Basic Retirement Considerations

Many of us spend a good portion of our lives working toward and reaching retirement. However, we often spend more time planning a summer vacation than we do planning how we are going to live through our retirement. Below are a number of key points that you should consider when contemplating this phase in your life. Remember, it is never too early to address these issues.

Have a Plan

Whether you get a professionally designed plan or you prepare it yourself, have a retirement “coach” to provide options that you may not have thought about. Further, as you look at retirement ask yourself:

• How much retirement income do I need to maintain the lifestyle I want in retirement?
• What do I want this retirement income to do? Remember, every day is Saturday in retirement.
• When do I want to turn on my retirement income streams?

Income is as important, if not more important, than assets when it comes to retirement. Many spend two-thirds of their lives accumulating assets. The objective of the last one-third of life should be enjoying the fruits of those assets. Unfortunately, many continue to hoard their assets and don’t get a chance to enjoy their lives by joining a club, buying that fancy car, getting a place in Florida or traveling the world. So, what happens? Their children get to enjoy the fruits of their labor.

Maximize Social Security

Let’s face it, longevity risk (outliving your money) is a problem we all face. So, when should you start your Social Security payments? Review this simple chart:

Age 62: $750

Full Retirement Age: $1,000

Age 70: $1,320

Basically, the purpose of the above is to show that for every $1,000 you would earn by waiting to receive Social Security at full retirement age, it would be $750 if you started collecting at age 62 or $1,320 at age 70. Now there may be legitimate reasons to do otherwise, but the general rule of thumb is that, if you can, hold out until age 70 to turn on your Social Security. If you are a married couple, at least have the highest earner wait until age 70, since that payout will be there for the survivor until death. Also, look at the dollar difference between ages 62 and 70. It is a 75% increase, which could really add up over a retirement of 20 to 30 years.

Consider a Hybrid Retirement

Many people drop into retirement so early that they miss an opportunity to maximize their Social Security benefits because of their lifetime earnings and/or because they turned on their Social Security too early. Try to extend your time at work. Once you do finally retire, consider ways to stay active. This could mean a greater devotion to a hobby, donating time to a nonprofit, consulting in the industry that you worked in and so forth.     

Review Lifetime Guaranteed Income

Almost all of us will have some sort of a payment coming from Social Security that will last our entire lifetime. Many from the Greatest Generation have some sort of a monthly retirement pension income from a previous employer. For boomers and Generation X and Y, a monthly pension check is an age-old fairy tale. Rather than a pension income stream in retirement, we own assets in 401(k)s, 403(b)s and IRAs. But are these assets going to sustain us through our retirement? The rule of thumb about taking no more than 4% from your retirement accounts per year is now closer to 2%. With that said, everyone should determine what type of income stream they will need in retirement to sustain the kind of lifestyle they want. Take that total income stream, subtract   Social Security, pension payments and the 2% of retirement account withdrawals. Most of us, if we are truly honest with ourselves, are going to come up short. This requires us to consider the top risk in retirement: longevity risk—the risk of running out of money in retirement. If you have this risk, and most of us do, consider talking to a retirement planning expert and discuss either an immediate annuity (if you are in retirement) or a deferred annuity (if you are approaching retirement) to transfer that longevity risk and plug that gap in your retirement income stream.

Watch Inflation

I remember the days of filling up a gas tank for 32 cents per gallon, going to the movies for a dollar, brand new cars selling for $4,000 and houses going for $15,000. Inflation is a purchasing-power killer for most consumers, and it must be considered for retirees who could be living on a fixed income for 30 to 40 years. Fortunately, Social Security payments are adjusted to inflation. If you’ve addressed the lifetime guaranteed income properly, you should be able to invest more aggressively in your portfolio which, in turn, should keep up with inflation. Other alternatives might be to structure your annuities mentioned above with cost-of-living adjustments. Also, you may want to consider laddering annuities to spring at various ages in retirement, say at ages 75, 78, 81, etc.

Don’t Forget Long-Term Care

Most of us joke about the need for long-term care in our future years. Unfortunately, it is no joke. More than 50% of those entering retirement will need it, and for those who will need it, expect to spend anywhere from three to seven years in long-term care. Annuity products can also be set up to protect the uninsurable. The cost of long-term care insurance can be scary, but the cost of not having may be even scarier.  

Use Home Equity Wisely

For at least a majority of us reaching those senior years, we own our primary residences without much, if any, of a mortgage. For those lucky enough to be in this position, use it wisely.  One, with a fully paid off property, consider setting up a line of credit for those “just-in-case” moments. Two, for those in need of a stream of retirement income, look at the potential of a reverse mortgage. For those able to downsize, Congress has provided an exclusion of $250,000 (for single) and $500,000 (for married) against any gain from the sale of the primary residence, so that you can use more of those sales proceeds to apply to your retirement home.