Financial Planning Tips for Retirement - What the Experts Recommend

How much thought have you given to your financial planning?  Do you know how much money you will have available to you in retirement?  Have you calculated whether or not your savings will last the rest of your life? Have you considered the impact of inflation on your financial planning?  Annual expenses usually rise faster than increases in your Social Security benefits.  Have you allowed for that in your financial planning?  Are you also prepared for periodic downturns in the stock market?  Are you ready for unexpected emergencies?  

While no one can be 100 percent sure they have planned for every eventuality, it is smart to be as prepared as possible when you enter retirement.  If you are already retired, it is shrewd to periodically review your plans and be certain you are still on track to maintain your current standard of living for the rest of your life.  Reading a book such as "Retirement Heaven or Hell: Which Will You Choose?" can help you make sure you are well prepared for all aspects of retirement, and that you are staying on track.  

What are some of the specific tips financial experts have for retirees?

Protect Your Financial Security in Retirement

Keep six to twelve months of living expenses available - While you will want to invest most of your retirement savings, it is also smart to set aside six to twelve months of living expenses in an easy-to-access account which pays you some interest.  This money does not need to cover all your living expenses, since presumably a portion of what you live on will be covered by your Social Security benefits and/or any fixed pension you may have.  However, if you need additional funds each month in order to live, you want to set enough aside money so you will not need to sell stocks or bonds when the prices are low.  Having this money set aside will also give you peace of mind as you go through the ups and downs of your later years. It is important to remember that this money is specifically earmarked for living expenses.  You don't want to start spending it on travel or other expenses you may have.

Set additional money aside for planned expenses - Many financial advisors recommend that you set aside 1 to 2 percent of the value of your home every year to pay for future maintenance and repairs.  If there are other expenses you expect in the years after retirement, such as buying a new car, travel, or a potential homeowner's association assessment, you may want to set that money aside at the start of your retirement, too, so you are not caught by surprise.

Create a realistic retirement budget - How much money will you need to meet your basic expenses during retirement?  Make sure you do not forget to budget for the taxes you may have to pay on IRA withdrawals.  Then, determine whether you have saved enough money to cover those expenses for 25 to 30 years after you stop working.  If your savings will not last at your current level of spending, cut your expenses immediately at the start of your retirement.  Do not wait until you are in a desperate situation and then try to cut back.  

Most financial planners recommend that you start your retirement withdrawals by taking no more than 3 percent a year out of your savings to add to your Social Security benefits in order to cover your living expenses.  You can gradually increase this amount, but only by about 3 percent a year. In other words, 3 percent the first year, 3.09 percent the second year, 3.18 percent the third year, etc.  In this way, your savings should last 33 years or more after you retire, since presumably you will also be adding interest and/or dividends to the principle amount over the years.  If your savings will not generate enough income to meet your needs, in addition to your Social Security, you need to make changes to your lifestyle as soon as possible. Otherwise, you could run out of money in your 80s or 90s.

Meet with your insurance broker - Do you have enough life insurance to cover your funeral expenses and make up for the loss of family income in the event you die before your spouse?  Should you get long-term-care insurance to pay for assisted living or a nursing home for the last few years of your life?  You do not want to over-insure your life during retirement, since you are probably not supporting children. However, a small amount of life insurance could help provide financial security to you and your spouse.   

In addition to life insurance, ask your agent if you are carrying enough homeowner's insurance, including insurance to cover disasters such as floods or earthquakes.  An insurance broker can help you decide how much insurance you need and what size premiums will fit into your budget.  .

Choose the best Medicare plan to meet your needs - Once you reach age 65, you have two different choices you can make for your Medicare coverage.  

1.  You can choose a Medicare Advantage plan, which covers virtually all your medical needs.  You may little or no premiums over the cost of original Medicare, but you will have an annual deductible and co-pays.   For most people, this is the least expensive option, but you will be limited to only using doctors in your network, except in an emergency.  Ask your current doctor if there is a Medicare Advantage plan which they accept.  Then, you can use this less expensive option, while keeping your current physician.

2.  Or, if you want more freedom in choosing which doctors you will use, you can choose to stick with original Medicare, which covers 80% of most medical expenses, and then you can buy a Medicare Supplement and drug plan, which will cover most of the additional 20% which doctors charge.  However, the supplement and drug plan will require you to pay premiums in addition to your Medicare premiums, and those premiums usually make this the more expensive option.  Depending on the supplement you choose, you may or may not have a deductible and co-pays.  

