Are you at or near retirement? Or are you in your prime earning years? Or are you just beginning your career? Regardless of where you are in your working life, you should be thinking about retirement. You should start planning your retirement when you enter the work force. Immediately out of high school or college is the best time to start investing in your retirement plans.
Have an exit strategy for leaving the working world and entering into retirement mode, regardless of your age. But where do you start? One place to start is to secure the services of a qualified financial professional who could assist you with your retirement and financial planning.
When you are planning for your retirement, there are three simple questions that usually have very complicated answers: 1. How long will you live? 2. What will your expenses be? 3. How much income will you need? You must answer these questions to the best of your ability and with the aid of your financial advisor to determine how much you should save for your retirement. Financial columnist Kathy Kristoff summarized these questions in an AARP Magazine article a few years back.
- How long will you live?
For you to address this question, you have to face your own mortality. Look at your family genes. How long did your Mom or Dad live, or your grandparents? Or even your siblings? Do you have any debilitating illness or chronic conditions that could affect your life expectancy?
There are life expectancy tables that are put together by a number of organizations from the Michigan Department of Health and Human Services to the Internal Revenue Service to the Department of Treasury to life insurance and/or annuity companies. You should recognize that females generally have longer life expectancy than males on average. It is not to say that if you are the guy that your wife will live longer than you. It all depends on your own circumstances.
When you are dealing with a financial advisor, make sure that that financial advisor addresses all of your financial needs, which include stocks, bonds, mutual funds and exchange traded funds (ETFs). If you are at or nearing retirement and your advisor encourages you to purchase risky and/or highly speculative investments such as options, puts, calls, real estate investment trusts (REITs), commodities or precious metals, get a second opinion. If your advisor only handles annuities, guess where he or she will recommend to you for a place to put your money.
Remember also that once you purchase an annuity you are generally locked into it for a certain period of time with a single company, even if there are underlying investments in the annuity. With deferred annuities there are typically surrender charge penalties if you withdraw more than a minimal amount within the surrender charge penalty period. The higher the surrender charge and the longer surrender charge penalty period, generally the higher the commission to the annuity peddler. I have seen surrender charge penalties as high as 50%, yes that is fifty percent, one-half of your investment. I have also seen surrender charge penalty periods as long as 20, yes twenty, years.
The commissions on annuities are usually a substantial portion of the first year surrender charge penalties. Before purchasing an annuity know what those surrender charge penalties and penalty periods are. Make sure that the company with which you are going to be dealing allows for a long-term care facility waiver of the surrender charge penalties. You do not want to have to cash in the annuity after a year or two because you entered a long-term care facility, only to find out that you have 8%,10% or more in surrender charge penalties.
- What will your expenses be?
The next thing you will have to determine is how much you are going to need every month. Do you have a mortgage payment? What are your utility bills, automobile insurance, automobile expenses and entertainment expenses? If you have two vehicles now, can you get by with one after retirement? If you have a vacation home, what are those monthly expenses?
Do you have any loans which have regular monthly payments that have to be serviced or any other monthly expenses that need to be covered? Your expenses are the one area of your retirement over which you have the greatest control. For example, what I often see is that initially after retirement, there is in increase in the usage of the vacation home. You would be spending more time down in Florida in the winter and/or up north in the summer. However, the chore of packing up and basically moving your household 2 or 4 times a year may get burdensome. As time goes on, I see retirees spending less and less time in one of the homes, and eventually deciding that it is much more of a chore to move 2 times a year, so they end up unloading one or more of their homes.
You may even want to downsize your main residence. So instead of having the 2800 sq. foot colonial, you could downsize to a 1200 sq. foot or 1500 sq. foot home or condominium with less expenses and less maintenance and upkeep. Simplify your vacations and instead of staying in traditional hotels and motels, since you can be spending longer periods of time away from home, stay at an extended stay facility or rent a house or condo for the several months in which you are staying in Florida or down south in the warmer climates during the winter or in northern Michigan for the summer. When you are retired, you may have more time at home to do cooking instead of going out as frequently as you did during your working life when you had less time to spend preparing meals.
- How much income will you need?
Look at what is coming in on a monthly basis. You will have Social Security, hopefully. You can see what that will be by going online at www.socialsecurity.gov. Will you have a monthly pension from your employer or former employers?
If you have investments, you have to estimate what they are going to earn. Prior to the decade of 2000 we had about 85 years of historical data that you could pretty much count on 5% to 10% return on your money. Unfortunately, the decade of 2000-2010 changed all that where there was basically a flat return or 0% return for the entire decade. You can ignore that decade and say it is an aberration and plan on the 5% to 10% return. However, if you do, you may come up short like today’s current retirees who also counted on a 5% to 10% return on their money.
You may also have some money in investments in IRA’s, 401(k)’s or other retirement plan accounts. When you are calculating the income that these are generating you should not just calculate what you will be drawing out of these accounts, such as the required minimum distributions, but you should be aware of the income taxes you will have to pay on those distributions and what income that the accounts would be generating in dividends and/or interest on an annual basis.
Two areas of your retirement income, over which you have some control is your Social Security benefit and any wages from part-time work. If you delay your Social Security start date, you receive a larger monthly benefit. If you live past 80 or so, the overall lifetime benefit will be more than if you took it earlier. However, if do not expect to live beyond 80, you may be better off taking your benefits earlier. Have your financial advisor run the numbers for you to see what would make the most sense for you.
Some retirees work out of necessity, but many have gone back to work because it is fun. Work becomes much more enjoyable when you do not have to work. You can even change careers and work in a completely different field, one that is fun for you. I call these hobby jobs. You can work as little or as much as you want and if you save more than you need to live on with your other income coming in, you can just bank the difference, to be used when you do need it.
Run the numbers, work with your financial advisor and plan ahead. The best time to plan for retirement is when you are first starting out your working career. The earlier you start the more you will have saved by the time you retire and you and your pocketbook will thank you.
By Matthew M. Wallace, CPA, JD
Published edited October 22, 2017 in The Times Herald newspaper Port Huron, Michigan as: 3 critical questions when planning retirement