The First Five Steps When Retirement Approaches
One of the top concerns for Americans in their 60s is how to pay for retirement. Consider focusing on a plan for these five areas of financial planning to help gain confidence as you approach or enter retirement. Interestingly, many individuals’ first anxiety is loss of principal – particularly with 2008 still in our collective rearview mirrors. However, given that retirement may last 30 years or longer, workers approaching retirement need to be just as focused on loss of purchasing power. The cost of a stamp in 1987 was 22 cents. Goods today generally cost more than twice as much as they did 30 years ago.
As a result, the first focus for individuals approaching retirement should be to gain a clear understanding of their current expenses and how those expenses may change in retirement. The most significant factor in determining whether retirement savings are sufficient is to forecast the spending that will take place in retirement.
Cost of Living Expenses in Retirement
Individuals should use those expense forecasts to develop a plan for paying for the costs of living. Done properly, that plan will account for Social Security income, retirement plans, pensions, and other savings vehicles. The plan will also quantify what other goals may be within reach, including travel, college for grandchildren, charitable giving, a vacation home, etc. The plan will contemplate the effects of inflation and balance that risk against conservative long-term investment return assumptions. Ultimately, the plan will assist in determining how assets should be invested for retirement, which is an outcome of the spending goals the plan contains.
Health and Long-Term Care Expenses
Develop a plan to cover health care and possible long-term care expenses in retirement. If retiring before 65, workers should understand the health benefits available to them through their employers and be able to weigh those against other health insurance options available in the public marketplace. All retirees should understand Medicare and Medicare Supplemental plans, what they cover and what they do not. They should understand the potential costs of a long-term care stay and have an idea of choices available to pay for that risk.
Individuals should learn about other employer benefits that may apply in retirement. Understanding deferred compensation, stock options, and restricted stock plans can be critical to navigating retirement successfully. If an individual holds a substantial amount of company stock in his or her retirement plan, it’s important to understand the concept of Net Unrealized Appreciation before taking a distribution from the 401(k) plan. For small business owners, the potential value of the business and the possible options for selling it in a tax-efficient manner are critical issues.
Lastly, individuals should decide where they anticipate living during retirement and make sure that their estate documents (wills, trusts, powers of attorney, and medical directives) are drafted properly for that state’s laws. This is a good time to also review the provisions of those documents and make certain they are still appropriate and relevant. If estate taxes are a concern, steps can be taken at this stage to design a wealth transfer plan to minimize or eliminate that concern.
With sufficient time and research, individuals and families may be able to handle all of these important steps on their own. However, working with an experienced and objective financial planner – especially a fee-only advisor who will not benefit financially from the vehicles recommended – can reduce the amount of time needed and help improve the quality of the planning work.
This is intended for informational purposes only and should not be construed as investment, financial, or legal advice. Please consult your investment, financial and legal professionals regarding your specific situation.