Comfortable Retirement Financial Planning

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Retirement can be a time of great joy - a time to travel, relax, take up new hobbies, and do the things you never had time to do during your working years. But retirement also can be a time of worry. You may be anxiously asking yourself:

  • Can I afford to retire?
  • Will I outlive my retirement funds?
  • What kind of investments should I make?
  • How much will inflation and taxes erode my investment income?
  • How do I pay for escalating health care costs?
  • What estate planning issues should I be concerned about?
  • Checklist for comfortable retirement

It's Never Too Late

If your already retired, you may think it's too late to satisfactorily answer many of these questions. Isn't retirement something you have to plan for years in advance? Ideally, that's the best approach. But it's never too late to start. Indeed, the strategies you pursue during the first few years of retirement may make the difference between exhausting your retirement funds early, or having sufficient funds to enjoy the rest of your life living the lifestyle you've always dreamed of.

Remember, while you may retire at age 60 or 65, your money is going to have to continue working for you, probably for another 20 or 30 years! With improvements in health care, diet, and fitness, people are living longer than ever. By the year 2000, it's expected that 100,000 people in the United States will be 100 years old or older. Retirement has become a whole new stage of life.

So let's get started to make sure those years are the best and most financially secure years of your life.

Setting Lifestyle Goals

Retirement is not just an issue of money. It is a way of life, an attitude, a set of dreams. What do you want out of retirement? What are your dreams and ambitions? Do you want a rocking chair or a deck chair? Do you want to take up a new hobby or learn a new avocation? Spend more time with your grandchildren? Go back to school? Move to a new state? Do you want to work part time? Start your own business?

While not all the issues are about money, they all have important financial implications. That's why you must first address your goals and aspirations. Only after you know where you want to go can you decide whether you have, or can get, the financial resources to take you there.

Write down your goals. Be bold but realistic. Are they goals you're willing to work toward, or merely wishes? Assess your health. Are you physically fit or in ill health? Do you have a family history of longevity? If you own a home, will you be able to mow your own yard and do other necessary maintenance? Do you have a positive or negative attitude toward retirement?

Share your goals with your partner. It's critical that each of you be involved in the planning and agree on what type of lifestyle you want to have. Once the goals are mutually agreed on, both of you should be involved in carrying out the financial strategies necessary to achieve those goals. Know and understand which investments you have or need, and why. Educate yourself about how to handle finances.

Can I Pay for My Dreams?

You've done the fun part. Now comes one of the most fearful questions facing many retirees: Will I have enough to live on and pay for my dreams?

A common rule of thumb says that to maintain your current standard of living you will have to replace 70 to 80 percent of your pre-retirement income, since your overall expenses usually will decline. But this is a guide at best. Much depends on your retirement age, level of pre-retirement income, health, circumstances, and retirement goals. If your in poor health, or if you want to travel the world, the figure probably will need to be higher. Some Certified Financial Planner® professionals recommend that people shoot for replacing 90 to 100 percent of their pre-retirement income. While this can be a tough goal for many, achieving it helps retirees be prepared for most any eventuality.

One of the first steps in determining if you have enough retirement income is to track your living expenses. How much are you spending each month? Don't guess. It's easy to underestimate where all the money goes. Monitor it closely and write down where every penny is spent. This is the benchmark your retirement planning is built on, so don't fudge. Indeed, it's best to overestimate for unexpected expenses.

Look at your net worth: your total assets minus your total liabilities. Ideally, at this point in your life, you shouldn't have substantial liabilities, but if you do, try to pay them off as quickly as possible if it is "cost efficient" to do so. High debt can rob your ability to build much-needed investments at this stage.

As part of your net worth, determine your retirement capital. This is the pool of assets beyond Social Security and any company pension you may be receiving that can provide income and capital for your retirement. Retirement capital can include individual retirement accounts (IRA), Keogh plans, company profit sharing plans, personal investments and savings, and annuities.

With current expenses and net worth as a bench mark, project future expenses. Most likely, your housing, clothing, gas, and food expenses will decline, as will some taxes. But medical expenses will probably rise, as might travel and entertainment costs. If you plan to move, try to estimate what the living expenses will be in the new location. It can vary dramatically.

Set up and maintain good records. They're the foundation for monitoring your income and expenses, and keeping your retirement plans on track.

What Resources Do I Have?

