June 13, 2019
5 Essential Steps in Planning for Retirement
It’s time to rebuild the American retirement.
Why? Because the landscape has changed. We’re living longer — up to 10 years longer than previous generations on average — and the “typical” retirement is extending up to 20 years and more. That’s double what it was just a few decades ago. This means that today’s retirement will cost you more and you’ll need that money to last you longer than ever before.
But that doesn’t mean it’s impossible.
Consider the following five steps as a guide to help prepare for your own retirement.
1. Make sense of your retirement savings
In a post-pension world, many people will likely be depending on savings to fund their retirement, rather than a pension provided by their employer. This means that having a complete picture of your financial assets is critical and should serve as a jumping off point.
If you are like most Baby Boomers you probably have six or more different retirement and savings accounts at various institutions (the average is more than 10 for married couples). Step one before retirement should be consolidating and rolling over these accounts. A consolidated picture of your retirement finances will help you understand not only how much you have saved, but also what you are paying in fees. It will also provide you a clear picture of what you have actually invested in and in what proportions (for example, what your stock / bond mix is). It’s simply easier to manage when it is all in one place.
And fees can add up — the average American is paying fees of 1.48% on their investment accounts and could lower their costs dramatically simply by rolling over their old retirement accounts into lower fee options.
The next step, if you haven’t retired yet, should be catch up contributions. If you are over the age of 50, the IRS allows you to “catch up” and add to both your IRA ($1,000) and 401(k) ($6,000) above the standard contribution limits. Top off those accounts now if you can. And don’t forget your home. For most Boomers, their home is both a personal residence as well as their largest financial asset. You might decide to downsize or extract home equity to help finance your retirement.
2. Estimate your spending
Spending in retirement can feel complex. You’ve spent your entire career saving for this next chapter — are you ready to flip the switch and start spending that money? For many of us our spending needs change over the course of our retirement. Want to go for a cruise around the world? Your spending might increase early in retirement but then drop off after that. Or maybe you’re just more frugal than you thought. You might not end up spending anywhere near what you did while you were working.
Those are all unknowns. But in reality the two biggest drivers of retirement spending are lifestyle and healthcare costs. To better understand how you can live the life you want in retirement, break out your essential spending (food, transport, housing) from discretionary spending (travel, lifestyle).
3. Understand Social Security
Social Security is one of the most valuable retirement assets Americans have. It’s income for life, with inflation protection, for you and your spouse. Deciding when to take social security can be a very sensitive and complicated topic because it often is strongly connected to your own thoughts around longevity.
Many Americans “default” to electing Social Security at the earliest age possible (62), but that often ends up leaving thousands of dollars on the table. If you qualify for Social Security, you can take it at any time between the ages of 62 and 70. And the longer you wait, the more you’ll get. In fact, the annual benefit at 70 is +76% higher than it is at 62 years old.
Knowing that modern retirees are living 10+ years longer, that difference could be critical but every situation is different. It is important to understand how electing earlier or later could impact your personal retirement goals.
4. Plan for Medicare/Healthcare costs
Healthcare costs are quite simply one of the biggest uncertainties in retirement. A couple that is 65 years old today should expect to pay about $280,000 in healthcare costs during their retirement, and that’s excluding the cost of long-term care if needed.
When planning for healthcare spending, you need to think about the knowns (general health care expenses) and the unknowns (long-term care, large medical events). While no one can predict the future, there is some basic math that will help with planning.
- Medicare: Most retirees depend on Medicare for retirement, and that option kicks in at age 65. In addition to understanding your costs and options for the various parts of Medicare (Part A, Part B, Part C, Part D), it’s important to understand all of the deadlines and the specifics of each plan. Every year you will have certain Medicare elections you can make, but when it comes to supplemental plans your first year’s choice is critical. During your first year on Medicare none of the plans are medically underwritten, but that changes after year one.
- Long-term care: The simple fact is that, someone turning 65 today has an almost 70% chance of needing some type of long-term care services, whether it’s in-home care, regular nurse visits, or even a full-time facility. These costs can add up quickly. One-third of today’s 65-year-olds may never need long-term care, but 20% will need it for longer than 5 years.
5. Create your paycheck
Once you know your consolidated retirement picture, Social Security benefits and expected spending in retirement, it’s time to create your paycheck. It is important to build a “retirement paycheck” so you can budget appropriately and make your money last in retirement. This should start with Social Security — it’s income for life, for you and your spouse. From there, you can top up your paycheck with personal funds.
One option that many Americans consider is purchasing an annuity. Annuities come in lots of different shapes and forms. The simplest are fixed annuities, which can offer guaranteed income for retirement, above and beyond what Social Security provides. Depending on its terms, a fixed annuity can give you a stable income in retirement and also can provide longevity insurance if the income is guaranteed to continue whether you live to 80, 90 or 100. Many retirees find it helpful to use Social Security and annuities to cover their essential spending, and use their investment portfolio for their discretionary spending. When picking an annuity, there are many important things you should consider, including the credit rating of the insurance company and the fees charged by the agent.
Planning for two? The best retirement plans are shared — both of your lifestyle goals and the numbers should line up. While it’s common for one partner to take the lead on the numbers, it’s now time to get both of you involved. Surviving spouses live on average five years longer and often have higher health care costs.
One of the best gifts you can give your spouse or loved one is a shared understanding of your retirement.