Market volatility can not only keep you up at night, but it can also devastate your portfolio in retirement, especially with negative returns in the early years,” Carter writes. “That’s because withdrawals can force you to sell more of your investments while they’re down in value, leaving less in your portfolio when the market eventually recovers.”
E is for events. There’s a reason why people say life happens. Carter writes, “ Fidelity’s most recent study estimated that a 65-yr old couple will need about $315,000 to cover out-of-pocket health care costs in retirement. That’s not even including any future cuts in Medicare, greater than expected increases in health care costs, and long term care costs. The latter is particularly dangerous since the median cost for a private room in a nursing home is over $9,000 a month.”
He adds, “Keep in mind that Medicare doesn’t cover long term care costs and Medicaid requires you to spend down almost all your assets to qualify.”
Here are Carter’s seven recommendations to tackle what LIFE throws at you.
1) Make sure your portfolio is properly diversified.
Carter writes, “The key is to have a balanced portfolio that protects you from a severe downturn while also maintaining enough growth to at least keep pace with inflation. The simplest way to do that is with a target date retirement fund that serves as a fully-diversified one-stop shop, which gradually becomes more conservative as you get closer to your retirement date. If you’re looking for more customized advice that can coordinate your retirement accounts and taxable accounts, consider working with a financial advisor.”
Of course, we would add here that a financial dashboard is an essential tool for a well-planned retirement. Contact us at AgingOptions and we’ll be happy to discuss this idea with you.
2) Consider purchasing long-term care insurance.
It should come as no surprise to our regular readers that nursing homes are horribly expensive, and monthly costs can wipe out even the most carefully planned retirement savings in a handful of years. Planning for this should be a priority for everyone, even if you’re relatively young and healthy right now.
Carter writes, “First, you never know when an accident or injury can happen. Second, a future health condition can make long term care insurance much more expensive or even impossible to qualify for. Finally, you’ll want to know the cost so you can factor it into your retirement budget.” Long-term care costs are the Great Unknown for the majority of retirees.
3) Pay off your debts by retirement.
A large percentage of seniors enter retirement burdened by mortgage debt. “While it can make financial sense to maintain a mortgage and contribute savings to tax-sheltered retirement accounts while you’re working, paying off your mortgage by retirement can improve your cash flow,” Carter explains. “That’s because you’re unlikely to generate enough income to make the mortgage payments from what it would cost to pay off the balance. Just be sure to keep enough savings set aside for emergencies and be careful to avoid making large retirement plan withdrawals that can force you into a higher tax bracket.”
Other consumer debts, like credit cards and car loans, can also be crippling and need to be trimmed if at all possible before retirement begins.
4) Estimate your pension and Social Security income.
“Get projections of any pensions you’re fortunate enough to be eligible for and Social Security benefits,” Carter writes. Also, he recommends calculating how much of your Social Security will be taxable and reducing your Social Security and pension payments by your effective federal and state income tax rates. This gives a good picture of after-tax cash flow.
5) Estimate your expenses.
It’s time to be honest with yourself, Carter writes. “Start by looking at your actual bank and credit card transactions to see your current expenses,” he says, “and record them on a worksheet like this. Then think about how your expenses could change.”
For example, if you manage to pay off your debts, you may end up spending more on travel and entertainment. Or you may spend more on health care over time. See if you can reduce your unnecessary expenses, bit by bit. Many retirees, especially in the first few years of retirement, actually find themselves spending beyond their means. Watch out!
6) Run a retirement estimator.
“Once you have your numbers above, enter them into a retirement calculator like this to see if you’re on track for retirement. Be sure to use a long time horizon to hedge against a long life span,” Carter writes.
Again, a financial dashboard does much the same thing only with greater versatility. It allows you to enter various interest rates, withdrawal rates, and investment returns, so you can get a good picture of how today’s decisions and assumptions will affect tomorrow’s financial health.
7) Determine your income strategy.
Delaying Social Security benefits until age 70 will get you a higher benefit, and this can provide a hedge against longevity risk. (There’s a companion article about this topic this week on the AgingOptions Blog.)
Carter explains, “If your retirement calculation shows a significant chance of running out of money, you may want to purchase an immediate annuity, which provides a guaranteed payment for the life of you and possibly your survivor. Some even include inflation protection. You can also get inflation-protected income by investing in high-dividend stocks, real assets, I-Bonds, and TIPS (treasury inflation protected securities). The income will be lower than with an annuity but you maintain control over your assets, can benefit from future growth, and can pass the remainder to your heirs. Finally, you’ll want to take steps to minimize the taxes you pay on that income.”
If this sounds like a lot, Carter highly recommends looking for a financial planner to help you navigate the twists and turns. “Life happens but you don’t have to let it get in the way of your retirement,” he writes.
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(originally reported at www.forbes.com)