Senior woman paying bills
Mike Tyson famously said “everyone has a plan until they get punched in the mouth”. Unfortunately, this can be just as true when it comes to retirement planning as it is in boxing. Here are some ways LIFE can get in the way of even the best plans and what you can do about it:
L is for longevity. The main challenge in retirement planning is making sure our money lasts at least as long as we do. The first problem is that we don’t know how long it will be. According to a recent report from the Society of Actuaries, most Americans underestimate their life expectancy.
But even using a precise life expectancy for retirement planning is problematic for a couple of reasons. First, by definition, about half of people will live longer than average. If you are in good health, your possibilities are older Second, advances in biomedical technology could mean increased life expectancy. In fact, some experts even recommend planning to live to be 120 or older.
I is for inflation. The second challenge is that the cost of almost everything we buy will likely increase over time, reducing the real value of our wealth and income. We have 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. This is because withdrawals may force you to sell more of his investments while his value is down, leaving less in his portfolio when the market eventually recovers. Take this example from Deena Katz writing in it Wall Street Journal:
“two investors, both with the same $1 million portfolio, each withdrew $62,000 per year adjusted for inflation and each earned, over the next 30 years, 7.6 percent per year. The only substantial difference was their return on the first The unlucky “Investor A” retired in a bad year and his portfolio lost 10 percent, while the lucky “Investor B” received 29 percent the year he retired. For the next 28 years, every one received 7.6 percent and last year A earned 29 percent and B lost 10 percent, bringing Unfortunately, A would have run out of money in 22 years, while B, in 30 years, would have a savings of over $1,500,000. The point is, in retirement, timing is everything and careful planning should take this into account.”
E is for events. The biggest one is health and long-term care costs. The latest from Fidelity study estimated that a 65-year-old couple will need about $315,000 to cover out-of-pocket health care costs in retirement. That doesn’t even include any futures. cuts in Medicare, larger-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 more than $9,000 a month. Keep in mind that Medicare doesn’t cover long-term care costs and Medicaid requires you to spend almost all of your assets to qualify.
So what is to be done? Here are some steps you might consider taking if you are just a few years away from retirement:
1) Make sure your portfolio is properly diversified. The last thing you want is to see your savings scrambled just before you retire. At the same time, being too conservative may not give him enough growth to achieve his goals.
The key is to have a balanced portfolio that protects you from a severe recession while maintaining enough growth to at least keep up with inflation. The easiest way to do this is with a target date retirement fund that serves as a fully diversified one-stop shop, gradually becoming more conservative as your retirement date approaches. If you’re looking for more personalized advice that can coordinate your retirement accounts and taxable accounts, consider working with a financial advisor.
2) Consider purchasing long-term care insurance. A life of smart savings and investing can be gone after a few years in a nursing home. Even if you’re relatively young and in perfect health, you’ll want to make this a priority. First, you never know when an accident or injury may occur. 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.
3) Pay off your debt before retirement. While it may make financial sense to keep a mortgage and contribute savings to tax-sheltered retirement accounts while you work, paying off your mortgage before retirement can improve your cash flow. This is because you are unlikely to generate enough income to make the mortgage payments than it would cost to pay off the balance. Just be sure to set aside enough savings for emergencies, and be careful to avoid making large retirement plan withdrawals that could force you into a higher tax bracket.
4) Estimate your pension and Social Security income. Get projections of any pension you are lucky enough to be eligible for and Social Security Benefits. You can calculate how much of your Social Security will be taxable and will reduce your Social Security and pension payments on your effective federal and state income tax rates.
5) Calculate your expenses. Start by looking at your actual bank and credit card transactions to see your current expenses and record them in a worksheet such as this. Then think about how your expenses might change. For example, your mortgage and other debts can be paid off, and you can spend less on clothing, eating out, and transportation, but more on health care, travel, and entertainment. You may also consider ways to reduce your expenses.
6) Run a retirement calculator. Once you have your numbers up, enter them into a retirement calculator like this to see if you are on track for retirement. Be sure to use a long-term horizon to guard against extended shelf life.
7) Determine your income strategy. Consider delaying Social Security benefits until age 70 for a larger benefit. This can provide a hedge against longevity risk.
If your retirement estimate shows a significant chance of running out of money, you may want to purchase an immediate annuity, which provides a guaranteed payout for life and possibly your survivor’s. Some even include inflation protection. You can also earn inflation-protected income by investing in high-dividend stocks, real assets, I-Bonds and TIPS (Treasury Inflation Protected Securities). Income will be lower than with an annuity, but you maintain control over your assets, can benefit from future growth, and can pass the rest on to your heirs. Finally, you’ll want to take steps to minimize the taxes you pay on that income.
Sounds like a lot? Fortunately, if you need help, there are many resources available to you. In particular, see if your employer offers access to unbiased financial planners. Life happens, but you don’t have to let it get in the way of your retirement.