With your goals and expenses laid out, the next step is to determine what sources of income and capital you have, or can develop, to fund your desired lifestyle.

These sources may include:

  • Social Security

    Most likely, what you receive from Social Security will not be enough. In fact, the higher your income, the smaller the portion made up by Social Security. A retired couple, whose annual pre-retirement income was $20,000, will have 46 to 62 percent of that income replaced by Social Security (the exact percentage depends on several factors). Yet Social Security will replace only 19 to 25 percent of the income of a couple who earned $80,000 before retirement, and 10 percent or less of a couple who earned $200,000.

    If you aren't already receiving Social Security, you can find out how much you'll receive by requesting your "Personal Earnings and Benefit Estimate Statement" (Form SSA 7004) from the Social Security Administration office nearest you. Remember, too, for each year you work beyond 65, up to age 70, you'll receive larger Social Security benefits once you start collecting them.

  • Pension and Profit-Sharing Plans

    Like Social Security, employer-sponsored retirement plans typically replace only a portion of the pre-retirement income for the average retired couple. Unlike Social Security, however, most company retirement plans are not adjusted annually for inflation.

    Employer-sponsored plans typically come in two offerings: defined benefit, in which you receive a specific monthly benefit, typically based on your salary; and defined contribution, such as 401(k) or money-purchase plan, the size of whose funds depend on how much you (and possibly your company) contributed during your working years and the rate of return the funds earned during that time.

    If your already retired, the decision about what form in which to receive any defined-contribution benefits has already been made, and is irrevocable. If you're about to retire, you still have the opportunity to select the benefit distribution option that's best for you.

    The complexity of choices can't be treated in depth in this document, but be aware of the three basic options typically available:

    1. Receive monthly payments, typically for a lifetime, in the form of an annuity. You'll probably have to choose from among several different annuity options, such as joint and survivor, fixed term, variable and fixed contracts, and so on. Each option has its advantages and disadvantages.
    2. Withdraw your retirement funds in a lump sum in cash. This approach raises a lot of tax issues, but can provide important investment opportunities.
    3. Roll over your lump some into an IRA. There are new tricky laws regarding rollovers, so be careful here, but rollovers can stretch your retirement dollars by deferring taxes.

    Which approach you choose will depend on the size of your funds, how much you'll need, how soon you'll need them, and so on. So before you decide, discuss your options carefully with your company's benefits specialist and your Certified Financial Planner Professional.

  • Other Retirement Accounts

    Do you have IRAs, annuities, or retirement plans for the self-employed such as Keoghs? Unlike typical company pension plans, you don't have to begin withdrawing from these accounts until as late as April 1 of the year following the year you turn 701/2. You can withdraw all, a little, or none from any given account, as long as the total withdrawal meets or exceeds your annual minimum withdrawal requirement (based on the total assets in all of your qualified plans such as 401(k) plans, IRAs, etc.) But there are two options for calculating your minimum withdrawal requirements, and it may be advantageous to draw from one account versus another, so again, carefully plan your withdrawals with the help of your financial planning professional.

  • Savings and Investments

    Do you have personal savings or taxable investments such as money market funds, mutual funds, stocks, bonds, or real estate? Are they predominately conservative, fixed-income assets producing a steady stream of income, or more speculative investments with potential for growth but currently producing little income? We'll discuss investments more in depth later.

  • Work Part Time

    According to the Social Security Administration, 43 percent of people 65 and older earning $20,000 a year work part time. Part-time work can help stretch your retirement funds as well as ease the emotional transition into retirement. You may also be able to keep contributing additional tax-deductible dollars to any Keogh plans, IRAs, or similar tax-deferred plans until age 701/2. If you plan to work a few years, estimate how much income you will receive. Keep in mind, if you earn too much income, you'll reduce the amount of Social Security benefits you're entitled to.

  • Your Home

    A large portion of many retirees' assets is tied up in their homes. If you sell your home and move to a less-expensive residence, you can invest any after-tax sales profits for future retirement needs. But moving is not the best choice for every retiree. Another home option is the reverse mortgage. With a reverse mortgage, you receive regular (nontaxable) payments from the lender instead of paying them. The principal and interest are repaid at a later date, either when the house is sold or the owner dies. Reverse mortgages are a fairly recent option for retirees, and terms vary widely, so carefully review the contract before signing.

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