It is highly advised that you choose the plan which will help you stay within your budget and meet your medical needs.  In addition, I also recommend that you read "10 Costly Medicare Mistakes You Can't Afford to Make."  It contains very useful information and is written by a Medicare broker who is licensed in nearly every state.  

Meet with a financial planner to decide how your savings should be invested - How much of your money should be in stocks and how much in bonds?  How will you diversify?  Will you follow Warren Buffet's advice to retirees and put your savings in a variety of index funds?  Once your money is invested, do not simply forget about it and assume everything will stay the same.  Meet with your financial planner at least annually and evaluate each holding you have to determine if it is still generating the growth and/or income you expect.  Re-balance your portfolio periodically.  Strive to live within your means and follow the general financial plan you set up when you first retired.

Do not become a victim of a scam - Sadly, many senior citizens fall for scams in their attempts to get an unusually high return on their money.  Often, this causes them to lose all or most of the money they have saved over a lifetime.  Remember: If it sounds too good to be true, it probably is.  Stick with reputable companies and well-known investments.  

In addition, do not "loan" money to people, especially those who contact you through the internet or on dating sites.  It is very unlikely you will ever get back any of the money you loan others.  If you cannot afford to give your money away, do not loan it. Finally, ignore unsolicited phone calls and emails.  If you want to make a purchase, initiate the contact yourself, not because someone contacted you.  A very high percentage of unsolicited phone calls and emails are cleverly disguised scams.  

Read up on retirement planning - It is always a good idea to study different retirement planning programs and choose the one which you think will work best for you.  For example, you may want to occasionally read popular books on financial planning for retirement. 

If you follow these suggestions, you may not be able to avoid every possible financial disaster, but you will have substantially lowered your risk of running out of money during your lifetime.  In fact, you may even have some money and other assets left over to leave your loved ones.  You will also be able to sleep better and be more relaxed when you know you have planned your retirement well.

You can find gifts for retirees and others at my Etsy Store, DeborahDianGifts:  http://www.etsy.com/shop/DeborahDianGifts

 

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The Retirement Income Red Zone Danger

If you have put together a sizeable portfolio prior to retirement, knowing how to protect those assets during your first five years after retirement will be extremely important, especially if you want to be sure they will last the remainder of your life.  These first five years after retirement are sometimes referred to as the red zone ... the time when decisions you make can have the biggest impact on your future.

What Bad Decisions Do People Make in Early Retirement?

When people first retire, they often have a number of of pent-up dreams they wish to fulfill.  They still feel healthy and they may want to move somewhere new, travel, buy a boat or RV, and have a little fun.  After all, they have waited and saved their entire lives for this moment and they want to enjoy it before age and illness slows them down.

Next, retirees often stop saving and putting aside money for the future.  As they pull money from the principal without replacing it, retirees gradually see their assets become depleted.

In addition, retirees sometimes do not prepare adequately for rising expenses or problems that could come up in the future, including extra medical expenses such as health insurance deductibles, expensive treatments, long-term care, etc. They also sometimes fail to prepare for things like replacing their car, hot water heater, furnace or other expensive items.

Even if new retirees do not make any of the above mistakes during their first five years after retirement, their assets could become depleted because of poor investment decisions.

Should You Invest for Growth or Safety?

Investment advisors recommend that your retirement assets should be invested for both growth and safety ... but what is the correct balance?  According to an article by CNBC writer, Kelley Holland, "Five Crucial Retirement Years For Your Money," it is extremely important that you do not have negative investment returns during your first five years of retirement.  When experts from Prudential Insurance examined two hypothetical $1 million portfolios, Portfolio A had negative returns for 4 of the first 5 years, but positive returns for all of the remaining years of its existence.  Portfolio B had all positive returns in the first 5 years, but had negative returns in 4 of 5 years between years 25 and 30.

What were the results?  Portfolio A had dropped to zero within 15 years.  Portfolio B had doubled in value by the end of 30 years, despite the negative returns at the end.

What Should an Investor Do?

After examining the results of these two hypothetical portfolios, experts believe it is important that investors manage their money conservatively early in retirement so their portfolio continues to grow in value, even modestly, during this crucial period.  In order to do this, it would be a mistake for retirees to make risky investments or begin depleting their principal for trips or other large purchases.

Retirees need to work with their investment advisor to make sure their money is wisely invested.  Holland recommends that no more than 40 to 60 percent of a retirement portfolio should be in stocks (and, obviously, these should be Blue Chip stocks, not high-risk ones).

