It was recently reported that the key reason that households seek out a financial planner is to talk through a plan to securely retire. We all try our best to prepare for the time we begin the Fulfilling Stage of life — that magical date when we stop full-time work. But creating a retirement plan takes in-depth preparation and decision making. In this post, I will briefly highlight key areas that require attention to develop the right plan for you.
I will only touch on the key areas and will spend time in future posts discussing each retirement reality in much more detail. One point I would like to stress is that practically everyone should begin this process no later than age 40, with the most prepared starting when they land their first major job. Overall, starting the process as soon as possible is the direction you should take.
Here are the 10 keys to retirement planning reality:
1. Determining Your Post Work Life’s Purpose When Every Day is a Weekend
What will you do when you stop working? What purpose will drive you to get up each day? Determining your life’s purpose when you stop working is a necessary first step in retirement planning and a major retirement reality. You need to have some idea what you really want to do or not do. Here are some examples from first-hand situations - some people say they will continue to work because it gives them positive reactions. Others say they want to spend more time with family, travel, volunteer or begin an educational program they never had time to do. As you can imagine, each of the above options comes with upfront and ongoing costs that must be budgeted.
2. Income Planning
So just how much income will you have when the stop work bell tolls? You need to determine how much income you will have from Social Security retirement benefits, company pensions, from converting your accumulated savings into income streams and other sources. The amount of income your assets and benefits generate has to be determined. I have found working with a professional to create an income plan is the most effective way to address this reality.
As part of this process, understanding what Social Security retirement benefits you are entitled to is an eye opener for many people. I have seen it written that more than half of baby boomers admit to knowing very little about Social Security benefits. Remember that Social Security is only supposed to replace 40% of your pre-retirement earnings. It is not designed to be your sole source of income.
3. Managing Your Assets
When you stop working, you should be lucky enough to have accumulated some amount of cash, property, retirement accounts and other assets. How you make these assets work for you to generate income to fund your lifetime spending is the key. This effort could involve selling assets, reallocating investments and using cash value life insurance or annuity products to generate income.
4. Managing Income Taxes
Minimizing taxes is a crucial consideration in retirement planning. Most all times the best outcome for an individual is to plan to maximize after-tax cash income and financial outcomes. Income taxes are very important. Over the next decade, we will likely see significant changes in income tax rates with increases likely to take place to fund new government spending programs to repay the government’s borrowings.
5. Carefully Managing Your Cash Budget
The need to have and aggressively manage a cash budget does not change once you stop working. In fact, once you stop working, there’s little room for financial mistakes you can avoid. You have to know your cash inflows and outflows. Managing your cash flows should not be viewed as optional. Look at your current and expected sources of income and expenses to determine what your cash-flow will look like during retirement and throughout your life expectancy.
6. Managing Living Expenses
The typical household headed by someone age 65 or older spends just over $50,000 per year to support their lifestyles according to a study for 2019 by the Bureau of Labor Statistics. This amount declines as individuals age but presents a reasonable case for what households spend to live a reasonable lifestyle.
This amount covers the basic costs of life and does not cover the cost for non-essential items such as significant travel costs, long-term care expenditures, large healthcare costs or the costs for supporting grandchildren or other dependents.
As you stop working, you need to carefully manage the spending for living costs and, if you do choose to take that once-in-a-lifetime trip or donate to your alma mater, you must make sure you do not jeopardize your ability to pay your lifetime expenses.
7. Keeping Proper Insurance Coverages
Just because you stopped working does not mean you should drop your insurance coverages. You still need a full portfolio of coverages including life, health, home, auto, long-term care and personal liability. The important thing to do is to work with your insurance professionals to tailor the coverage to your needs as you age. Two examples would be to make sure your car insurance is based on the miles you drive (likely less) and that your health insurance coverages take into consideration Medicare Part A and B coverages.
8. Funding Healthcare Needs
According to the 2021 Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2021 may need approximately $300,000 saved (after-tax) to cover health care expenses in retirement. Another way to look at this amount is that the couple will likely spend about $15,000 per year for their expected 20-year retirement life expectancy.
The amount you’ll need will depend on when and where you retire, how healthy you are, and how long you live. The amount you need will also depend on which accounts you use to pay for health care — e.g., 401(k), HSA, IRA, or taxable accounts; your tax rates in retirement; and potentially even your gross income. According to Fidelity, approximately one-third of "early retirees" who claim Social Security at age 62 do so to help pay for health care expenses until they are eligible for Medicare coverage at age 65.
Healthcare costs make up a large, expected cash outlay as you age. They must be planned for and proper strategies to fund them put in place.
9. Planning for Long-term Care
Most of us will need some form of long-term care as we age. According to the insurance company Genworth, the world’s population is aging at a faster rate than ever before, and people are living longer. Every day until 2030, 10,000 Baby Boomers will turn 65 and 7 out of 10 people will require long-term care in their lifetime.
The cost of that care varies based on where the care takes place (e.g., at home, in a facility), geographic location of care and level of care required, among other things. As you plan for retirement how you will pay for a long-term care event, should you need it, must be considered.
10. Leaving a Legacy
Many people want to leave a legacy to children, grandchildren, their church or charitable organizations. Others want to pass away as their last check bounces at the bank. If you do desire to leave a legacy you will need to take the legal, tax and estate tax planning actions to make it happen so that the amounts you want to leave are available.
Summary
Retirement planning comes with certain realities and mandatory decisions you must make. I wish it were a series of easy actions, but it is not. From finding purpose in your non-working years to electing the most appropriate Social Security retirement benefit, to paying close attention to your cash budget, these are all actions you must take to create the most secure retirement possible.
The key is to create a plan and keep it up to date. Generally, it is appropriate to revisit your cash-flow projections, asset allocation, and any financial planning documents every two to three years or so, or more frequently in the case of life-changing events such as a divorce, death in the family or a major change in income.