10 considerations for getting retirement-ready
By Rand K. Gordon, CFP®
As you approach your 60’s, time starts moving fast. Sixty-five, the age most think of as normal retirement, is just around the corner and finally within your grasp.
Or is it?
As they approach age 60, many folks are so eager to leave the workplace that they don’t focus enough attention on the details of how, or if, their personal retirement plan will actually work. They start counting down the days until they put in their notice, prepare for the retirement party, and eventually sail off into the sunset.
This could be a costly mistake. It’s too late to find out, after you turned in your notice, that you don’t have enough resources to pay for retirement. In most cases, once you leave the workplace, you can’t return.
Now may be your last chance to get retirement-ready. Following are 10 things to consider for turning 60:
Pick a retirement date – In order to make the retirement calculations, you’ll need to have a target date. How much money you will need and how much you will receive from Social Security, pensions, etc. will depend on this date. You will need to be flexible, however, in case the date you would like to retire turns out to be too soon. Working even a year or two longer could greatly increase your retirement savings and how long they will last.
Where will you live in retirement? – Will you live in your current home that’s paid off or will you still have a mortgage? Will you move to a less expensive area or downsize to a smaller home? Will you move to a retirement village, the beach or perhaps the mountains?
Where you live in retirement can have a huge impact on how much retirement income you’ll need. If your personal retirement plan doesn’t work out one way, you may need to consider another. Although most retirees live in the same house in which they retired, moving to a less expensive area or downsizing to a smaller home could reduce costs and possibly free up home equity for investments or income.
Long-Term Care costs – Planning how to pay for the care you might need if you become ill or disabled as you age is a daunting task. It’s not the sort of thing we even want to think about. Yet studies estimate that up to 50% of 65 year-olds will probably need nursing-home care in the future. Without long-term care insurance, a nursing home will cost on average about $83,179 a year according to Long-Term Care Tree (www.ltctree.com). Assisted living facilities are a little cheaper, though still expensive at $45,000 a year. Care directly in the home is about $39,784 a year.
Although expensive, you may want to consider long-term care insurance to cover at least a portion of the possible costs you may incur. Unfortunately, the longer you postpone the decision, the greater your chances of suffering an illness or developing a condition that will disqualify you from coverage or cause the premiums to be too expensive. Regardless of how it’s paid for, you need to at least consider long-term care costs as you plan your retirement years.
Health Care costs – Paying for health insurance before age 65, when you don’t qualify for Medicare, can be extremely expensive. But even once you qualify for Medicare, your expenses aren’t over. A couple in their 70s, who are in relatively good health, can pay as much as $1,200 a month for health care insurance, deductibles, co-pays and prescriptions. You can learn more about healthcare costs, benefits and options at www.medicare.gov.
Rising medical costs, longer life spans, and possible shortfalls ahead for Medicare all add up to make health care costs a critical challenge for you in retirement.
Nail down a retirement budget – Forget about the old rules of thumb (i.e., you’ll need about 75% – 80% of your pre-retirement income) and get busy laying out exactly what your living expenses are. Consider pulling out your checkbooks, bank and credit card statements for the past 12 months to see where your money is going. Take into account your lifestyle and goals, identify which expenses are essential (must have) with those that are discretionary (nice to have).
Ideally, you’ll enter retirement with no debt, but you definitely want to take care of any credit card balances or other consumer loans before you get there.
Review Social Security and pension options – You can start receiving Social Security as early as age 62, but the longer you wait the bigger your benefit payments will be. You can check on your benefits by going to www.socialsecurity.gov for the amount expected at various starting ages.
Starting benefits at age 62 means locking in a lower benefit amount for life. If you don’t expect to live very long or you can’t work and need the money, then by all means, sign up. Otherwise, think twice.
If you plan to continue working past age 62, definitely hold off on starting Social Security payments unless you won’t be earning much. If you start taking Social Security payments before your full retirement age and earn more than $15,120 (2013), your payment will be reduced by $1 for every $2 you earn.
Along with reviewing your Social Security options, you also should check if you qualify for a pension benefit from your current or former employer. You may have the option of taking either a monthly pension amount or a lump sum equivalent.
Don’t forget about inflation and your withdrawal rate – When thinking about your retirement planning; don’t forget about factoring in inflation. Inflation increases the future cost of goods and services and potentially erodes the value of the assets you set aside to meet those costs.
For example, $50,000 of income today may only be worth $37,205 in 10 years at a 3% inflation rate. At a 4% inflation rate, that $50,000 would only be worth $33,778.
Another factor to consider as you prepare for retirement is the withdrawal rate of your savings. The withdrawal rate you decide on can dramatically affect how long your money will last. This is a variable that’s largely in your control. The consensus among financial planners is that the safe withdrawal rate is somewhere between 3% – 5% of your retirement savings.
The earlier you retire and the longer you expect to live, the more conservative you’ll want to be about tapping your retirement savings. Given improved medical technology and longer life expectancies, you should consider planning for income to last well into your 90s.
Estate planning considerations – Your chances of being mentally or physically incapacitated rise as you age. Make sure you have updated durable powers of attorney for finances and health care with someone you trust to take over for you.
You should also review your wills, trusts, and beneficiary designations for your retirement, bank, investment and life insurance accounts. If you haven’t updated your will for the last five years or more, now’s the time to do it. Consider the guidance of an estate attorney.
Put your plan to the test – With the facts and figures you now have, it’s time to see if your plan will work. If you have access to retirement planning tools through your current 401k provider or with other resources, take advantage of them. If not, you can start by going to www.fidelity.com and utilizing the retirement planning tools and calculators at this site. Use a post-retirement rate of return of no more than 5% – 6% on your investments. That’s a relatively conservative assumption for a portfolio of stocks, bonds and short-term investments. Fidelity’s tools can even give you a probability of success.
If your plan falls short, see what happens if you work a little longer, save a little more prior to retiring, and/or adjust your budget.
Consider working with a Financial Planner – The decisions you’re about to make are too important to your future not to get a second opinion. A Financial Planner can help you examine the realities and possibilities of retirement, and plan accordingly, no matter whether you’re self-employed, work for an employer, have retirement benefits or are on your own. An advisor can evaluate if you have enough resources, how they are invested, and help you plan when is the best time to retire. Look for an objective planner who’s experienced in personal retirement planning.
Rand Gordon is a CERTIFIED FINANCIAL PLANNER™ at Harbor Capital Management, Inc.