You hear and read a lot about planning for retirement. Saving enough money to maintain your lifestyle in retirement, or to adopt another more preferred lifestyle, is essential. But just like people can make the mistake of not planning correctly for retirement, they can make the mistake of not planning correctly for how they will live in retirement.
More sophisticated healthcare procedures, advanced medicines, healthier diets—all are contributing to people living longer than ever. Among other things, that means we need to understand how to responsibly use the nest egg we built during our working years to get us comfortably through our retirement years. Planning during retirement is even more important than planning for retirement.
Fundamentals of a proper life plan
The initial considerations for ensuring your money will last through an extended lifetime, to live how you want to live and do the things you want to do, are fairly straightforward.
- A budget and spending plan. We typically recommend retirees plan a budget based on withdrawing 4 to 5 percent annually from your portfolio. A well-managed portfolio should earn at least that much on an annual basis over time, enough to replenish your principal. You don’t want to be too spendthrifty, nor too frugal to enjoy your retirement. Building flexibility into your retirement budget is key. For example, someone taking 4 percent a year from a portfolio valued at $1 million, would reduce their draw from $40,000 to $36,000 in a year when the market is down 10 percent. Adjusting for market variation should be doable if your plan is flexible.
- Life insurance analysis. Your kids are raised and out, their educations paid for. You’re relatively debt free. You’re not earning an income so you don’t need to worry about replacing it. So why keep paying life insurance premiums? Of course, life insurance can be an excellent estate planning tool, but it needs to be analyzed to ensure it’s serving a purpose. If not, find something better to do with your dollars.
- Long-term care event planning. Studies show on average one person in every couple will need some type of long-term care: home health care, assisted living facility, nursing home. Those services and facilities are expensive. They can eat away at a nest egg quickly, in the matter of a few years. The super wealthy can self-insure and the government will take care of the poor, but the majority of people need a plan to address the likelihood of a prolonged long-term care event. Long-term care insurance now comes in a variety of forms, including hybrid policies that include life insurance.
Beyond the fundamentals
Other elements of a retirement plan that are not always top of mind or planned for in advance include having sufficient cash reserves and balancing what you need to enjoy life and what you want to leave to your children.
- Enough cash in reserve to deal with periods of market volatility. Traditional investment markets, stocks and bonds, have been extremely volatile in recent years. They serve as an example of what volatility can do to a portfolio. We know we have to be disciplined in volatile markets, that we don’t want to make an emotional decision that could wreak long-term havoc on our savings. You don’t even want to be drawing from your portfolio when the values of your holdings are depressed. A better plan is to have sufficient cash reserves, that is, enough to support your lifestyle for at least six months, and to cover an unexpected event or two, like a home repair or unanticipated travel, while you ride out a volatile market environment.
- Giving beyond your means to your adult children. Gifting is admirable if you have the means to do it. But if you’re on a budget, it might not be in the cards. It’s not selfish to worry about yourself first. Your children are working and earning; you’re not. You don’t want to drain your savings to the point that you become a burden to your children.
Our advice: Enjoy!
The financial planning we do with our clients in retirement is built around one primary goal: to help them enjoy their lives, to capitalize on those life’s savings. That means your entire retirement, considering the likelihood of an extended life. And if you’ll live another 30 years, your first 15 will be your best 15, so get out and enjoy yourself.
Most importantly, your planning should be personal. You can read a lot online about what you should be doing with your money in retirement, but no two people have the same wishes and needs, so you have to have a plan designed specifically for you. That’s where financial advisors earn their fees, by helping you plan the right lifestyle for you, the right balance between saving and spending. You don’t want your life to revolve around what the Dow Jones is doing that year. Consult with your advisor to develop your lifestyle plan, then stick to it regardless of market conditions.
If you take the time to create a retirement plan, you can have a great retirement. But you have to plan for it; it’s not going to happen on its own. Your advisor and the financial plan you develop with your advisor will keep you from making critical financial mistakes and help you ensure a secure and financially stress-free retirement.
We’re here to help. To discuss your retirement planning, call us at (814) 459-1116, or you can email me at CPAllegretti@hbkswealth.com.
The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.
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