Three Important Questions Answer Before You Retire
December 12, 2018
People are often shocked to find out how much “green” it takes to make their golden years comfortable and worry-free. A Gallup survey released in April 2018 found that only 20% of nonretired investors have “carefully calculated” the amount of money they’ll need in retirement and whether their current savings are on track to meet that goal. While half those surveyed had thought about how to spend their leisure time in retirement, roughly the same number had given little or no thought to the costs of retirement, including routine medical care and long term care.
Certainly, retirement can be the best time of life; it can also be time of fear and uncertainty about finances, health, and relationships. The only way to have the best retirement possible is to plan for it and be flexible. Start by asking yourself these three questions – giving realistic answers.
1.Will my money last as long as I do?
Be realistic about how much you’ll have and how much you’ll spend.
The average retirement age is 63, and the average length of retirement is 18 years. The key term here, however, is “average.” According to Vanguard’s retirement planning tool, a 65-year old woman has a 30% chance of living until age 90, while a 62-year old man has a 20% chance of living until age 90. There’s a big difference in the nest egg needed for an 18-year retirement and a 28-year retirement.
Early retirement can have long-term financial consequences. The earliest age you can claim Social Security benefit is 62, but you won’t receive “full benefits” unless you retire at age 65 or 67 (depending on your current age). In fact, your monthly benefit amount will be about 30% less at age 62 than if you wait until age 67 to begin collecting benefits.
People tend to overestimate how much they’ll receive in benefits. The average monthly social security benefit in 2018 was $1404. For retirees who mistakenly assume they can live on Social Security benefits, that can represent quite a pay cut. Early retirees who lack adequate retirement savings or other sources of income can easily come up short just when they need the money most.
2.Do I have a realistic plan?
Once you’ve taken a hard look and answered question #1, it’s time to separate retirement reality from fantasy. Remember that, while some of your household expenses will decrease, others will increase. Most financial planners counsel clients to save enough to replace 80% of pre-retirement income, so it is important to think carefully about your post-retirement standard of living.
One common mistake people make is to have a single plan that depends on meeting specific dates and targets. Something like “I’ll work until I’m 67 and my spouse is 65, but we won’t start drawing down retirement funds until age 70. Then we’ll sell the house and travel.” That sounds perfect, but what if something disrupts the plan – illness, unemployment, bad economy, etc.?
Consider what would happen if you or your spouse (or both!) develop health problems that force you to retire early or pay high medical costs. An economic downturn like the Great Recession of 2007-2009 can cause home values and investment portfolios to tank.
Instead of a single plan, you need to prepare for several different scenarios, worst case to best. Think of it as developing a “disaster plan” for retirement. Include as many variables as possible:
- Routine medical expenses are likely to rise in retirement. Medicare covers a lot, but not everything. Include the cost of additional coverage, medications, etc. If you’ve always been covered by a generous, employer-provided plan, medical costs can be quite a shock.
- Household expenses for repairs and renovations may rise. In addition to expenses like roof replacement, you may need to install assistive technologies that help you remain at home and age in place. A bathroom renovation that includes a walk-in tub, grab bars, and other safety aids can cost $5,000 or more.
- Medicare doesn’t usually cover long-term care or in-home care expenses, although CMS recently allowed Medicare Advantage plans to pay for non-skilled nursing care.
3.How will I recover from setbacks and losses?
The older you are, the less time you have to wait for markets to recover after a crash. The US stock market took about 4 years to recover from the Great Recession, but some real estate markets still haven’t completely recovered from 2008’s crash. Additionally, recent market volatility and trade tensions have rattled both investors and markets.
2018 was a year of floods and fires in the United States. An AARP report explained that seniors often take big financial hits from storms and floods because they’re less likely to be covered by flood insurance. Most have paid off their homes, so there’s no obligation to purchase it. Also, many people like to retire to Sunbelt communities near coastlines. Stronger, more damaging storms have also caused devastation in areas not previously considered to be flood zones.
Before moving to any new area, make sure you understand all the costs involved: taxes, insurance, cost of living, etc.
Finally, remember that the death of a spouse not only brings emotional devastation, but can also cause financial turmoil. Couples often develop financial plans based on two social security checks or one partner holding a part-time job. The surviving spouse may not be physically capable of going back to work.
It’s hard to make good decisions during times of personal and family crisis. Having a good financial plan in place can stop you from making impulsive decisions that hurt you in later years.
Talk to a financial planner
The poet Robert Browning wrote hopefully and poignantly about aging:
“Grow old along with me. The best is yet to be.
The last of life, for which the first was made.”
That’s the ideal retirement, isn’t it? But it doesn’t just happen. A secure retirement requires careful planning and discipline. It’s never too soon – or too late – to sit down and work out a plan that will help you have the most rewarding retirement possible.
Find a certified financial planner to help you consider your options. Review the Wall Street Journal’s suggestions for choosing a financial planner to make sure you’re getting the best possible advice.
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