by Dave Kutcher
You’re quickly approaching your retirement date … are you ready and set to go?
We overwhelmingly see folks in their years just prior to retiring. It is who we market to and it is these folks with whom we feel we can be of most value in terms of helping plan their road ahead.
It is quite often that folks come see us with a retirement date etched in their minds, but they have little to no planning done while stepping toward that starting line.
Don’t get me wrong, plenty of folks we talk to have saved significant amounts of money in their company sponsored retirement plans and personal IRA and ROTH accounts. This is obviously an important part of retiring, making sure you have enough money on hand to replace the loss of earned income resulting from your retirement.
If nothing else, our initial conversations with folks tend to uncover a few common misunderstandings in areas that can have a substantive impact on future years.
There are a few key things people need to establish and take note of if any planning model is going to work.
The first area most people underestimate is the time period for which they need to provide for themselves at retirement. In the days of old, life expectancy was significantly different than it is today. If you planning to retire at age 65 and your life expectancy is sometime close to your mid-80’s, that means you need to minimally plan for 20+ years with little to no assurance you will outlive your money. You can’t plan to spend your savings down to zero the day you die. We don’t have a crystal ball on that future date of death and so you need to maintain enough assets to continue producing income or have guaranteed income plans that provide for non-stop income through your eventual death, no matter how long you live.
Planning for minimum needs can bite you hard in this phase of your life because if the eventuality comes to pass that you have depleted your sources of income before you die, there is little you can do about it other than you becoming a ward of the State or a family member having to help you get by. We need to remember that when we see published tables of life expectancy, some people outlive those numbers and some people don’t. If you are on the long side of that equation, something you won’t know until it actually happens, you need to be prepared to keep on providing for yourself.
Besides planning for a realistic time period of years ahead when trying to determine your needs for retirement, the next area that needs evaluation is the amount of income that will be needed each year in order to meet your standard of living. While most folks look favorably upon a time when their major expenses should be changing in their favor, such as the end of their 30 year mortgage payments, there are other expenses at retirement that can be a big surprise and cause tremendous strain on a limited or fixed income situation.
In simpler days when planning was not as sophisticated as it can get today, we tended to plan for meeting an income need of about 80% of pre-retirement income to keep someone in the same world they created for themselves during their working years. So, someone making $100,000 per year at work planned to provide $80,000 in retirement income annually, ideally adjusted for some cost-of-living increase in the years ahead. Know your needs!
Things aren’t what they used to be, however, and folks tend to need a reality check when planning for this income need. The discretionary income created by a mortgage being paid off can be quickly eaten away from unexpected costs for healthcare. In this area alone there are two major issues; the first is the carrying costs of Medicare related insurance programs where premium requirements are likely far higher than most pre-retirees think. The second area of big concern is chronic, long term care needs and the associated expenses of this custodial type care which is NOT covered by Medicare. Know the financial risks ahead!
Another area folks tend to make mistakes is when they have pension plans that provide for lifetime income. People need to plan for taxes and they need to remember that if you have a spouse and need to account for income to that spouse after a retiree dies, the pension income provided under the original plan is going to be reduced significantly to accommodate that spousal income in later years. It is important that you understand how your pension at work is calculated and how it will serve you during your retirement years, including accounting for net income after taxes. And, not to add salt to the wound, but people also need to understand that those pensions do NOT provide for income to family members beyond the spouse. So, if there are intentions of leaving assets behind as a legacy, a joint spousal income plan from a pension is not going to make that happen. When both spouses have deceased, the income no longer continues to anyone.
We help people look at their pension options all the time and can help you understand how your plans features and benefits can best serve you and your situation at retirement. Know your plan!
One of the other areas requiring close scrutiny is the asset or money allocations that are needed in order to best serve someone at retirement. Investing in a more conservative manner may or may not serve you best. Likely, it means your money won’t be able to keep up with inflation and you will have deteriorating buyer power in future years.
There are plans and tactics that can be engaged at this time in someone’s financial life that can provide a combination of safety, growth and control that most folks aren’t aware of. We incorporate these types of programs all the time in order to help folks incorporate more predictability and have less stress about the unknown in those later years. Know your options!
