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Planning for the New Normal Retirement

Planning for the New Normal Retirement

Nov 2020

The need for retirement planning didn’t really exist until well into the 1970s. Up to that point, people worked until age 65, spent a few years in leisure through their life expectancy which was about 69. Many retirees of that era were able to coast into retirement with a cushy pension plan. Over the next few decades, as life expectancy continued to expand, as did the number of years in retirement, financial planners came up with simple rules of thumb for determining how much a person would need at retirement in order to maintain his or her lifestyle.

That’s where the 70 percent rule came from. People were told that they would only need 70 to 80 percent of their pre-retirement income to preserve their lifestyle throughout their golden years. While that may have worked for retirees back in the 1970s and 80s, it could spell disaster for today’s retirees.

It’s not your Grandfather’s Retirement Anymore -Today’s retirees face a whole new set of financial challenges. Many are carrying mortgages and other debt into retirement. Health costs have increased nearly ten-fold. And, because we are living longer these days, health care costs will consume an increasing piece of the retirement budget. About 50 percent of today’s retirees find themselves sandwiched between their own kids, who may still be in college, or struggling to break free of the nest – and their aging parents who may require assistance in their daily living. Some retirees are actually finding that their retirement income needs may be as much as 110 percent of their pre-retirement needs. So much for the rules-of-thumb.

Better to Manage your Risks than your Investments -Today’s retirement savers are finding that there are no certainties in the markets, or in the economy. The only certainties that do exist are the risks they face leading up to and all the way through retirement. The two biggest risks all retirees must confront are longevity risk and inflation risk. Unlike market risk, which can be avoided by simply taking your money out of the market, these two risks are inescapable. And, most people are either unaware of these risks, or have not fully grasped their significance in planning. It seems like decades ago that we experienced any real inflation. And, it has only been in the last couple of decades that the life expectancy rates have been accelerating.

For today’s retirees, longevity risk is a new phenomenon. While people may understand that they can expect to live longer, few realize that age longevity is constantly expanding, meaning that the higher your attainted age, the greater your life expectancy. The risk of longevity is further compounded by the risk of inflation. Even at an average inflation rate of 3 percent, the cost of living will double in 20 years which could put many retirees’ life style in jeopardy.

Retirement as a New Life Cycle -For this reason, most retirees are viewing their golden years not as retirement, but as a new life phase in which earnings from some form of employment or a business may be a necessity. But who says that is a bad thing? Many people can’t imagine themselves coasting through 30 years of life without being able to apply their skills or knowledge in a meaningful way. For many, it is an opportunity to regenerate themselves through new opportunities and new knowledge. Instead of an ending phase of life, retirement will be looked upon as a new life cycle in and of itself.

The prevailing attitude among a growing number of pre-retirees is that they aren’t going to limit themselves by trading a life of work for a life of leisure; rather they are going to take control and trade in work that they no longer want to do, for work they will really like to do.

Today’s retirees are finding that retirement requires at least as much psychological and emotional preparation as it does financial preparation. So, retirement planning needs to include a thorough assessment of human assets and liabilities along with an assessment of financial assets and liabilities. It is no longer enough for retirees to know how much money they will need to live; they need to know how they will be able to make the most of this new life stage.

By focusing primarily on financial issues, traditional planning reduces retirement to an economic event with its financial objectives marked by a finish line. The dangerous misconception it perpetuates is that, if you hit the finish line, on time and on goal, your planning is done and you’ll have a successful retirement. While it may address the financial goal of creating a sufficient standard of living, it doesn’t address the larger, more important issue of the quality of life.

Tags: education, retirement planning, tax planning

Tags: investments, managing investments, retirement

Insurance Basics

Insurance Basics

Nov 2020

Insurance may be less about if you’ll need it than when you’ll need it. Anyone who started driving at 16 is likely to have had a claim by the time they’re 34. More than 1 in 20 insured properties reported a claim in 2016, according to Insurance Services Office (ISO). And according to the U.S. government, someone who turns 65 this year has an almost 70% chance of needing long-term care services, which are generally not covered by Medicare.

