By Dave Coen
Retirement is knocking at the door. You either feel like it happened overnight or that the bulk of your working years moved slower than you wanted. Regardless, you are in the home stretch now.
But even though you’re getting closer to the goal, this is not the time to turn on cruise control and count down the days until you pack up your office for good. The decisions you make and actions you take in these next 10 years before retirement could make all the difference in your golden years.
I am going to save the most important point for FIRST for a change
1. Reduce the Inefficiencies
For those who have worked with us for a while, you will know our focus is not that of many advisors, which is: “Give your money to me and I will get you a better rate of return.” We believe that there is often more value to avoiding the losses than trying to always pick the winners.
A large part of what we recommend is to identify the inefficiencies in our current financial life and plug those holes in our financial bucket, thereby leaving more for retirement. All of those unknown inefficiencies in our planning could make a huge difference in retirement, without having to sacrifice lifestyle.
2. Plan For The Unexpected
Try as you might, you can’t know exactly what situations you will face in retirement. While it may be impossible to predict exactly how long your nest egg will last, you can run your figures through different scenarios to evaluate what will happen if the market crashes, if you face unexpected healthcare costs, if a spouse dies prematurely, or if inflation increases. Once you stress-test your savings in this way, you can come up with a plan to mitigate these risks. If you wait until you are retired to take this step, it may be too late to make the changes necessary to maximize your retirement income.
3. Test The Waters
Whether you choose to continue working during retirement or not, you’ll likely rely on a retirement income generated from several different sources, including Social Security, employer-sponsored retirement plans, personal retirement plans, and other savings and investment programs. Over the course of your working years, you’ve likely been contributing money to these accounts so you’ll have a consistent income in retirement. But how do you know if it’s enough to last your entire retirement?
One way is to test it out. While it’s generally recommended to assume you’ll need 80% of your current income in retirement, you and your family may need more or less. For a few months, test drive a reduced budget. To start, try living on 80% of what you currently receive. Do you find yourself pinching pennies or did you find even more ways to cut back?
4. Save, Then Save Some More
The years leading up to retirement are your last chance to save, so make it a goal to save as much as you can. Cut back on expenses, channel any raises and bonuses directly to savings, and automate savings increases of 1% every few months.
Your increased savings can be invested into your company 401(k) or 403(b) plan or your personal IRA. If you are over 50, you can invest an extra $1,000 a year into an IRA for a total of $7,000 for 2019. At $6,000, the catch-up contribution for those over 50 is even greater for 401(k) and 403(b) plans, allowing a total annual contribution limit of $25,000.
5. Make Some Housing Decisions
According to studies by the Employee Benefit Research Institute, housing expenses account for an overwhelming 43% of spending for those ages 75 and older—even more than healthcare. (1) As you approach retirement, think through where you’re going to live and how much you’ll spend on housing costs in retirement.
If you plan on relocating, do your research. Visit your potential locations, and decide if the climate, community, and area are right for you. If your plan includes staying where you are, ask yourself if downsizing is a viable option. If you want to stay in your current home, look at any modifications that are needed to accommodate aging. Plan to make any expensive adjustments and repairs now before you’re living on a tighter budget.
6. Monitor Your Investments
When you start saving early in your career, your investments were probably on the more aggressive side to create more opportunities for growth. But now that you are getting closer to needing that money, it’s time to adjust your portfolio’s allocations to make sure they are in line with your time horizon and risk tolerance.
Along with reallocating your investments, you’ll want to consider how the sequence of returns could impact your portfolio’s value over time. In the simplest of terms, sequence of returns refers to the risk of receiving lower or negative returns early in a period when you’re making withdrawals from your investments. If your retirement date correlates with the onset of a bear market, your savings can be depleted quickly as you withdraw from your portfolio. With a smaller investment base, you’ll have less wealth remaining to benefit from a future market upswing.
To mitigate the risk of sequence of returns ruining your retirement portfolio, work with your advisor to take the appropriate steps, such as reducing volatility, examining your withdrawal strategy, and finding different market options to protect your money.
