Successful Retirement has a blueprint.
Whether you already are retired or retirement is years away, you can follow the blueprint to enhance your financial independence.
You should have a written retirement plan. Developing a plan requires you to carefully consider key issues, and surveys of retirees show those who had written plans are more satisfied.
A plan reduces uncertainty, and it gives you reasonable expectations. Those without plans “learn as they go.” They make more mistakes in the early years of retirement and require more frequent and dramatic changes as times goes on. They often have unrealistic expectations about retirement.
A plan for successful retirement must answer crucial questions. I’ve stripped retirement planning to its essence and determined the questions that must be answered. That is your blueprint for retirement.
When will you be ready and able to retire? Age shouldn’t determine when you retire. You need to be ready and able.
Retirement readiness is a state of mind. Being ready means you are content to leave behind your workplace, including colleagues, structure, the sense of purpose and the activities associated with it. You’re ready to spend more time on other activities.
Being able to retire means your income and assets are sufficient to allow you to stop working. Answering the questions in the rest of this article will help you be able to retire.
Of course, the transition to retirement doesn’t have to be abrupt. More and more people find a gradual transition is better. Over months or years, they reduce working hours or increase vacation time, often by changing jobs.
Unfortunately, the retirement date isn’t always in your control. When you’re more than a couple of years from retirement, your plan should include a contingency that you might retire before you intend because of health or layoffs.
How long will retirement last? In other words, what is your average life expectancy? Your plan will be very different if your life expectancy is 10 years than if it is 35 years. Most people underestimate average life expectancy. That makes for a bad retirement plan. We discussed this question in detail last month. Review the article for ideas on how to develop a reasonable estimate.
If you’re married, a related question is, how long will you live together? Income and expenses will change after one spouse passes away. The plan should anticipate this event
What will you do in retirement? This is a sneaky way of determining how much you’ll spend.
As I’ve said in the past, don’t make the mistake of using a formula or rule of thumb to estimate how much you’ll spend in retirement. Develop a personalized spending estimate based on your interests and planned activities. Decide the lifestyle you want in retirement, including where you will live, and estimate its current cost.
Keep in mind that spending doesn’t stay the same, adjusted for inflation, year after year. Most people spend less as they age because they’re less active and have done those once-in-a-lifetime activities. For most people, spending steadily declines after age 75 or so and might increase later in life because of medical and long-term care expenses.
After estimating the spending and looking at your sources of retirement cash, you might need to modify the expected activities to make spending match income and assets. That’s a key part of retirement planning.
Don’t forget to include inflation in your spending estimates. Most of what you’ll spend money on in retirement will increase in price over time.
Imaging your retirement lifestyle also increases your retirement readiness, preparing you psychologically for the changes retirement will bring, as I discussed at the beginning of this issue of the newsletter.
How will you pay for medical expenses and any long-term care costs? The wildcards in most retirement plans are medical expenses and long-term care. Their timing and amount are unpredictable.
Many new retirees underestimate these costs and overestimate what Medicare and other government programs will pay for.
The best way to control retirement medical expense spending is to maximize insurance coverage.
Sign up for a Medicare Advantage plan, or join traditional Medicare and add a Medicare supplement (Medigap) plan and Part D prescription coverage. Your fixed monthly expenses will be higher because of the insurance premiums, but your potential maximum outof-pocket expenses will be lower.
If you don’t buy the insurance, you should save more and spend less on other things. You’ll need a cushion in your nest egg for large medical expenses.
For long-term care, most people should use a combination of personal income and assets and insurance. You can choose traditional long-term care insurance, an annuity with a long-term care rider, or permanent life insurance with a long-term care rider. We show how to make this choice in this month’s Insurance Watch.
How much guaranteed lifetime income will you have? Financial security is increased when you have income that is guaranteed to continue no matter how long you live. I recommend that most people have enough guaranteed lifetime income to pay their fixed, basic expenses. That reduces much of the stress and uncertainty of retirement, and it also makes some people more comfortable investing for higher returns with the rest of their nest eggs.
Social Security is the only inflation-indexed guaranteed lifetime income for most people. Don’t make a fast decision on when to receive Social Security benefits. You have choices, and it’s important to optimize the Social Security decision, especially for married couples. The right choice can add tens of thousands of dollars of lifetime income.
You also should consider buying additional guaranteed lifetime income through an immediate annuity or longevity annuity (also called a deferred income annuity).
How will you manage and spend the nest egg? Of course, you need an investment strategy, and it will have to be adjusted as circumstances change.
The great gap in many retirement plans, though, is the spending strategy. Surveys indicate most people believe they can spend 7% or more of their retirement portfolio each year without the risk of running out of money. But the consensus among financial planners and economists is that the maximum safe spending rate is about 4%. Some say the safe spending rate is even lower.
You need to establish a spending policy. Most people don’t. They “wing it.” We discussed how to develop a spending policy in our July 2015 issue.
What is your legacy? You need a complete estate plan. A complete plan includes documents such as a will, financial power of attorney, advance medical directive and perhaps more, depending on your situation and goals. You need to determine how the estate will be divided among the objects of your affection and how to meet any other goals you have.
An estate plan should cover more than what happens to your assets after you pass away. You also need to ask whether it is likely you’ll have to help support either your children or parents or both at some time during retirement. Of course, you should plan who you want making decisions when you might need help in the later years.