13 Retirement Facts You Need to Take Seriously
If you pay attention and adapt accordingly, you just might get that retirement you're dreaming of—here are the facts that you can't ignore.
You must have a plan
Once you stop working, there’s little room for financial errors. You have to know what you want and need and have a strategy for getting there. Planning 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. As part of this process you should establish your financial and retirement goals to determine how big of a nest egg you need,” explains Anthony Criscuolo, a certified financial planner with Palisades Hudson Financial Group.
For example, will you take a $20,000 vacation to Europe every summer or just visit the kids for the holidays? Having a defined target for your nest egg is one of the most important aspects of your retirement plan. Create a budget of your current expenses and then make adjustments for what you expect to change during retirement. Your mortgage may be paid off, but you may have increased medical expenses or more leisure expenses.
There’s no getting around doing the math
“Sixty percent of baby boomers today say they are more worried about running out of money than dying! No one wants to estimate their life expectancy, but it’s important to take this into account for proper planning,” says Shane Eighme, a financial advisor and partner at Shane & Shane Financial.
Online calculators can help estimate your longevity, but in reality, there are a lot of factors to consider—your current age, gender, health, and family history, just to name a few. You can help mitigate some of the longevity risk to your portfolio with proper planning.
A budget is not optional
Maybe over the years you kind of had numbers rolling around in your head about what you were earning and spending. That’s over. Says Eighme, “Budget your expenses. Retirees are on a fixed income. It’s important to write down every expense for the month so you know how much money you are spending. You may also want to consider working in retirement. The longer you work, the less likely it is you will have to dip into your nest egg. Even part-time work for people in their 60s can make a big difference in how much you’re saving and spending.” Watch out for these kinds of costly retirement budgeting mistakes.
Start saving as early as possible
While you might think, I’ll start tomorrow, be aware that tomorrow might come too late. According to Eighme, “A recent study shows one in three Americans has nothing saved for retirement. Workers either don’t want to reduce their take-home pay or aren’t making it a priority to set money aside for retirement.”
That is a costly mistake. “Every dollar you save in your 20s or 30s in a tax-deferred vehicle is extremely valuable. The dollars grow without taxation (deferred growth), therefore the longer you have to accumulate the better,” says Chantel Bonneau, a wealth advisor with Northwestern Mutual. With some creativity, you can come up with ways to save money.
Make no assumptions
Don’t wait until retirement is a decade away before you get serious about saving. What if you get ill or laid off and can’t get another job? “Forty-six percent of retirees left the workforce earlier than planned, so it is important to start saving earlier,” says Garrett Oakley, a certified financial planner and CPA at Betterment.
Don’t rely heavily on the government
“More than 80 percent of pre-retirees have not even tried to guess how much healthcare will cost them in retirement. Medicare is designed to cover many of your healthcare costs, but it doesn’t cover everything,” says Eighme. Here’s a timeline that can help guide your retirement saving.
Expect healthcare costs to increase
If you are eligible, consider saving in a Health Savings Account. An HSA is a great retirement savings tool because you can withdraw money tax-free for qualifying medical expenses. After age 65, if you need to take money out for another reason, it will be taxed, but you will not pay a 20 percent penalty. HSAs do not have required minimum distributions after age 70, so you can let the money grow in your account until you need it.
You can also reduce medical costs by doing little but meaningful things, such as switching your prescriptions from name brand to generics and comparison shopping before paying for treatments or medication. “Apply for federal subsidies to reduce your co-pays and other out-of-pocket expenses. Supplement your Medicare coverage with a medigap policy, prescription-drug plan, or Medicare Advantage plan,” says Joshua Zimmelman, president of Westwood Tax & Consulting.
Don’t be too conservative
“As life expectancy continues to rise, everyone needs a growth component in their portfolio. Don’t be overly cautious in retirement as your money may have to sustain you for 30 or 40 years,” says Mark Carruthers, a certified financial planner.
In that same vein, you don’t want to put all your investments in one asset. Diversify in and outside the stock market. You wouldn’t bet all your retirement money on a long shot in a horse race, neither should you in investing. Think spreading your money to a variety of horses to get the job done. Sit down with a financial advisor to determine which assets will best help you achieve your goals and how you should divvy up your investing dollars. Smart people do these things when preparing for end-of-life plans.
Understand the stock market
“It’s a game of averages. Don’t try to outsmart the market. It’s a marathon and not a sprint. You will not make money every year, so let the averages play out over time,” says Carruthers. Consider dollar-cost-averaging. It’s pretty simple. You put money in your investments on a regular and consistent basis. You’ll do far better in the long run than jumping in and out of the market based on daily gyrations.
Yes, you really do need a will
“Most people don’t have a last will and testament, leaving it to state laws to govern their estates. This could, for example, produce disastrous results if it is a blended family—the current spouse and the children from various marriages could end up as co-owners of property together. Talk about strange bed-fellows,” says John Cleveland Hill, an estate lawyer with Hill & Watchko.
A DIY will is ill-advised. Check with your employer to see if your benefits include any legal services.
Be secure about Social Security
“More than half of baby boomers admit to knowing very little about Social Security benefits. This could be why most people start taking their benefits at age 62, the earliest age possible. Taking benefits early might not be best for everyone. If you tap into Social Security before full retirement age (66 or 67 depending on what year you were born), your benefit is permanently reduced,” cautions Eighme.
No question, social security is complex. You need a strategy. You can’t start drawing your money willy-nilly. Educate yourself on the best age to tap into social security. The decision not only affects you but your spouse. A surviving spouse is eligible for their partner’s benefit if it’s higher than what they are already receiving. Ideally, you and your financial advisor should have a Social Security plan before you turn 62. Here’s the perfect retirement age, according to science.
Revisit your plan
Creating a financial plan should not be considered a one-time event. A financial plan is not a map you create once and then follow to the end. As life changes, so too should your financial plan.
Says Criscuolo, “Generally, it is appropriate to revisit your cash-flow projections, asset allocation, and other financial planning documents every two to three years or so, or more frequently in the case of life-changing events such as a divorce or a career change.”