There are many, many decisions to be made as you move from the working phase of your life to the retirement phase. Retirement planning is a common discussion that we have with our clients – regardless of their age. This article talks about some retirement considerations that seem to be universally applicable.
Retirement Date. You may have been thinking about retiring at a particular age for some time. Before actually taking the big step, see if your plans need any adjustments. For example, delaying retirement a year or two can make a significant difference in your retirement finances. This is because of two key factors. First, you reduce the number of years that your savings need to last. Second, you accumulate additional savings to help fund retirement. Additionally, you should think about whether this is the right time to fully retire or to partially retire. Not only does part-time employment provide additional income during retirement, but it may enable you to keep doing something that you love, but at a more relaxed pace.
Expenses. It’s difficult to know whether you’re financially ready to retire if you don’t know how much you’ll need. There are rules of thumb that you can use, but they vary quite a bit. The old standard was that you’ll need about 80% of your pre-retirement income in retirement. This was based on the elimination of several expenses such as commuting and saving for retirement. However, certain other expenses will actually increase such as health care and travel expenses. Many financial advisors now advise planning on having similar pre-retirement and post-retirement expenses. If affordable, this is a pretty safe bet. Another expense planning approach is to track your expenses now and adjust certain categories to see what your retirement expense might look like. A previous blog called How to Manage Expenses in Retirement can fill you in on some of the details of this approach.
Health Care. This is an expense that deserves special attention because it’s a very large portion of your total expenses and it will increase significantly as you age. The initial cost of health insurance depends on your age. If you’re 65 or older, things are pretty straightforward. Most of us will sign up for Medicare and probably choose one of the supplemental plans. After considering deductibles and co-pays, we have a pretty good idea of our initial medical costs. If we’re younger than 65, we’ll need to obtain private insurance to replace employer-supplied insurance that many of us had before retiring. This is pretty dynamic and depends on future changes to the Affordable Care Act. A special aspect of health care cost is long-term care coverage. It used to be that people were encouraged to purchase long-term care insurance. However, in recent years this coverage has become much more expensive and benefits have been reduced. Other approaches are often superior now. For example, see a previous blog called Life Insurance Policies That Pay For Long-term Care.
Interest Expense. Another expense you’ll want to spend some time thinking about is interest. It’s interesting that many of the guidelines on interest are the same before and after retirement. That is, it’s always best to retire high-interest rate debt (such as credit card debt). Large debts also deserve some consideration, especially as you approach retirement. Does this mean you should always have your mortgage payed off before retirement? Not necessarily. Some people may have greater peace of mind if their mortgage is paid off and that is an excellent reason to do so. However, from a strictly financial point of view, there are arguments to be made both ways. The main reason to retire your mortgage is to narrow any gap between your income and your expense projections. There are several common reasons to not pay off your mortgage before retirement. These include freeing up funds for other reasons such as maximizing 401(k) contributions before retirement or paying off higher-interest debts. It may also be that you plan to move in the next few years, so it probably makes sense to maintain your mortgage until then.
Income. Once you’ve figured out your expenses, you have a good handle on the income you’ll need. You’ll need to add up all of your investment assets to see where you are on this. For many of us, this will include Social Security, any pension or defined benefit plans we have, IRAs, 401(k)s or 403(b)s and our personal portfolio of investments. A reasonable rule of thumb is to withdraw 3.0-3.5% of your nest egg annually to avoid outliving your savings. So, how do your expense and income results compare?
Portfolio Review. You probably know that you’ll want to decrease the percentage of your assets that are in the market as you age. There’s considerable variability on the best way to do this. Many advisors have their clients at 50% stocks and 50% bonds when retirement begins. (In practice, this actually varies from a 40/60 to a 60/40 stock/bond position.) A simple rule of thumb exists that can help you think about your asset allocation. You simply subtract your age from 110 to determine the percentage you should have in the market at a particular age. For example, at 70 years old you should have 40% in stocks. Beyond asset allocation, you’ll want to be sure that your portfolio is properly diversified so that you can ride out the normal ups and downs of the market.
As you can imagine, there are many other financial considerations as you approach retirement. We’d be glad to help you develop a retirement plan that makes sense in your situation. If you’ve already put together a retirement plan, we’re able to review it and point out areas you may want to think about a bit more. In addition, we can stress test your plan to see how it will hold up under a variety of market conditions over the coming decades (using Monte Carlo simulation). So, whether you’re already retired or are still preparing for it, we’d be happy to sit down with you and review your situation in a no-charge, no-obligation initial meeting. Just visit our website or give us a call at 970.419.8212 to learn more.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.