Successful retirement has a blueprint.
Whether you are already retired or retirement is years away, you can follow the blueprint to enhance your financial independence.
For starters, you should always have a written retirement plan. (Surveys of retirees demonstrate that those who have written plans are more satisfied.)
Developing a plan requires you to carefully consider key issues.
A plan also reduces uncertainty, and it gives you reasonable expectations.
Those without plans, on the other hand, “learn as they go.”
They make more mistakes in the early years of retirement, and require more frequent and dramatic changes as time goes on.
What’s more, they often have unrealistic expectations about retirement.
A plan for successful retirement must answer some crucial questions.
In this post, I have stripped retirement planning to its essence and determined the questions that must be answered if you’re age 50 or older.
This is your blueprint for retirement.
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 also 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.
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.
Also, 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.
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.
Imagining your retirement lifestyle also increases your retirement readiness, preparing you psychologically for the changes retirement will bring.
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 out of-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 also choose traditional long-term care insurance, an annuity with a long-term care rider, or permanent life insurance with a long-term care rider.
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 should also consider buying additional guaranteed lifetime income through an immediate annuity or longevity annuity (also called a deferred income annuity).
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.” Which is not the most prudent thing to do when it comes to your retirement finances.
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.
That’s it! Answer these 7 retirement blueprint questions honestly and carefully… and you’ll likely find yourself much more satisfied with your retirement plan.