- Plan for both a long life, and a short one
Chances are if you’ve reached 65 years old you will live into your mid-80s according to life expectancy calculations. But many are living longer—one in four people will live into their 90s, while one in ten will live past 95. Make sure that your retirement plan takes longevity into account so that you don’t run out of money—no matter how long you live.
At the same time, none of us knows for certain what the future holds, so make sure you and your spouse are protected from the unexpected. Consider the financial impact of the loss of one spouse, running the numbers both ways. Remember that the surviving spouse will only get the higher of your two Social Security checks, not both checks, which can necessitate a drastically different lifestyle for some people who haven’t done a thorough job of retirement planning.
Your financial advisor can help you identify and plan for various retirement risks, including longevity and lost income. By planning for best and worst case scenarios, you can feel a greater sense of peace, which is the goal.
- Plan for long-term care
The average cost of a semi-private room in a nursing care facility was more than $7,000 per month in 2017, and it’s estimated that approximately 50% of people over 65 will need long-term care. Your retirement advisor can help you devise a plan to pay for costs if you do need long-term care, but not overspend on policies that may be subject to drastic premium increases, sudden cancellations or never be needed at all. There are many strategies and new options to consider.
- Plan for inflation and/or higher interest rates.
Inflation and interest rates are considered by economists to be inversely related. So when inflation—or the cost of goods and services—rises, interest rates go down. Interest rates in the United States are set by the Federal Reserve based on the rate of inflation, which they like to see at 2%. In 2017, the Fed raised interest rates, and has said they will raise them even more in 2018.
When interest rates rise, the value of bonds goes down. Although you will see savings accounts, money markets and CDs yield higher rates, these are still low compared to rates prior to 2000. When inflation rises, your retirement income won’t pay for as much food, fuel or other necessities. That’s why your retirement plan should include provisions for both inflation and/or higher interest rates. Your financial advisor can help you design a strategy to address the many future possibilities.
- Plan for retirement income.
When you go from working and receiving a steady paycheck every month to not working and having to withdraw money from your investments every month to cover your living expenses, it’s all brand new, and a bit scary. How much can you take out without endangering your future by depleting your nest egg too soon? What accounts should you draw on first? Does the 4% Rule still apply, or is it outmoded?
Creating reliable income that won’t run out is the number one objective of a good retirement plan, and why you should work with a financial advisor who has helped many other people retire and understands what’s required. Retiring is a one-time life event for everyone, and it’s important to have someone experienced on your side.
- Plan for energy levels.
You may have heard the terms “go-go, slow-go and no-go” in relation to retirement planning. This simply means that if you plan on traveling or doing strenuous activities, you should plan to do those early, in the first part of your retirement, while planning for less activity (but higher healthcare costs) in later years.
- Plan for sequence of returns risk.
The “buy and hold” strategy that works when you are young—where you wait for the markets to come back up after a downturn—does not apply in retirement as we saw in 2008, when many people’s retirements were wiped out. You may not be able to recover from a downturn if you have to continue to take money out of your accounts to live on, kind of like compound interest in reverse. It is very important to work with an advisor who specializes in retirement and understands the critical need to help reduce risk.
- Plan for your estate
Even if you don’t think you have “an estate”, if you own a home, property or investments, you do. It is very important to work with your financial advisor in conjunction with an estate attorney to determine the best ways to help avoid taxation and probate for your beneficiaries, and to ensure documents are prepared correctly. Not only that, but there are other documents you should have as you get older, such as a healthcare directive and power of attorney
- Plan for RMDs / taxes.
WSpeaking of taxes, RMDs (Required Minimum Distributions), which are mandated starting at age 70-1/2, surprise many retirees by placing them in a higher tax bracket than they expected. Not only are the calculations complex, but ensuring that you take the correct amount money out of each of the proper tax-deferred accounts by December 31st of every year can be tricky—and costly if not done right. The penalty is the tax owed, plus an additional 50%!
Your financial advisor can help you plan out your whole retirement distribution plan in advance, help you calculate and minimize taxation, and make taxes simpler for you to manage as a retiree.
- Plan for Social Security filing
You only have one chance to get Social Security right. There are literally dozens of ways you can file, especially if you are a married couple, or divorced after having been married for 10 years or more. And most people don’t realize that although they can file at age 62, they will get a larger check if they wait until their full retirement age, which is from age 65 to 67 depending on your month and date of birth. Not only that, but if you continue to wait past your full retirement age, your benefit amount will grow by 8% yearly until age 70. Your financial advisor can help you by using software to compare your options.
- Plan for healthcare costs and Medicare.
Surprising to some, Medicare is not free—your premiums for coverage are usually deducted from your Social Security check. And standard Medicare doesn’t cover dental, hearing or vision, is subject to deductibles, and doesn’t cover long-term care. Fidelity’s latest estimate is $275,000 per couple for out-of-pocket healthcare costs in retirement.
11. Plan for regular reviews and plan updates.
Once you have a retirement plan in place, it’s not set in stone. Things change. You may add or lose family members, your retirement goals may change, the economic environment may create new considerations, and financial innovations may present new strategies. Once per year is a minimum in terms of making sure your retirement plan (and beneficiaries) are constantly up-to-date.
12. Plan ahead for happiness
Research shows that staying active, engaged in life and having fun can extend your life. For instance, spending time with grandchildren can benefit you—and benefits them too. In addition to finances, your retirement planning should encompass a bucket list of things that you want to pursue when you’re no longer in the workforce.
We can help! Call us to set up an appointment to refresh your retirement plan. You can reach Eric Scott Financial at 435.773.9444.
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