A network of prudent insurance coverage is the foundation of any solid financial plan. A single healthcare crisis, incident of property loss, or other liability can quickly wipe out a lifetime of savings. The types of circumstances that may require the use of insurance may not be a subject we like to think about, but it’s one of the most important issues to address when planning for the financial security of you and your family.

Here are some common types of insurance available and the associated risks they can help address.

Health Insurance:

Many people receive health insurance through their employer, while others purchase it independently. Health insurance can cover everything from preventive care, treatment for injuries and disease and mental health treatment, as well as products and equipment necessary to address various medical needs. Your insurance may dictate from whom and in what types of facilities you are eligible to receive treatment. It will also indicat what your responsibilities are for payment in terms of deductibles and any limits to your coverage. It is critically important that you review your health insurance on an annual basis and fully understand your policy.

Auto Insurance:

Your automobile insurance is designed to cover property damage and personal injury in the event of an accident. The amount of coverage for these occurrences can range dramatically from policy to policy. With car insurance, you not only have to be concerned about covering your own liability if you’re at fault — but damage that may be caused by uninsured drivers as well. One in eight drivers are uninsured according to The Insurance Information Institute. Luckily uninsured motorists coverage for both property damage and bodily injury is available, although not all states require it.

Disability Insurance:

This covers loss of income resulting from injury or illness. Many people receive disability insurance from their employer, but not everyone does — so it’s important to understand whether or not you have this benefit. If you do not have disability insurance through your employer, you may wish to buy a private policy. You may elect to purchase short-term disability insurance, long-term disability insurance or both. Many people think they’re automatically covered for disability losses through Social Security disability, otherwise known as SSD. However, SSD which is administered through the Social Security Administration, has stringent requirements:

  • You are unable to perform the work you did before.
  • The SSA determines you are unable to do other work due to your condition(s).
  • The disability is expected to last at least a year or lead to death.

Private disability insurance eligibility requirements are often less strict and no not require a complete inability to work in order to receive benefits. And it is possible to receive SSD and benefits from private disability insurance simultaneously.

Long-term Care Insurance:

This can cover medically necessary assisted living or nursing home care —or if you require help at home to carry out daily activities. Many people mistakenly assume that Medicare pays for such services, but this would be a faulty assumption. With Medicare, coverage is generally limited to rehabilitation from an acute injury or illness where a full recovery is anticipated as opposed to long-term care needed in old age as a result of gradually declining function. This type of care is extremely costly. Here are some averages according to government statistics:

  • $6,844/month for a semi-private room in a nursing home
  • $7,698/month for a private room in a nursing home
  • $3,628/month for care provided in an assisted living facility

Life Insurance:

This coverage pays a death benefit when the insured passes away. It’s particularly important for breadwinners with family members who depend on their income. Life insurance needs often change over time as children grow up and move out of the house. Here’s an article that explains some common types of life insurance (link to previous life insurance blog here). This may be the type of insurance people don’t like to think about the most — but in the event of the unthinkable, it may matter the most.

Property and Casualty Insurance:

P&C can cover your home and possessions as well as provide personal liability protection should you injure someone or damage their property. It’s a broad category of insurance. Here are some common types:

  • Homeowners Insurance:insures your home and possessions in the event of theft or damage. It’s important to know your deductible for different types of losses, and any limitation for certain types of events, such as floods and hurricanes.
  • Renters Insurance:this insurance is specifically designed for renters, who do not own their dwelling. It is substantially less expensive than homeowners insurance, and can cover property and liability as a renter.
  • Condo Insurance: These policies can mitigate risks specific to condominium owners,including portions of the structure they’re responsible for, as well as assessments levied against owners to pay for repairs or improvements to commonly owned elements.
  • Umbrella PolicyAn umbrella can extend the coverage of your auto and homeowners insurance policies. Carriers will generally require insured individuals to have a minimum amount of coverage already in place before they will write an umbrella policy.