As retirees begin to live off their assets, their withdrawals should be modest and their asset allocation should be conservative, particularly during the first five years.  In other posts on this blog, we have reported that most investment advisors suggest that no more than 3 percent of assets should be withdrawn for living expenses during retirement, with tiny increases in the withdrawal rate as the years go by.  If the principal balance is invested conservatively, the assets of most people should last well over 30 years.

Some investment advisors also recommend that any income from the assets that is in excess of what is needed for living expenses should then be invested in stocks which, hopefully, will appreciate and provide an extra cushion for the future. This extra cushion will be especially helpful if there is a stock downturn in the future ... which is almost certain to happen every few years.

In the end, this plan is the one that is most likely to leave you with enough assets to last the remainder of your life.

If you are interested in reading more tips about handling your retirement income, where to retire, common medical problems, Medicare, Social Security and more, use the tabs or pull-down menu at the top of the page to find links to hundreds of additional articles.

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How to Make Your Money Last the Rest of Your Life

Managing Your Money Well
Helps You Enjoy Retirement More!

Many people worry about whether or not their money will last the rest of their lives.  This is not an unreasonable fear, and several of the posts you will see on this blog have been about how to cut your costs down before you retire so that you can live comfortably on Social Security and whatever other income you can expect to receive.  I've also mentioned a few times that it is wise to work as long as you can, in order to maximize your earned income as well as Social Security benefits. 

The 4% Withdrawal Solution

One area of concern for many people, however, is how to manage the distributions from your IRA, your 401K, or any other retirement savings that you have in place.  How much can you take out in order to insure that your assets will last?  I recently read about the 4% solution, a concept that is simple and makes it easy for anyone to figure out whether or not they are on track.  Here is how it works:

When you retire, at approximately age 66, total up the value of the stocks and cash that you have in liquid assets.  These are the assets you plan to draw down in order to supplement your Social Security.  To keep the math simple, let's assume they add up to $50,000.  Now, make a record of that number, as well as 4% of it, or $2,000. 

If you withdraw no more than $2,000 a year from these liquid assets, they should last 25 years, even if you get a 0% rate of return on the balance.  This means that, if you retire at 66, these assets should last until age 91.  If you get any interest or dividends during that time, which is quite likely, your assets will last even longer.  In fact, with a very conservative 2% rate of return, they should last years longer.

A More Conservative Approach to IRA Withdrawals

If you want to be ultra-conservative, you might start out taking less than 4% during the first few years of retirement.  Then, as you need the money, you can gradually increase how much you draw out each year. 

If, in later years, you want to make sure you are not drawing your money down too quickly, here is how to do a 5 year check on the principle:

After 5 years of withdrawals, you should have 80% or more of your original balance.
After 10 years of withdrawals, you should have 60% or more of your original balance.
After 15 years of withdrawals, you should have 40% or more of your original balance.
After 20 years of withdrawals, you should have 20% or more of your original balance.
After 25 years of withdrawals, you will have depleted your cash assets, unless you have earned dividends and interest over the years to stretch your assets out longer.

If you expect to live to be 100 or older, you may want to start making your withdrawals at an older age than 66, or you may want to only withdraw 3% a year instead of 4%.  At 3% a year, your cash assets should last for over 33 years, or until you are 99 years old or older, if you began withdrawing money at age 66.  Again, this is assuming that you have earned no additional interest or dividends.

Comparing This Method to an Annuity

Some retirees choose to purchase an annuity when they retire, using the money in their IRA or 401(k).  Before doing that, however, you will want to see if the payments you will receive from an annuity will be much larger than what you would get by using the 4% solution.  If not, the 4% solution might be a better alternative than an annuity, since you maintain control of your assets and can get a higher rate of return if interest rates go up.

However, if you decide to do this, you have to be disciplined about not spending down your assets too fast.  IF you start spending more than 4% during the early years of your retirement, because you want a new car, would like to travel, or have other expenses, you may find yourself poverty stricken in the later years.  If you do not think you will be that disciplined, then purchasing an annuity might be a better choice.  At least you will know for sure that you will always have the extra income.

Whichever plan you use, your assets should last the rest of your life if you manage them wisely.  Sadly, far too many people burn through their IRA's as soon as they are able to remove the money.  They are only postponing the time when they will run out of cash, and have to live solely on Social Security ... a very meager sum for most people.  Use your assets wisely, and your money will be there when you need it!

If you need other retirement information, including financial planning, where to retire, health concerns, and changing family relationships, use the tabs or pull down menu at the top of the page to find links to hundreds of additional articles.

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