I recently saw a commercial with a man throwing darts and reminiscing on the fact that he is closer to his retirement days than his college days (Aw!) and wanting to know the holy grail of all retirement questions: Will I Be OK? So how do you answer that? How do you know if everything is in order for your retirement? Well…it can be complicated; and the answer is never a one-size-fits-all solution. Take a stab at the following questions and see if you are ready.
To answer this question, you must consider both your income needs and income sources (and everything else in this article!). To start, how much do you spend now and will you have the same expenses in retirement? How will inflation affect those expenses over the next 10, 20 or 30 years? On the other side, what income resources will you have? Will you have Social Security benefits or a pension? Do they consider cost of living adjustments or benefits for your spouse? What if you plan on working part-time in retirement or have rental income from real estate? Do you have savings set aside to cover unexpected, large expenditures such as a new roof or an air conditioner?
Your investment strategy depends on how much money is saved, your income sources and expected expenses in retirement (and everything else in this article!). Another large part in determining the risk/return mix in your portfolio is the time until your expected retirement date. As you slow down your savings and get ready to move towards withdrawing money for your retirement, it is extremely important that your portfolio is properly balanced (more on this next quarter). One of the worst scenarios to consider is a downturn in the market during the first two years of your retirement, which can deliver a large blow to your retirement picture.
If you have multiple types of accounts such as a Traditional IRA, Roth IRA, or Individual/Joint Account, withdrawals can be complicated especially when determining which strategy is most tax-efficient. Withdrawals can be taxed at ordinary income rates, capital gains rates, or tax-free. It is important to develop a withdrawal strategy that is sensitive to the tax makeup of your total portfolio.
As I am sure you guessed…this depends. Your Social Security benefits can be claimed as early as 62 and delayed as late as age 70. While each year you delay increases the amount you will receive once you start claiming, you are also foregoing current benefits. The best time to claim depends on other factors such as your income needs, available investment assets, spouse’s age/benefit and life expectancy (and everything else in this article!). Since you will never outlive your Social Security benefits, it is often best to consider which strategy will provide the largest lifetime benefit and the maximum survival benefit for your spouse.
Health care plays a critical role in any retirement picture due to the high costs and numerous options available. For those retiring before age 65, options to consider include Pre-Medicare plans, Healthcare Sharing Plans (Medi-Share) or a plan through the Healthcare Marketplace (Obamacare).
Three months ahead of your 65th birthday, you must enroll in Medicare. While Part A (hospitalization) is standard, you will need to make decisions on Parts B, C, & D. Additionally, supplement plans such as Medicare Advantage or Medigap plans are available to help fill any gaps that Part A – D might not cover.
Unfortunately, Medicare does not cover long-term care expenses such as nursing homes or at-home health care. Deciding on how to prepare for long-term care expenses starts with evaluating your own circumstances, such as your family medical history and your personal assets (and everything else in this article!). If you plan on using your own assets, your portfolio should be able to support at least 3 years of nursing home care costs (approximately $60,000 per person in Louisiana) for each individual. If your assets can’t support long-term care expenses it would be worth examining long-term care insurance policies. If you are considering a Long-Term Care policy, the best age to apply is between the ages of 55 and 64.
Last, but not least, do you have your legal affairs in order? If you pass away, will your assets go to your loved ones? Who will take care of the kids? If you are out of it, who will be calling the shots? If you are hospitalized, how will big decisions be made? All of these are crucial questions that should be addressed in your estate plan.
Whew! The question of “Am I Going to Be OK?” is a puzzle with many pieces. Thus, our multiple references to “and everything else in this article!” Your retirement needs to take into consideration ALL the pieces to see the total picture. But more importantly, establishing your retirement goals will lead all of the parts that factor into your retirement. This way you can more easily determine how all the pieces should fit together.
by Montgomery Gossen, CFP®