If you are over 40 years old, you have probably already at least started to think about retirement. If you are over 50 years old it is now on your radar screen. If you are over 60, retirement is definitely in your close proximity thinking. No matter where you are at, you may be thinking for sure that you are not prepared for it.
This little retirement planning guide is here to educate you on some of the issues and maybe take some of the scares out of it. I only met a few people, who based on their current lifestyle at the time were truly financially prepared for it. The financial services industry is great at alarming people in hopes of a new client or sale.
The truth of the matter is that you have a lot more control and resources regarding your retirement than you think. This retirement planning guide does not take into consideration mitigating and catastrophic occurrences such as major accidents or rapidly declining health concerns. These need to be handled outside of the scope of this Guide, by experienced professionals. However, the information in it is still useful no matter what your current situation.
The problem with this scenario is that each of us has employed most of the above to varying degrees but has not enjoyed our lives. We think of retirement as some utopian dream that most people do not enjoy for long. We want to give you an idea now that may change your life and your thoughts about retirement.
The premise is that if you actually enjoyed doing something, why would you retire from it? You would not! So the question of when to retire is based on what you are enjoying in your life.
It does not matter how old you are, you need to create the life of your dreams now. Not later. Most people do what they can or need to do in life for a career, not what they want to do. There is so much more that we can say about this, but for now, let’s redefine retirement for our purposes.
Retirement is simply doing what you love to do in life on your terms, with enough assets or cash flow to maintain that lifestyle.
We think that this is a good working definition, so the best time to retire is when you can with certainty say that you can do this. We understand that you still may have to continue working in the job or career that you are in, but that does not mean you cannot start to recreate your life now to work towards that goal of retirement on your terms and doing what you love.
Please refer to the following link to clear the bugs out of your mind and start having structured thinking about your future life. Start by getting the Life Breakthrough Kit by Andy Shaw
We also know that in many cases, people may have to retire before they can get to know exactly what it is that they love to do and get paid for it. You can also semi-retire by working only part-time after leaving your career job and start working towards what it is that you will enjoy doing for the rest of your life. Either way, focus on making it the best life in the best possible way.
Now let’s talk about some of the mechanics. Your actual assets that will help fund your retirement by the definition that we have stated. This is where most people get scared about not having enough.
When we discuss retirement planning, we are including all salary reduction plans such as 401(k) or 403(b). We also include IRA. We will treat the Roth IRA as a non-qualified asset. Pensions will be discussed separately. These plans all have something in common and that is that they did not pay any taxes during the accumulation phase.
Consequently, they are 100% taxed at the current income tax rate in effect upon withdrawal. Of course, not knowing what that tax rate will actually be is a problem. So here is the basic way to look at these for funding your retirement. Simply assume a conservative rate of return of 3%, plus contributions minus 30% for taxes from the aggregate amount.
The simple formula will look like this:
(Current value + total of annual contributions) x 3% annual growth – 30% each year for taxes = what you get to keep.
We know this is not the exact formula, it is to explain to you that no matter how much your retirement plan grows, assume a 30% reduction to pay for taxes and you will have a better understanding of what you will have to pay for your lifestyle. The reason is that they are defined contribution plans, meaning the contribution is defined but the end benefit is yet to be determined.
If you happen to have a Pension, you can contact your employer’s administrator and get a projection on this asset to several retirement ages and scenarios, especially helpful if you are married. Understand that these are defined benefit plans, meaning the benefit is defined but the contribution is not defined.
Also, understand that any corporation can become insolvent. This also means that any pension can also become insolvent. Best to plan your pension as just a partial solution to your retirement needs!
One last thing about this, most Americans have worked for more than one employer. It is best to roll as many of your salary reduction plans, including Pensions if the lump sum is offered into your own IRA. You will have more control over it and much wider investment choices.
Please contact your well qualified financial advisor for this. It is best to perform due diligence now on getting a good advisor who will truly have your best interests in mind. A good approach is to let him know up front that you understand he makes a living by commissions and fees, so if he wants to get paid, he should convince you why he or she is the best advisor for you to pay.
Social Security Benefits
Most people do not see this as a real asset from a lump sum perspective. The fact of the matter is that this asset for older Americans over 50 is easily worth between $300,000 to close to $900,000 over a thirty to forty year retirement.
Due to the fact that we are living longer, having a 30-year retirement starting as early as 62 is not at all unreasonable. There are many different scenarios regarding this benefit that is not at all an entitlement, so it would be difficult to cover them.
Some potential retirees have supplemental pensions that go away at 62, so they think it needs to be covered by taking an early distribution. Nothing could be further from the truth. The question would be if one’s current assets could gap fill between 62 and full retirement age.
Here is a simple analysis of a social security recipient who may be considering taking social security at age 62 or 66. These numbers are not actual numbers but used for example only. You will need to use your numbers from your own social security statement.
|Social Security Breakeven Analysis|
|Enter current year||2017|
|Enter client's age||61|
|Enter the earlier age benefits may be claimed||62|
|Corresponding benefit amount||$1,542|
|Enter the later age benefits may be claimed||66|
|Corresponding benefit amount||$2,296|
|COLA%(Annual cost-of-living adjustment)||2.80%|
Click on the image to see full size
As you can see that the breakeven occurs at age 75 between starting at age 62 versus waiting four years to age 66. This is a personal choice and can be answered based on current assets and health.
The thing to note here is that social security will be paying you a substantial amount of money over a thirty-year retirement.
