What’s your perfect retirement look like? Perhaps it’s relaxing with your spouse in Adirondack chairs during a cool fall evening on your wraparound porch, grandchildren chasing fireflies in the backyard. Or it’s a fresh start on the road as you traverse the heartland, coffee and tea nestled up next to one another as you drive your RV across the sand-swept highway.
I have something I want to tell you about those idyllic dreams. Whatever you’ve imagined, you can make possible. If you plan it properly. You can get started with our ultimate retirement planning checklist.
1. Define Your Ideal Retirement
The first step toward building your ideal retirement is to actually determine what that retirement looks like. We need to go beyond simple daydreams and start putting pen to paper.
We recommend trying to answer these two questions:
- How do you want to spend your retirement?
- Who do you want to spend retirement with?
They may seem simple, but answering them fully and honestly is a surprisingly difficult task. For instance, you may want to spend more time on the golf course when you are out of the office, but do you really envision swapping briefcases and loafers for golf bags and spikes every single weekday for the next twenty years?
Finding purpose and meaning each day in retirement is crucial to your mental and physical wellness. Tee times and travel can remain integral hobbies, but they shouldn’t define your daily life in retirement.
Further, how will you approach all this newfound free time with your spouse? Don’t underestimate the transition for both of you when you no longer leave the house for work every day.
Your children and local relationships may influence your retirement plans, as well. Do you want to live closer to your children or do they prefer traveling to you? What will you do about your existing social circle? Establishing new roots may be fun and exciting, but consider the time and effort needed to start a new life somewhere else.
2. Categorize Your Retirement Income Sources and Needs
Now that you’ve crafted a vision of your ideal retirement, you will need to break down how you can make that dream happen. We believe retirement income planning should incorporate three different components: guaranteed income, growth opportunities, and flexibility.
Guaranteed income sources include Social Security, pensions, and annuities. Social Security planning is a very involved topic but making the right filing choices can potentially lead to tens of thousands of dollars of additional lifetime benefits. Don’t assume that you should file immediately when you retire. The rules governing Social Security filing and payments for you and your spouse are incredibly complicated, and we recommend speaking with a tax or financial advisor.
Though most employer retirement savings plans today are defined-contribution, pensions and other defined-benefit plans offer some level of guaranteed income during your (or your spouse’s) lifetime if available to you.
If you happen to have a pension plan, you aren’t completely off the hook in terms of financial decisions. You can likely either choose a stream of income or a lump sum. There are positives and negatives to weigh with both approaches.
Finally, annuities are contracts with an insurance company in which, for an up-front investment, you receive income over the rest of your life. Annuities come in all shapes and sizes, from ones that start immediately to ones that start in the future. While this sounds enticing, you give up access to those funds, requiring additional planning for unexpected emergencies. Additionally, annuities typically come with higher fees, so it’s important to review all of the provisions of the contract before making an investment.
You’ve likely built a substantial investment portfolio as the primary source for your retirement income. Up until this point, you’ve owned a mix of stocks and bonds and have made annual contributions to bulk up your nest egg. But with retirement around the corner, what should you do with your investment portfolio?
There are many approaches to drawing down your portfolio in retirement, including strategies like the “four percent rule” or Guyton’s guardrails. Our recommended approach is to build buckets with your investments.
The bucketing approach requires a review of your anticipated expenses in retirement. You then take a portion of the investment portfolio and invest that in safe, short-term fixed-income investments to make sure that you have a runway of at least five years of expenses covered. This allows you to ride out any equity market volatility and focus on long-term, and not one-year, returns. The rest of the portfolio is then invested in growth securities, like equities.
Just think of your last five years. How much has changed? I would bet a lot more happened than you thought you would experience. Did you necessarily plan for all of those changes? Likely not, and that was OK when you were earning an income.
This changes in retirement. You lose a little wiggle room since you are dependent on something other than yourself for your income. We want to create a retirement income plan that allows for flexibility. Whether it’s that dream beach home or that unfortunate health issue, having the ability to access the right buckets of capital at the right time is immensely important to proper retirement planning.
3. Determine Your Retirement Expenses
You’ve envisioned your dream retirement, and you’ve identified what you have to support that dream. But how much does that dream actually cost?
One of the hardest steps in retirement planning is building a comprehensive but realistic view of the costs you can expect to incur. No one envisioned Netflix or iPhones twenty years ago — some might wonder how they can plan for unknowable future expenses, today.
While the individual bills may swap out (Netflix for Blockbuster, iPhones for pagers and Blackberries), you likely won’t stray too far from the same overall spending levels you’ve experienced during your working years.
We don’t mean you can’t splurge every now and then, of course! Some bills will go down (income taxes and dry cleaning) while others will go up (vacations and dining out).
Of course, this assumes you’ve continually saved during your working years. You will invariably have to optimize back and forth to get your projected income to match your projected expenses.
Additionally, we see clients experience three phases of retirement expenses: those “go-go” years just after leaving the workforce where they travel, dine out, and experience all the leisures of life. After this, clients tend to slow down their lifestyle and spending during those middle years of retirement before transitioning to a more stationary life well into their advanced years.
