By Al Lindsten
You’ve probably seen plenty of images online of smiling, gray-haired couples walking on sandy beaches or pre-retirees meeting with their financial advisors, making plans for how to stretch their income and maximize their Social Security benefits. Or maybe you’ve even seen ads from retirement communities, luring you in with the promise of unlimited opportunities for recreation and a lifestyle they tell you you’ve earned and deserve.
That’s often our traditional view of retirement, but as different generations age and get close to retirement, that mindset has been challenged. No longer are recent retirees content to sit in rocking chairs and watch the ever-expanding golden years pass by. Retired baby boomers are asking new questions about issues that never used to enter the minds of retirees 20 years ago, questions relating to work, finances, relaxation, family, calling, and purpose. How does this new view of retirement change how we plan for retirement?
A New Retirement Needs A New Plan
It’s not uncommon for today’s retirees to no longer consider their work lives complete after they officially retire. Perhaps there’s an ongoing financial need for some form of employment or a desire to reinvent yourself in a new career or volunteering capacity.
And with Americans living longer than ever before, a 30-year retirement doesn’t seem out of the question. Not only do we need to plan for longevity, healthcare, and making our money last, we also need to plan for how we spend our time and energy during these ever-important years. Whether that’s enjoying our family, grandchildren, and friends, relocating to a new area, or diving into a hobby, retirement nowadays brings about a whole new conversation of purpose and new questions to address to make sure you are on the right path to your ideal retirement.
As you plan for retirement, have you considered the following factors? Here’s a thorough look at some things you need to plan for as you draw closer to your golden years.
For many people, picking a retirement date is easier said than done. Although many people may plan to retire at age 65, 37% of American workers end up retiring sooner than planned. (1) Circumstances, such as health issues, job loss, or caring for a family member may require an earlier retirement age. Regardless of when your retirement actually becomes a reality, it is wise to plan for a variety of scenarios and build your plan around an earlier retirement age to make sure your money lasts.
How much will you need to live while in retirement? The answer to this fundamental question is key to a successful retirement. Some expenses will disappear or decrease, such as your children’s college expenses or commuting costs, and some will increase, like travel and entertainment. Then there are the expenses that shift as you go through retirement. The early years, or the “go-go” years, typically have higher expenses in travel and recreation. As you move into the “slow-go” years, you may have less spending in those areas but more healthcare-related costs. Finally, the ominous “no-go” years may significantly reduce the golf fees and frequent flyer miles and cause you to spend more on long-term care. Your retirement plan should incorporate these changes. Consider creating a mock retirement budget now to see how well your money fares through these phases of retirement.
When you retire and are living on a fixed income, you want all your financial resources to go toward your expenses. Carrying debt into retirement can eat away at your precious savings and force you to be much tighter with your budget than you’d like to be.
Make a strategic plan to simultaneously eliminate your debt while still saving for retirement. Review all current debts you face and compare interest rates and balances. This can help you decide which to pay off first. Once you’ve eliminated credit card and auto debt, see how you can aggressively pay off your mortgage. Being mortgage-free could reduce your monthly expenses by up to a third and make a significant impact on how you spend your savings.
Housing costs tend to be the largest expense in retirement, with the average retiree spending $16,723 per year on housing, not including utilities or amenities. (2) As you approach retirement, think through where you’re going to live and how much you’ll spend on housing costs in retirement.
If you plan on relocating, do your research. Visit your potential locations, and decide if the climate, community, and area are right for you. If you want to stay where you are, ask yourself if downsizing is a viable option. If not, look at modifications that might be needed in your current home to accommodate aging. Plan to make any expensive adjustments and repairs now, before you’re living on a tighter budget.
Where will your retirement income come from? Employer-sponsored plans like 401(k)s? Personal savings? Social Security? Likely, it will be a combination of various savings vehicles and sources that provide your income. That’s why you need to maximize these plans and accounts.
Social Security benefits can be claimed anytime between ages 62 and 70. However, the timing of when you decide to collect these benefits will impact the amount of payout you receive. At 62, you become eligible to receive Social Security benefits for the first time. But before you start claiming Social Security, it’s important to review your benefits and options for claiming so you can plan to maximize your lifetime benefit.
If your full retirement age (FRA) is 67 and you start claiming benefits at age 62, your monthly benefit amount will be 30% lower than if you waited for full retirement age. (3) And if you wait until age 70 to claim your benefits, your monthly check will be 24% higher than if you retire at 67. (4) It’s also important to consider how long you’ve worked and your lifetime average monthly earnings, which are used to calculate your benefit. In some cases, working a few extra years can have a big impact on your monthly Social Security benefit.
If you have annuities or pensions, work with a financial professional or your HR department to get details about the best withdrawal options for you.
Undoubtedly there will be a gap between your expenses and your guaranteed income that will need to be filled by either part-time employment and/or investment income. Analyzing your retirement income needs will help you understand how aggressive your saving needs to be and how much risk and return is needed to get to the investment “bucket” you will need to fund your retirement.
Are you planning to take Medicare at age 65, or do you plan on working past age 65 and continuing with your employer’s healthcare plan? Have you considered the options for filling the Medicare gap with a Medicare Advantage plan or Medicare supplement plan? No matter how healthy you are today, you may need more health services as you age. According to the Employee Benefits Research Institute, the average couple at age 65 will require anywhere from $183,000 to $363,000 in healthcare costs in retirement. (5) Most people don’t even have that much in their retirement accounts to live on, let alone cover medical costs. Even with Medicare, there could be significant out-of-pocket expenses and many conditions and treatments that are not covered.
When choosing your health insurance for retirement, make sure you understand all Medicare options and supplements and work with an experienced professional to help you evaluate your options.
Along the lines of health, think about your potential need for long-term care insurance. According to the U.S. Department of Health and Human Services, most Americans turning age 65 will face the potential of requiring long-term care at some point during their later years. (6) On average nationally, it costs $280 per day or $8,517 per month for a private room in a nursing home. (7) If you decide that long-term care insurance is the way to go, now is the time to act. Insurance costs increase with age. There is also the risk that your health will change and your application for insurance will be denied. Generally, you will have fewer options the longer you wait.
If you want to get a long-term care plan in place, you have a few options. It is smart to consider a traditional long-term care insurance policy, add a long-term care rider to your life insurance policy, purchase an annuity with a long-term care rider, or start saving for your long-term care so you can self-insure.
Seek Professional Advice
The retirement planning process has multiple moving parts, and in the end, there is no perfect plan. A retirement plan is dynamic, changing as your life changes. Your financial advisor is a guide to help you better understand your future through the planning process.
About Shelton Financial Group
Shelton Financial Group is an independent, multi-generational firm in North East Indiana that takes a team approach to addressing their clients most pressing financial concerns. SFG was founded in 1996 with the mission of helping people enjoy their wealth. Using their proprietary “One Life Formula,” the team at SFG focuses on what matters most to their clients and what they can control, integrate their wealth management needs with other aspects of their financial picture. To learn more about Shelton Financial Group and how they can help you achieve financial independence,.