By Scott Snider
Retirement may sound like something that is way off in the distance for you. It may seem even incomprehensible to think about at your current stage in life. While these are common thoughts and feelings for many people, we hope that this article explains why it is so critical to start planning for retirement today. Below you will find several tips about important aspects of retirement planning.
Seek Positive Outlets And Keep A Sense Of Purpose
For all of your life, work has been how you spend most of your waking hours. In this new, foreign stage of life called retirement, you will have the ability to no longer work—period. Everyone is different, so for some, no longer working may be an easy thing to transition into. For other people, it might be scary in that they’ve lost a sense of their identity and may not know how to spend their time. Wherever on this spectrum you fall, it is important to think in advance about how you want to spend your retirement.
Even though work is over for you, you can still find ways to find a sense of purpose and fill your time with meaningful endeavors. A few ideas on how you can spend your time in retirement include traveling, volunteering, part-time work and consulting, starting a new business, spending more time on hobbies or with loved ones, helping family members, increasing physical activity, etc.
After many years of putting in the work, you deserve to enjoy this next stage of life. In order to fully enjoy it, start creating a vision of how you want your retirement days to be spent.
There are many different types of insurance, and when it comes to planning for different life stages, insurance is certainly something you should consider.
During your working years, it made sense to have life insurance for yourself. You were earning income that helped support your children and spouse, so it was prudent to make sure that they were covered in the case of your death.For most people that enter retirement, their children are usually self-supporting. Therefore, in the life stage of retirement, it is important that you review all of your in-force policies. It may be the case that you are over-insured. Finally, it may make sense to use cash value to pay premiums.
The recommendations above on life insurance may make sense for most. However, for large estates, above $11.4 million, it could be more advantageous to actually increase life insurance coverage. When it comes to business owners, especially family-owned businesses, insurance planning done right is a critical piece to a financial plan.
Long-Term Care (LTC) Insurance
Often overlooked is the cost that is associated with long-term care. This is the expense incurred for the assistance with basic personal tasks of everyday life. There will be a time when you will not be able to take care of yourself independently. Many individuals go about this in different ways: senior living centers, home healthcare, or maybe family members handle it.
One important financial planning tool that can help alleviate some of this expense and potential burden is long-term care (LTC) insurance. There are different types of policies, including traditional LTC policies or hybrid LTC policies. When thinking about your insurance needs before entering retirement, we highly recommend doing research into the best way to cover your long-term care costs.
It is crucial for the success of your retirement that you thoughtfully take some time to pre-plan your retirement as best that you can. This does not have to be anything too sophisticated, but this is where you’d want to decide how you want your retirement to look and figure out what steps you need to take to get there.
First, you want to think about your life expectancy. What is a realistic time horizon for your retirement given your current overall health and family history?
Next, if we think about a 5- to 10-year time period before you actually enter retirement, you want to think about if you are on-target or off-target. If you are on-target, you may want to consider the risks that may throw you off your plan. If you currently have a job that is less stable, try saving extra money if you can. To reduce volatility, you may want to allocate funds in a more conservative manner. Finally, consider asset preservation strategies and income-guaranteed solutions.
However, if you are currently off-target, you must find ways to fill the retirement income gap. Some ideas for this include delaying your retirement date, saving more, increasing portfolio growth prospects, or getting a part-time job.
Living On A Fixed Income
There’s a complete mindset shift that must be made when you realize that in retirement you must live on a fixed income (for the most part). It is important that you prep yourself for this shift and also prioritize your spending to get a handle on what financial resources you'll have to cover your expenditures. You may want to categorize your fixed and variable expenses into the following three buckets: needs (can’t live without), wants (often where your expenses can be trimmed), and dreams (budget using financial windfall). After categorizing everything, you can now figure out which of your financial resources will be funding each of the items within the three buckets. If you’re like most, your resources will include retirement savings, Social Security, pensions, business interests, and other investment accounts. Alternatively, it may be advantageous to implement other creative planning ideas (if necessary), such as downsizing your home, using insurance as a resource, generating income from rental real estate, and leveraging reverse mortgages or lines of credits.
Distributions From Retirement Accounts
In this new stage of life, it is important for you to be aware of the nuances involved with taking distributions from your retirement accounts. You will certainly want to get a handle on when distributions can be taken without penalty and what taxation will be.
First, there are Required Minimum Distributions (RMDs), which are minimum distribution amounts that the U.S. Federal Government requires one to withdraw annually from traditional IRAs and employer-sponsored retirement plans. These normally begin when the account owner turns age 70 1/2. Once you are required to take your RMDs, make sure that you do not fail to do this, as the IRS enforces a hefty penalty of 50% if you miss the RMD deadline. It is important to note that Roth IRAs are not subject to RMDs.
The next important point has to do with early withdrawals. Currently, early withdrawal penalties apply if you take a distribution before age 59 1/2. This penalty is generally subject to income tax and a 10% IRS penalty. There are several exemptions to this 10% penalty, which include:
Withdrawal from qualified plan after separation of service when age 55 or older
Death and disability
Unreimbursed medical expenses above 10% AGI
Rule 72(t): Take substantially equal periodic payments.
IRAs allow up to $10,000 to be withdrawn for a first-time home-buyer.
IRAs permit distributions for qualified education expenses.
Your First Step
The earlier you start thinking about retirement, the better off you and your family will be. If you’re feeling overwhelmed or unprepared for the many financial considerations of retirement, speaking with a financial advisor to review your financial strategies may help you feel more confident. At Mellen Money Management, we specialize in walking our clients through the milestones and transitions they face in life. If you’d like to make sure your bases are covered and your finances are optimized, set up your free introductory phone call online today!
Scott Snider is the founder of Mellen Money Management, an independent, fee-only financial planning firm specializing in college-specific consulting and student loan repayment advice. Scott has more than ten years of industry experience and is an FPA Northeast Florida board member, member of XY Planning Network and NAPFA, and is part of the Finance Advisory Council at University of North Florida. He graduated with a Bachelor of Science in Finance from Miami University and holds both the CERTIFIED FINANCIAL PLANNER™ (CFP®) and Chartered Retirement Planning Counselor (CRPC) designations. He lives in Nocatee with his wife, Emily, their daughter, and their two dogs. He loves animals, spending time outside, and anything sports related! Learn more about Scott by connecting with him on LinkedIn.