David J. Perrotto
The ultimate financial cheat sheet for a pre retiree
For most of your life, you had to work hard, deal with the roller coaster of life, have been through recessions, golden years, and now you are literally in the home stretch, to your own retirement. The mystical 10 letter word you have been hearing about since your twenties.
This is the age where there are so many important decisions that will hopefully set the stage for the next 30 years. One of the biggest decisions at this age is one of the main questions you will be asking yourself, “When do I actually want to stop working?” You could potentially work another 10 years if you wanted to, or you can start the shift to retirement and start living off of your assets/pension/social security. So let’s go over some of the decisions you will have to start making.
How much longer do you expect to work. This is a big decision, most likely the biggest, do you intend to keep working for another 5 years? 10 years? Or you have a plan to retire as quickly is allowed? Most current retirees called it quits before turning 65, a recent Gallup survey found. But the average age of retirement has been ticking higher, and today 37% of workers say they expect to work past age 65—up from just 14% saying that in 1995. Some thoughts on if you work until your 70, T. Rowe Price estimates that a typical 60-year-old couple that stays on the job to 70, rather than retires at 62, would nearly double their monthly income in retirement. Another thing to consider, is working longer keeps you around people, and keeps your social connections strong. Once you move into retirement, your work connections, will wither as those people are still working, while you are not. One of the biggest regrets for people who retired early is that they miss their work place friends. So think long and hard about this question.
When is the best time to take social security benefits? This is the second most important thing you must ask yourself. Social security is the staple of many retiree’s income and makes up a large part of their monthly income. It lifts 15 million seniors out of poverty and is the sole source of income for almost 25% of all recipients. Social Security may be your only source of income that will never run out. So it is critical to get the most you can. In general, you will do that by waiting as long as possible until age 70 before claiming. Why? Your monthly benefit rises 6% to 8% every year you delay between age 62, when you become eligible for early benefits, and age 70, when you must begin collecting. But not everyone should wait that long. If you are in poor health or have few other resources, you may be better off claiming the benefit as soon as possible. There are a million calculators online that allow you to go over when the best time to start taking income as well as many advisors out there that will help you. This is one of those things that you will want to sit down with a financial advisor and go over when is it best to start taking money, and what type of filing options you have. If you want to do it yourself, two good options are maximizemysocialsecurity.com and socialsecuritychoices.com.
Start going over the guaranteed income options that you may have. Find out if your employer offers a pension and start to get a handle on how much you will receive monthly from it. An increasingly popular option for additional income is an annuity, which is an insurance contract where you pay a large up-front premium and get monthly income for life, or for some shorter designated period. There are many different options that allow you to have a joint account, that pays out both you and your spouse when you pass away, as well ways to increase income over the life of the contract. A financial advisor can help you with this too.
At what rate will your savings/investment/retirement accounts be drawn down. One common strategy is withdrawing 4% of your balance each year, and adjust for inflation annually. This gives you a good chance of not running out of money for 30 years. But there are no guarantees; a long period of low returns might exhaust your nest egg early. Let’s look how the lost decade effected many retirees who did this. As the mkt came down 40% they were realistically taking out 7-8% of their balances, now allowing for the accounts to recover. This wreaks havoc on your overall net worth and ability to stretch the money as long as possible. So this is another important step to think about when going into retirement. To be on the safe side, try to build up enough assets that you can safely take out 3% a year.
Start to pay down all debts aggressively. Debt is going to be one of your main drivers of cutting your income that you could use for other expenses that matter. Let it be crazy credit card debt, a lingering mortgage, or even student loans. It needs to start being paid down aggressively. Here’s some crazy statistics, the percentage of homeowners age 65 and older carrying mortgage debt is 30% in 2011, according to the CFPB. Seniors are also carrying more credit card debt, according to the National Center for Policy Analysis, and even student debt, according to the Federal Reserve Bank of New York. Every dollar that goes to interest, especially high interest like credit cards, is another dollar that can be going to you to enjoy your older years.
Think about letting your term insurance expire, or if you should convert it. After years of paying for term insurance it may seem weird to finally let go but remember term life is different than whole life insurance. There is no cash value, nor will there ever be cash value. What term afforded you was a large death benefit in case of early death. There is nothing there to hang on for if you no longer need the coverage. You may no longer need the coverage if, let’s say your mortgage is paid off, you saved enough money to pass down to your kids, or they are grown and self-sufficient. In general, you want enough term life so that your spouse would be able to retire all debts immediately, pay for the kids through college, and generate enough income to live the same lifestyle. Once this is achieved through savings, and age, you really don’t need it anymore. At worst, if you want to keep life insurance, you may be able to convert your term policy to a whole life policy without evidence of good health.
Start to run through a budget for long term healthcare costs. Routine healthcare costs rise about 4-5% per year, and in this day and age, only one third of companies will cover you through retirement. This usually tops the list of people who are thinking about retirement. For most, this is the most over looked, and under prepare for the lifetime expenses. Everyone thinks Medicare and Medicaid will take care of everything but people fail to realize life time caps of those programs. According to many reports the average healthcare costs for a 65-year-old couple comes in at about 250,000 dollars. Make sure you budget and plan accordingly.
Think about long term care insurance. The average 65-year-old will most likely need three years of long term care, that comes in at 2 years of at home care, and one year in a facility. According to Genworth, the average nursing home in America runs a little bit over 77,000 a year, assisted living comes in at close to half that, at 42,000. Oh by the way, that is not included in the above 250,000 cost of healthcare. Buying long term care insurance is a very tough decision, only one out of 3 men actually put in a claim, while woman put in a claim roughly 38% of the time. With time not on your side, it would make sense to sit down with an insurance agent to see if this fits into your overall picture. Usually people with under 200,000 in assets don’t have much to protect and will eventually go on Medicaid, but if you are part of the mass affluent, this is something that should be taken seriously, as you could spend down your assets.
Now the main question which sums everything up, what are you retiring to? Are you retiring to spend more time with your loved ones and grand kids? Are you retiring because you do not like work? To maybe take on your passion that you never had the time for. This is an important question, because there is going to be a large transition. Your whole life you had a ridged schedule. You had to wake up, go to school for almost 20 years. You had to wake up and go to work for almost 40 years. This will be a large difference of waking up, and not having a set schedule or anyone to listen to. Find meaning in retirement, and remember, you worked hard for it!