If you’re planning to retire this year (or soon) what should you be doing right now? If you haven’t quite figured that out, we can help.
It will certainly be challenging for many. Surveys and polls continually give us the depressing news that Americans are not prepared financially to retire. But many of us don’t really have the option of delaying retirement.
“We believe that there will be a significant shortfall in terms of providing health care and retirement benefits to Baby Boomers who have not saved and will have a longer retirement than previous generations,” says Ron Weiner, president of RDM Financial Group in Westport, Conn. “That could cause a significant increase in terms of taxation for those individuals who have actually saved for the future.”
Adds Mark Fried, president of TFG Wealth Management in Newton, Pa.:”People spend more time worrying about their vacation this year than if they are going to be successful in retirement and how they are going to get there,” he says. “It is when it’s almost in front of them that people begin to focus in on it.”
Here are six things you need to do or think about now to prepare for that impending retirement.
1. Write down your income and expenses. The tricky part for most people, planners say, is getting used to the fact that that a steady paycheck is not coming in.
Andrew Rafal, founding partner of Strategy Financial Group in Phoenix, says it is time now to sit down and write an income plan with a trusted professional.
Most retirement advice focuses on building up a big pile of money, says James Nichols, head of advice strategy for ING Retirement Solutions. “But the reality is when you’re moving into retirement, a big pile of money doesn’t do you much good unless you know how to turn that into income.”
Tom Karsten, of Karsten Advisors in Fort Worth, suggests his clients try a test if they think they’ll be living on less income in retirement. “If it is a scenario where you will not be able to maintain that income, and you need to retire anyway, I usually suggest trying to go through two or three months living on that amount,” he says. “If your take-home is $6,000 a month and when you retire, you have to live on $5,000, spend the next three months spending $5,000. See if you can really do that. I found that a more practical way to address what people spend each month. Most people don’t have a budget.”
2. Don’t underestimate the importance of taxes. “Your two biggest expenses in retirement are taxes and health care,” says Fried. He says a strategy to reduce taxes should be in your financial plan, including converting retirement accounts to Roth IRAs, which are tax-free on withdrawal. To reduce the tax burden, don’t convert it all at once. Spread it over five years, he says.
Weiner, meanwhile, says people often forget about property taxes. Sometimes they need to relocate to a city or state with lower taxes. “Retirees have an emotional attachment to where they live,” he says. “However, it’s got to be replaced with hard business decisions regarding the cost of the state and municipality they live in, as well as cost of property tax and home maintenance. As people get older, they are less likely to repair things themselves.”
3. Consider health care costs. “If you are retiring prior to age 65 and not having access to Medicare, look at your insurance options, either through (your) employer or … a private policy,” says Karsten. If you are married and your spouse doesn’t work, make sure they are covered, as well, he says.
LONG-TERM CARE INSURANCE: Peace of mind at a price
“There is a 70% chance that a couple age 65 will need some sort of long-term care or in-home care as they get older,” says Weiner. “This could have the effect of doubling budgetary costs. These are scary statistics: 45% of all Alzheimer caregivers die before the Alzheimer patient. Not having money to hire proper help is extremely taxing on the caregiver. This needs to be understood. ”
4. Know the intricacies of Social Security. “The big issue is Social Security,” says Fried. “How should you take it, when you should take it. You’re retiring this year. The challenge with Social Security is it is an art, not a science. Too often, people are plugging in their Social Security information and getting a strategy that will maximize Social Security. That maximization may not translate into a better lifestyle. Do I care that I’m getting more money at 80 than 70? I’m doing a lot more at 70.”
SOCIAL SECURITY: What age is best to start taking benefits?
“If they make the wrong choice there, they can miss out on hundreds of thousands of dollars,” says Rafal.
5. Consider reducing debt. “You want to look at any debt obligations you have,” says Karsten. “If you have mortgage and auto payments, look at your payment. Even today, I have clients paying 6% or 6.5% on their mortgages who should be paying lower rates.” They should refinance, or, if they have the available cash, pay down their debt, Karsten says. “You are not only reducing your debt, you will start getting a bigger return on cash flow for your retirement.”
6. Make sure you have the right financial adviser for retirement. “You are shifting from accumulation of assets to spending,” says Fried. “Your adviser who helped you accumulate may not be the right one. When you are in you mid 50s early 60s, it’s time for a serious evaluation of the abilities of advisers.”
Courtesy of USA Today