7. Strategize Social Security
Social Security benefits can be claimed anytime between ages 62 and 70. However, the timing of when you decide to collect these benefits will impact the amount of payout you receive. At 62, you become eligible to receive Social Security benefits for the first time. But before you start claiming Social Security, it’s important to review your benefits and options for claiming so that you can plan to maximize your lifetime benefit.
If you start claiming benefits at age 62, your benefits are about 26% lower than if you waited for full retirement age, and over 40% less than if you wait until you are 70 to claim. It’s also important to consider how long you’ve worked and your lifetime average monthly earnings, which are used to calculate your benefit. In some cases, working a few extra years can have a big impact on your monthly Social Security benefit.
8. Wrap Your Head Around Increased Health Expenses
No matter how healthy you are today, you may need more health services as you age. According to the Employee Benefits Research Institute, the average couple at age 65 will require anywhere from $157,000 to $392,000 in healthcare costs. (2) Most people don’t even have that much in their retirement accounts to live on, let alone cover medical costs. Even with Medicare, there could be significant out-of-pocket expenses and many conditions and treatments that are not covered.
When choosing your health insurance for retirement, make sure you understand all Medicare options and supplements and work with an experienced professional to help you evaluate your options.
9. Don’t Forget About Long-Term Care
Along the lines of health, think about your potential need for long-term care insurance. An average of 63% of today’s 65-year-olds will require some form of long-term care during their lifetimes. (3) On average nationally, it costs $253 per day or $7,698 per month for a private room in a nursing home. (4) But the older you get, the higher your cost for a long-term care insurance policy will be and the greater the likelihood of your application being denied. Generally, the last age long-term care insurance is affordable is when you are in your mid-60s.
If you decide to plan for long-term care, you have a few options. You can go with a traditional long-term care insurance policy, add a long-term care rider to your life insurance policy, purchase an annuity with a long-term care rider, or start saving for your long-term care on your own through a contingency savings account.
10. Strive To Minimize Taxes
Tax planning can save you more money than you realize. By projecting your future income and taxes now, you may find opportunities to save. When you are living off a fixed income in retirement, tax strategizing can make a world of difference in the longevity of your nest egg.
For example, a $50,000 withdrawal from a Roth IRA will have a wildly different tax impact than that same distribution from a traditional IRA. Creating a tax plan can help you strategically withdraw from your various retirement accounts and minimize your tax liability.
Have A Plan / Rely On A Professional
Even if you have been saving and planning on your own up until this point, these final years before retirement are critical for making decisions that have far-reaching consequences. If you want to spend your last handful of working years enjoying life rather than worrying, I’d love to help you create a personalized retirement road map that will address your concerns and unique life circumstances. Get started by emailing me at dcoen@sageviewadvisory.com or calling 800-814-8742.
About Dave
Dave Coen is a Financial Advisor with SageView Advisory and the CEO of College Planning America. Along with his retirement financial industry experience, he is a College Planning Specialist. He works closely with individuals and families to provide them comprehensive financial planning that addresses all elements of their financial picture. Learn more by connecting with Dave on LinkedIn.
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Registered Representative with Cetera Advisor Networks LLC, doing insurance business in CA as CFGAN insurance agency. Member FINRA/SIPC. Advisory services offered through SageView advisory group, LLC. Cetera is under separate ownership from any other named entity. CA insurance license #0G82578
Distributions from traditional IRA’s and employer sponsored plans are taxes as ordinary income and, if taken before age 59 1/2, may be subject to an additional 10% IRA tax penalty.
This material is designed to provide accurate and authoritative information on the subjects covered. It is not however intended to provide specific legal, tax, or other professional advice. For specific personal assistance, the services of an appropriate professional should be sought.
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(1) “How Does Household Expenditure Change With Age for Older Americans?” Employee Benefit Research Institute. September 2014. https://www.ebri.org/pdf/notespdf/EBRI_Notes_09_Sept-14_OldrAms-WBS.pdf
(2) https://www.ebri.org/pdf/notespdf/ebri.notes.oct13.retsvgs1.pdf
(3) https://longtermcare.acl.gov/the-basics/
(4) https://longtermcare.acl.gov/costs-how-to-pay/costs-of-care.html
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