Then there is the issue of spousal benefits when it comes to social security and how spouses can use this benefit to maximize distributions. There are also spreadsheets for spouses to that will show various scenarios in dealing with the rules regarding spouses and their own social security benefits. If not addressed properly, there could be a lot of money left unclaimed.
In addition, there is the spousal benefit of a single person who was married more than 10 years and is still single. This person may be able to collect on her former spouse as a spousal benefit, and not affect the benefit of the former spouse.
The truth of the matter is that you need to discuss your options with not only the Social Security Administration but also a well-qualified financial advisor. One who is well versed in all the rules and technicalities of social security. It is not an easy decision and this asset needs to be worked in with your other assets.
Your non-qualified assets would include brokerage accounts, checking and savings and CD accounts, investment property, precious metals accounts, non-qualified annuities and even your Roth IRA.
We put the Roth IRA here because it did grow tax-deferred but it is able to be distributed tax-free at the right time. This is true on the principal part of non-qualified annuities. You only pay taxes on the growth part of the annuity.
All of these assets need to be taken into account when you are creating your distribution plan for retirement. This is where planning properly for retirement and knowing which asset to draw down first is important. The reason has to do to some degree with the markets.
If you had an investment account for 10 years that had varying degrees of returns year over year, with three of the years as down years it would not matter much when those three years occurred during accumulation! At the end of 10 years, you would have the same amount of money in the account.
However, during distribution, if those three years occurred during the first three, instead of every other year or every two years, the results would be drastically different. So knowing when to draw down your assets during retirement is much more of a science than during accumulation.
If you have only term life insurance this is an asset for your loved ones but not for you during retirement. However, if you have permanent insurance that has cash value to it, if properly utilized could also be an asset to draw down during retirement.
Proper distribution of the cash value without causing the policy to lapse will result in a tax-free income. It is another asset that is part of the retirement scenario. If you are at least 10 years away from retirement, then you may consider using permanent insurance as another retirement income source. This is simply good retirement planning.
The way to do this is to get a permanent policy using preferably indexed universal life. The other types will work, but we are fans of indexed universal life. The idea is to minimize the death benefit and maximize the cash value by the payment of premiums. This will accelerate the living benefit inside the policy.
It would be a good idea to have that insurance review with a well-qualified financial advisor who is also licensed to discuss your insurance options.
So you have the large house, lots of material possessions, boxes of memories and all the children are grown up and out of the house. The time to consider downsizing is not the week after you retire. Maybe a good idea would be to start planning this in your life about 5 years before you retire.
The phrase less is more is very applicable when preparing for retirement. There are many reasons to downsize. You can bring in some extra income, even at the reduced value of what you paid. In addition, it will start to remove the clutter out of your life.
Simply start with having what some people call yard or garage sales. I would call them Lifetime Accumulation Inventory Reduction Sales. Here is a suggestion.
Any item that is not seasonal, that has not been used for more than 12 months or does not have emotional sentimentality attached to it is an item to either sell, donate or simply trash. This could all take time so if you plan this systematically, over 5 years before you retire, you will successfully declutter your life as you embark on the next phase of your life.
This brings us to your primary residence. Based on our definition of retirement and creating your life by design, does the empty nest of your house represent the size and location of where you desire to live during retirement?
If not, it is time to consider fixing it up to sell. Start five years out before retirement as well. Moving into a house or living arrangement with less maintenance is a great idea and highly recommended.
Health Care Issues
One of the biggest costs going into retirement is that of health care. Most advisors will tell you that you only need 75% of your current expenses to enjoy retirement. This may be partially true if you implemented some downsizing. However, the cost of going to work with business or employment costs can easily be replaced by medical costs.
The cost of health insurance premiums and the coverage received is going to be a moving target in the next five to 10 years. The reason is that there is more uncertainty now on how the government is dealing with the issue of health insurance. The Affordable Care Act is replete with unworkable provisions and as of this writing, it is not clear what Congress will be doing to address these issues.
In planning for retirement, just consider health care insurance and health care to be one of the more expensive items in your life, with increasing costs. Plan on health insurance to cost more than when you were employed. In addition to this, plan on Medicaid as part of your insurance starting at age 65.
Retiring to another State
The issue of where to live has always been a consideration in retirement planning. This needs to be thoroughly thought through as part of your retirement planning at least 5 years before retirement.
It is part of the retirement new direction as discussed above and should be considered with great care. Everyone’s situation is different and family concerns should be taken into the thought process. Retiring to another state should be considered with the pros and cons of doing such a move.
Make sure you do it for all the right reasons.
Many Americans have found that retiring abroad either permanently or partially for extended periods of time has created a retirement dream come true. The reason is that there are so many great places to live outside of the United States that are available to Americans.
We are talking about the usual places like Asia or Europe and even the not so obvious ones like Central America and even South America. A little research has shown that you can live abroad with a very high quality of life with a lower cost of living.
If you are not sure about this, we suggest that you start your research with International Living and at least get on their free email newsletter.
Creating Retirement Revenue
The whole concern and fear about retirement are that people are told that they will run out of money. I will tell you that is not true. The reason is that I can take any amount of money and annuitize it so that people will have a lifetime of income.
The issue, in reality, is running out of the quality of life as designed. The question is, do you have the cash flow from assets and social security and retirement accounts to cover the lifestyle?
With the advent of the internet, the playing field has been leveled and most people can start an online business or a cottage home business for the extra cash flow. This can not only be an enjoyable experience, but it can be done anywhere, even if you are living abroad.
Maybe this is the time to consider having your own business on the side or becoming the author you always wanted to be, or pursue that lifelong goal of having your own business.
We trust that you will have the time of your lives as you start your retirement journey as discussed in this guide.