Risk is a part of life — there’s no getting around that. But with solid insurance coverage, you just might be able to sleep a little better at night no matter what the future may hold.

Reference:

https://www.iii.org/fact-statistic/facts-statistics-homeowners-and-renters-insurance

https://longtermcare.acl.gov/the-basics/how-much-care-will-you-need.html

Tags: Baby Boomer, behavioral finance, education, finance, insurance, millennials, retirement planning, risk management

What If I Can’t Save Enough to Reach my Retirement Goals?

What If I Can’t Save Enough to Reach my Retirement Goals?

Nov 2020

You just ran the numbers on your retirement and realized that you aren’t going to be able to save enough to make it happen. Don’t panic: There are still things you can do to better your situation, especially if you’re willing to be flexible about your plans and your lifestyle.

The first step is to determine exactly where you are. In retirement, you may have income from a number of sources:

  • Social Security
  • Pensions
  • Investment income
  • An inheritance
  • Earned income from a side hustle

Next, estimate the likely cost of your future monthly expenses: rent or mortgage, utilities, automobile payments and insurance, credit card and loan payments, food, health care (insurance plus out of pocket) and emergency repairs. A good way to capture these categories is to look at your credit card statements and checkbook and list everything you’re spending on now. If you haven’t kept track of this on paper, most online bank and credit card services offer easy access to your transaction history.

Leave out or lower your estimate for anything you won’t spend as much on when you’re retired (your commuting cost should go down, for example). Now, what about potential costs for travel, hobbies and other post-retirement fun? Will you set aside money to give to grandchildren or other relatives in the years ahead?

Once you have your monthly income and expense estimates, compare the two. Are you still coming up short?

If you don’t have enough income to cover your projected expenses, there are some things you can do. But first, there are some things you should definitely NOT do:

  • Panic.
  • Shift into higher-risk investments to try to capture higher returns.
  • Decide your head hurts, avoid thinking about it altogether and assume your health and career will allow you to work long enough to make up the difference.

Here are some things you CAN do:

  • Make catchup contributions to an IRA. The tax code allows workers over 50 to make extra, pre-tax contributions to boost their savings.
  • Re-think your lifestyle. Do you really need to live on a golf course? Maybe you could live near a golf course and be just as happy.
  • Take on a side hustle to create a little extra income. This could be something that’s been a hobby – tying fishing flies, restoring old cars, or knitting comforters. Or work a few hours a week at a friend’s business. Be aware, however, that your earnings may have implications for your taxes and Social Security benefits. Because the tax code governing what portion of benefits can be taxed is complex and subject to change, you should talk to an accountant or financial advisor well versed in that part of the code.
  • Do you have two cars? Maybe one would do. Or perhaps you can do just fine with a used model with a reputation for reliability and longevity.
  • Downsize. Move to a smaller house or condo, and if you’re single, maybe take on a roommate.
  • Consider relocating to a lower-cost area. The cost of living in Knoxville, TN is about 17% below the national average, and there are plenty of other places below the norm: Cheyenne, WY (-8%), Green Bay, WI (-10%) and Sherman, TX (-14%) are just a few.
  • Tap your home equity to pay expenses.
  • Consider a reverse mortgage. However, be aware that the reverse mortgage products offered by various lenders are wildly different in their terms and risks. Look at this very, very carefully before committing.
  • Delay taking Social Security benefits. Waiting until at least your full retirement age boosts your monthly check significantly; your monthly benefit will increase by about 0.67% for each month you delay past your full retirement age, and will add about 8% for each full year you wait until you reach age 70. Your full retirement age depends on your year of birth. Use the calculator on The Social Security Administration website to figure all of this out for your particular situation based on your personal earnings record.

But before you do any of these things, the most important step you can take is to talk to your financial advisor. Because they deal with the intricacies of the tax codes and Social Security every day, they can help you steer clear of landmines and set a course to that bright retirement you’ve been dreaming of.