4. Know Your Healthcare Coverage Options
As you plan your transition to retirement, be mindful of your healthcare coverage and costs. For those retiring prior to age sixty-five, you will need to bridge the gap between your employer plan and Medicare. There are typically four options:
1. COBRA coverage
The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) allows you to continue your existing healthcare coverage for a certain period of time, though you will likely have to pay the entire cost as well as an additional 2 percent fee.
2. Spouse’s plan
If your spouse is still working and has access to a healthcare plan, or they are already retired and have access to retiree medical coverage, this may be your best, and cheapest, option.
3. Public marketplace
The Affordable Care Act provides a marketplace for healthcare plans to anyone who is not yet eligible for Medicare. Costs can vary widely.
4. Private insurance
Local health insurance agents or professional associations may offer “private exchanges” that offer plans from different carriers. There may be more options than the public marketplace, but government-funded tax credits are not available for insurance purchased through these private exchanges.
Healthcare in retirement — even with Medicare — are considerable. According to Fidelity, a 65-year old couple retiring in 2019 can expect to spend $285,000 in healthcare and medical expenses throughout retirement.
Fidelity’s estimate assumes both members of the couple are eligible for Medicare, which between Medicare Part A and Part B covers expenses such as hospital stays, care at a skilled nursing facility, doctor visits and services, physical therapy, and lab tests.
It’s important to note that Fidelity’s figure does not consider certain high-cost items, such as long-term care. These expenses, unless insured, can be sudden, unexpected, and often are very large outlays.
Additionally, it comes as unwelcome surprise to many that dental coverage is not provided in Medicare. Two out of three Medicare enrollees do not have dental coverage (according to Kaiser Family Foundation) and 20 percent of Medicare beneficiaries spend more than $1,000 on dental services.
5. Protect Against the Biggest Risks in Retirement
The question we hear most often from pre-retirees is “Will my money last?”. There are three risks that could seriously derail the ability of your savings to last through retirement: longevity risk, a long-term care event, and market or inflation risk.
Longevity risk is, quite simply, the risk that you live longer than you planned. It can multiply other risks because the longer you live, the more likely you are to experience a long-term care event or a market downturn.
There is no panacea solution to longevity risk, though guaranteed income sources are a helpful base on which to build other protections. While not every worker has access to a defined-benefit plan, Social Security (which adjusts for inflation every year) should be considered a valuable hedge against outliving your plan.
A long-term care event is the most acute risk one may face in retirement. The sudden need for comprehensive care, which may last for years, is a serious financial stressor. Many erroneously assume Medicare will cover this type of care. It doesn’t.
There are explicit options to help hedge this risk, like long-term care insurance, though it is expensive and the market is changing rapidly. Standalone policies are disappearing and “hybrid” policies, combined with permanent life insurance, are growing in popularity. They are also very complicated contracts, and we recommend a thorough review of the coverage, limits, and costs with a licensed and independent insurance provider.
Outside of insurance, one may self-insure by either carving out a piece of the investment portfolio for this specific need, or potentially tap equity within your home to pay for this outlay.
Finally, market and inflation risk can erode your ability to generate the income you need in retirement. An immediate risk for pre-retirees is something called “sequence of returns” risk. If you have to start withdrawing funds from your portfolio after the market has had a big down year, your portfolio no longer has time to “earn back” the losses on the money withdrawn. This could seriously impact your portfolio’s ability to generate income over the course of your retirement.
Inflation, while tame, shouldn’t be ignored, either. If inflation averages 2 to 3 percent your cash will lose half its value in 25 years.
6. Plan Your Legacy Properly
Planning your legacy and your end-of-life care are weighty decisions. What happens to the family home, or family business, when you’re gone? How should you pass along your assets to your heirs? What do you need to have in place ahead of time to make the process easier for all involved?
Estate planning strategies are also incredibly complicated, and we would advise speaking with an estate attorney to understand the best way to efficiently transfer your assets to your heirs.
With that said, there are several documents that we should all have as part of our estate plan. A will is a public legal document that states how your assets will be portioned out when you pass away. Note, most financial accounts (like IRAs or 401(k)s) fall outside of the will, so be sure to check and update those beneficiary designations frequently!
A living will is a document that states how you would like to proceed, or not proceed, with life-sustaining medical intervention if you become terminally ill and/or unable to communicate. A healthcare proxy is a document that will authorize someone you trust to make medical decisions on your behalf if you are incapable of doing so yourself.
There are other estate planning strategies and tools, like trusts, that could also be a helpful addition to your legacy planning goals.
Retirement Planning with Harbor Crest Wealth Advisors
Retirement is life’s greatest transition. You get to plan for decades of time to pursue your passions and hobbies, rekindle relationships, and enjoy the little things in life with those important to you.
Make sure you can make the most of your time in retirement by preparing for it now. If you would like to discuss our approach to retirement planning, please contact us and we will happily speak with you about this momentous time in your life.