Life is all about balance. You want to enjoy life along the way, but it’s also vital to set aside resources for days that lie ahead. Successful retirement planning means planning for the expected and the unexpected.
Plan for potential early retirement
There are many reasons why you might retire earlier than you originally planned. Perhaps your home has appreciated greatly in value and you decide to sell and move to an area with lower housing costs and living expenses. Perhaps you have inherited a large sum of money or your investment returns or earned income may be greater than anticipated.
But there’s also the chance of undesired early retirement, such as from job loss or health concerns. Plan for outcomes that could include: 1) gradually reducing your participation in the workforce or 2) supplementing your Social Security, pension benefits and other investment-related income with part-time employment.
Plan on living longer than life expectancy indicates
Your investment horizon is not the number of years to retirement. For example, if a 55-year-old planning to retire at age 65 assumes his or her investment horizon is only 10 years, this would imply that the individual would die on his or her 65th birthday. At a minimum, the appropriate investment horizon is the length of time your financial assets will be needed to support your desired lifestyle — the remainder of your life. In addition, if you wish to leave an estate to your family or a charity, the investment horizon may extend even beyond your own life span, at least for some portion of the portfolio.
In general, people are now living longer. For example, life expectancy at birth in 1950 was 66 for males and 71 for females. By 2010, those figures had increased to 76 and 81, respectively. And, by definition, half of us will live longer than our life expectancy.
What options are available if you are at risk of consuming all the assets you have set aside for retirement? Some options include: 1) returning to the workforce, 2) downsizing your home and taking out equity, 3) withdrawing equity from an existing home (via a reverse mortgage), 4) moving to a region with a lower cost of living or 5) cutting non-essential expenses.
Do not underestimate the need for income
Individuals have a tendency to underestimate their need for income in retirement. A study about replacement ratios, conducted by AON Consulting and Georgia State University, found that the average person needed to replace 77–94 percent of his or her pre-retirement income once he or she was in retirement. Contrast these figures with the findings of a 2008 MetLife Retirement Income IQ Study that found that nearly 40 percent of people thought they would need just 40–50 percent. Additionally, almost seven out of 10 respondents overestimated how much they can draw down from their retirement savings.
Even this percentage may be low in the face of increased medical insurance concerns. The reason for this is because many people have their medical insurance covered by their employers. Some individuals may also be counting on their employer to cover their medical insurance after they leave the workforce. Yet, there have been instances when employers have been unable to keep such promises because of financial distress (or even bankruptcy).
Consider the cost and timing of obtaining regular and supplemental health insurance, particularly if there is an age gap between spouses. For example, if the primary wage earner (whose health insurance is provided by his or her employer) plans to retire at 65 and has a younger spouse, the couple should be aware that only one spouse will be covered by Medicare.
Create, understand and follow your plan
In many households, one spouse manages the investments. Both spouses should have all the information needed to manage family assets and carry out carefully established plans. This includes having met and being able to contact all the trusted professionals (such as advisors, CPAs and attorneys) with whom the family has established a relationship. With this information, either spouse would be prepared in a time of crisis.
There’s a lot to consider when planning for retirement. One way to approach the process is to start with a clear goal — to design a realistic retirement plan. This should make it easier to adhere to the plan throughout retirement.
The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.
© 2013, The BAM ALLIANCE