Worried about retirement? If you are like many contemplating retirement, it’s hard not to worry. In a recent survey conducted by Aon Consulting, 87 percent of employees reported they are holding off on retirement as a result of current economic conditions[i]. Are you part of this 87%?
When we hear news of doom and gloom, it is all too easy to think the worst about our own retirement dreams. The reality is that you most likely can retire but you need to take action now. Here are some things you can do to get ready for retirement.
Decide what you want most from your retirement lifestyle.
It seems like a simple thing, right? We just stop working. But if you are like most people, lounging around in your pajamas all day will get old in about a week. For many, this is their time to dream about doing the things they always wanted to do but would never give themselves time to pursue…is it volunteering, taking on a completely new career...some travel, or writing that book? This decision is especially important and complex for couples and may require some help to work through these issues.
Set your target date for retirement.
I know this is obvious, but don’t forget to do it. Every conversation you have with your family and/or financial advisor should consider the timing of your goals. A mistake in timing could cause you to take unnecessary risks with your investments. For example, purchasing a lifecycle fund with a 2025 target date when you plan to retire and begin accessing your money in 2010 may not be a wise decision. You may be surprised at how often mistakes like this happen to those who don’t determine a reasonable retirement target date.
Track your spending.
If you have never lived on a budget for the first 55 or 60 years of your life, you are most likely not going to start now. However, you will learn invaluable information about your household spending that will help you determine your real retirement income needs. Have trouble living within your means? Then you may need a spending plan. Oh yeah, if you carry a credit card balance or owe money on your automobiles, it is time to consider getting rid of all consumer debt.
Determine your post-retirement income needs.
This is one of the most misunderstood issues in retirement planning. Many popular sources claim that most households will need between 75% and 85% of their pre-retirement income during their retirement years[ii]. This rate comes from some long-established academic research funded by the insurance industry.
In my opinion, the research is out of touch with the average American household. The common replacement rate assumes that you still have children at home or are paying for their college, you still have a mortgage and general expenses wrapped around raising kids and working. The reality is that some discover they only need 1/2 to 3/4 of the income they thought they would need. Seek the advice of a financial planner that uses an economics approach to planning to help you determine your specific retirement income needs.
Downsize or pay off your home.
Still carrying a mortgage on your house?
Consider paying it off as soon as you can. There are many pundits that will argue the advantages of having a mortgage. Many clients get really excited when they start thinking about what they could do with their money if they did not have a monthly mortgage payment.
Think that paying off the mortgage is impossible? Consider downsizing to a smaller house. You have to consider if you really need that large of a home. (Don’t use the excuse of the grandchildren visiting twice a year to justify needing excess space.) The reality is that having a smaller home could mean less maintenance, upkeep and potentially lower taxes.
Learn about Social Security and Medicare.
Please seek the counsel of a financial planner or check out www.ssa.gov to learn more about Social Security. For some households, waiting to collect Social Security benefits to age 70 may create the best scenario for long-term financial planning. Ask a financial advisor when might be the optimal time for you to start collecting those benefits.
The same is true when it comes to Medicare and planning for future medical expenses. You would need a PhD in government legalese to understand all the rules surrounding Medicare and Medicaid. Reexamine your current medical insurance to determine if you will have enough coverage if you plan to retire before the age of 65. Don’t forget about the costs of Medicare Part B and Part D (Prescription Drugs), as those seem to be increasing at a rate higher than inflation[iii].
Learn about Long-term Care.
A common assumption among many is that Medicaid is there for their long-term care needs. The rules for Medicaid vary from state to state but the common criteria are that you have to be dirt poor to receive assistance. Care in a nursing home facility can cost upwards of $60,000 a year or higher[iv]. Long-term care insurance is not for everyone, however, many states are adopting new programs to help more families afford this coverage.
Reassess your tolerance for risk; examine asset allocation and diversification.
The stock market lessons of 2008 and 2009 are many but will hopefully reshape how you manage your investments. We learned that some investors might likely be taking on too much risk in their portfolios. You should remain actively involved in your investments. You can do this yourself but unless you would like financial planning as a second career, a professional advisor with a more active or tactical approach to investing may be for you. The lesson from these past few years is that the buy-and-hold mentality may not be the step to take when you are in or near retirement. Take charge of your financial life.
Evaluate your Legal Documents.
No one likes to consider the prospect of dying but all of us will one day. And, unless you enjoy the thought of having your estate divided up in court by a stranger, who has no idea that you never intended to leave your most precious possessions to cousin Fred, you may want to consider a Will.
Also, you may want to consider two other important documents to add: A Durable Power of Attorney—granting your designee authority to conduct personal business on your behalf. You decide how and when the power can be used; an Advanced Medical Directive—giving explicit instructions to your doctors and loved ones on how you are to be given medical care in the event you are unable to communicate with doctors.
Spend Life Well.
Is life worth living unless we are able to enjoy the fruits of our labor? With all of these things, don’t gamble with the enjoyment or the peace of financial security. Seek the counsel of skilled advisors to help your plan succeed.
Preparing for retirement provides us the peace of knowing that we will be able to sustain our lifestyle while we pursue the dreams of the next chapter in life. What will your book read like?
[i] Aon Consulting, available at http://insight.aon.com/?elqPURLPage=4552.
[ii] “Spend Til The End”: Kotlikoff & Burns: 2008
[iii] AARP Bulletin Today May 7, 2009 available at: http://bulletin.aarp.org/yourhealth/medicare/articles/part_b_premiums_in_2010_frozen_for_many_higher_for_some_.html
[iv] Genworth Cost of Care Survey 2009 available at: http://www.genworth.com/content/genworth/us/en/products/long_term_care/long_term_care/cost_of_care.html