Sources:

1. https://www.forbes.com/sites/investor/2017/06/09/what-to-do-when-you-havent-saved-enough-for-retirement/#368f06f06e20

2. https://www.aginginplace.org/are-there-taxes-on-social-security-for-seniors/

3. https://www.ssa.gov/planners/retire/1955-delay.html

4. https://www.kiplinger.com/slideshow/retirement/T047-S001-cheapest-places-where-you-ll-want-to-retire-2019/index.html

#save #retirement #future #wellcents

ACR# 336900 NFPR-2020-8

Frequently Overlooked Retirement Costs

Frequently Overlooked Retirement Costs

Nov 2020

Think you know how much you’ll need to retire comfortably? You might want to think again. According to the Schroders Global Investor Study 2018, which surveyed more than 22,000 investors from 30 countries, 15% of retirees lacked sufficient income to support a comfortable retirement. Moreover, the research found that people anticipate budgeting 34% of their retirement income for basic expenses but actually require nearly 50%. This disparity is understandable given the many unexpected changes that can occur during this phase of life. With that in mind, here are some costs that are often overlooked or underestimated when planning for retirement.

Taxes. No more employer means no one is withholding income taxes from your Social Security check each month (unless you specifically request it from the Social Security Administration)— and that can lead to an unwelcome surprise at tax time. Many retirees don’t realize that their Social Security benefits are taxable as income, so it’s important to plan ahead for any retirement tax bills. And you’ll pay taxes on withdrawals in retirement from your traditional (but not Roth) IRA.

Home Maintenance. Hopefully you’ll remain robust enough to continue to maintain your home yourself during retirement, but it’s often wise to put aside a little extra in case you need to make routine repairs or hire outside help for some home maintenance tasks you’ve been handling such as lawn care, laundry and general housekeeping.

Medical Costs. While many retirees are often pleased when they’re finally Medicare eligible, they’re often surprised when they learn that some costs are not covered under the government plan. For example, many dental, vision and other expenses (e.g., hearing aids) are generally out-of-pocket expenses and can run in the thousands of dollars. Also, Medicare premiums, deductibles, copayments, coinsurance and medication costs can add up once you’re no longer on your employer-sponsored health insurance plan.

Aging-in-Place Renovations. Many retirees want to be able to remain in their homes as opposed to receiving care in an assisted living or nursing home facility. Often, however, modifications to an existing floor plan to accommodate wheelchair access or a live-in caregiver become necessary. For example, you might require a walk-in tub or shower, grab bars or an entrance ramp to your home. While needs in this area can be hard to predict, additional dollars in your emergency fund to cover such renovations constitutes smart retirement planning.

Home Care. While we all hope to maintain our independence throughout our lives, the reality is that most of us will require some additional help with activities of daily living as we age. And the cost of this assistance isn’t cheap. Purchasing long-term care insurance is one way to plan for this expense, but that can be quite costly as well. Another option is relocating to a state with more favorable Medicaid benefits. Speak with your advisor about this essential part of your retirement plan.

Family Assistance. Many retirees want to be able to help out their children, grandchildren and extended family. You may wish to contribute to a college fund, treat your grandkids to a nice vacation, or help your children with a first home purchase. Try to anticipate these wants and budget for them accordingly.

Vehicle Replacement. For many retirees, retirement can last for decades. So it’s likely that you’ll need to replace your car at least once or twice if you continue to drive. This can be a significant expense to cover if not budgeted for ahead of time.

Inflation. Again, with many retirements lasting 20-30 years, it’s important to take inflation and the degradation of your retirement dollars’ purchasing power over time into account. This can be a complex cost to calculate, and it’s another good reason to consult with a professional.

Retirement is an exciting time of transition that brings with it many changes to your budget and lifestyle. Speak with your financial advisor to help you create a realistic budget that will anticipate as many of your retirement expenses as possible. Then, when the time comes, you’ll be in a better position to sit back and enjoy the adventure.

#costreduction #overlookedcosts #wellcents #financialwellness

Sources:

1. https://www.schroders.com/en/media-relations/newsroom/all_news_releases/schroders-global-investor-study-2018-people-significantly-underestimating-cost-of-living-in-retirement/

2. https://www.advisortoday.com/2018/07/17/people-underestimate-cost-of-living-in-retirement/

3. https://www.ssa.gov/planners/taxwithold.html

How Much Will I Actually Need to Retire?

How Much Will I Actually Need to Retire?

Nov 2020

There are many formulas for figuring out how much money you need to retire. Almost all of them can end up being wrong for a variety of reasons.

Let’s face it: We love fast food, and we love “fast-food” formulas - simplistic rules of thumb that we can use instead of actually thinking about a problem in depth. The retirement investing space is filled with these. Some say you need eight-to-12 times your current annual income or that you should have 25 times your annual expenses, 80% of your income at the time of retirement or - and this is a good round number - $1 million.

While thinking seriously about retirement finances is useful, for most people, these formulas aren’t going to come close to what your retirement actually looks like.

Taking Stock

To truly get comfortable with your retirement plan, the first thing you need to do is actually plan your retirement. How long are you likely going to live based on averages, genetics and behavior? What will be meaningful and enjoyable to you after you finish working full time? Do you plan to travel or pursue a hobby? Where do you want to live? And what’s your style - hanging out at a pricey country club restaurant every night, or cooking for yourself and staying in? Do you expect to go shopping at trendy boutiques weekly, or are you more of a “I bought these pants at the Gap five years ago, and they still look good” person?

In short, it’s your lifestyle and your length of life that will drive your financial needs once you’re no longer working. To gauge your needs, try this exercise. Carve out a couple of hours of quiet time. Turn off your phone, close your email and tell your family members to leave you alone. Better yet, maybe you and your significant other can take a long weekend in a place that’s comfortable, but not so fascinating as to be distracting, and do this together.

Think really hard about what “retirement” means to you. At a younger age, “not having to go to work” seems like what retirement is - and should be - all about. But if your mentality never evolves beyond that, then you can’t take full advantage of new opportunities. Instead, think about your bucket list - places you want to go as well as experiences you want to have.

Think about how you want to live your life and where. Living in a dense urban area affords you easy access to cultural amenities like concerts, festivals, museums and more. However, it may be more crowded than living in a suburb, exurb or rural area. If you do live in the city, you probably won’t need to drive a lot, and you may not even need a car at all with easy access to public transportation. Have you considered moving to another part of the country? Or even another country altogether? Tens of thousands of people do. Some hate it and come back, but many find it’s an adventure that keeps them engaged.

List things that would be meaningful to you. They may be volunteering for a charitable organization, mentoring others, or painting, gardening, beekeeping, birding or learning to play the zither.

Now your future is starting to come into focus. Extend the exercise by imagining what an average retirement day is going to be like: Where will you be? And with whom? Doing what?

How Much is Enough?

Once you have a fix on your future - the where, the how, the what and with whom - it’s much easier to put actual numbers on that lifestyle. Multiply that need by the number of years you expect to live - taking into account slowing activity as you get older - and you’ll come to a much closer estimate than any formula can provide. Throw in a little extra for increasing lifespans. Want to feel optimistic? Here’s what the Social Security Administration’s actuarial scientists say: “That mortality rates are found to continue to decline, at every age for which adequate data are available, demonstrates that no absolute limit to the biological life span for humans has yet been reached, and that such a limit is unlikely to exist.”

Write a brief overview of your conclusions and then schedule a conference with your financial advisor. With a clear picture of where you want to go, he or she will be able to help you build a solid map of how to get there.

Be optimistic: Retirement really can be some of the best years of your life.

#retirement #wellcents

Source:

http://www.ssa.gov/oact/NOTES/as120/LifeTables_Body.html


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