Retirement is one of the most anticipated phases of life. For many, it marks the end of the daily hustle and replaces assignments, meetings, and deadlines with travel, hobbies, and more time with family. For others, it’s the simplicity of having the time to have that first cup of coffee in the morning with no rush.
The fact that retirement is such a life event means there’s going to be some planning involved. That being said, we think the term “retirement planning” has become overused and has become meaningless. In our business, we try to avoid the phrase altogether because in most cases people have a plan. But they cannot execute it with the accuracy they need to produce the results they want to support their lifestyle after paychecks.
Most of us have been employed for many years. We go to our jobs, get our paychecks, raise our families, pay our taxes, contribute to our 401K, 403B, or whatever retirement plan is important to us. Then one day, we reach the time to retire. You start counting down the last few days or weeks, someone plans a party, you receive your retirement package or talk with someone in Human Resources about your benefits and now you’re retired. Great, right? Well, good for you, but now what?
For most of us, retirement was always somewhere down the road. Most people have a money manager, broker-dealer, trusted friend, family attorney, etc., who will point them in the right direction. The unfortunate truth is that most retirement planning involves only money, growing it, saving it, and investing it while ignoring or giving little attention to the two most important components of living life without paychecks.
The Two Most Important Components of Retirement
The first is health care—the cost is always going up, and the type of health care you choose is critically important. Good health care means less of an out-of-pocket cost to you. And on a fixed income (regardless of the amount, we all live on a fixed income), planning for that unpredictable, inevitable variant costs pennies to prevent and sometimes major dollars to deal with once it happens.
The second reason people run out of money during retirement is “independence.” Staying in your home or living independently is of great concern for people over the age of 75. I am not talking about going into a nursing home—most of us probably won’t have to. The CDC reports only about 7% of the population over 75 will need the type of care provided in nursing homes. In a few words, I’m talking about planning forward for things like when you are unable to care for yourself, who is going to pay? Even if it’s a temporary situation, you will receive a bit of help from Medicare (if you qualify), but as we age, recovery times get longer. Many people depend on their spouses or adult children to stay in the comfort of their homes. At our age, we all have either had that experience with our own parents or at the very least know someone who has been there.
What is Retirement Planning?
The retirement planning process involves looking at your life as a whole, not just financially. Setting retirement income, healthcare, and independent living goals and implementing the actions required to reach these objectives we have been talking about.
Many professional retirement planners believe that 70% to 90% of your pre-retirement income needs to be replenished to lead a comfortable, retired life.
Why Do You Need Retirement Planning?
Medical Emergencies
With age comes new health problems. Medical expenses can make a massive dent in your finances post-retirement. Studies show that medical inflation is at an average of 5.26% per year. With a forward-thinking retirement plan, you’ll never lose sleep over medical expense debt or exhausting your nest egg, thus leaving a surviving spouse vulnerable.
Inflation
The effect of inflation, even if it appears small in the short term, can be noticeable over a few years. Some research points to a 1% inflation rate that could swallow up $34,406 of retirees’ benefits. If inflation were to increase to 3%, the shortfall would total more than $117,000.
Making Your Savings Last
Most Americans wonder if their retirement nest egg will last their entire lifetime. Many times running out of savings could leave you completely dependent on Social Security, and these benefits don’t provide much in the way of income.
Monthly Expenses
According to the Bureau of Labor Statistics, “older households”—defined as 65 and older—spend an average of $50,220 per year, or roughly $4,100 a month.
When Should I Start Retirement Planning?
The answer I give most clients when they ask that question is “a year ago.”
There’s an old adage that says the best retirement plans are often started at a young age. And it’s true—the earlier you start saving for the future, the more money you will have in retirement. Another advantage of starting early is that you can take more risks with your investment choices.
But what about those of us who have spent our lives building our nest eggs or are forced to retire early due to illness, or can retire earlier than we expected? Then the time is now. The best time to have any plan in place is when you need it. Sure, it would be nice to have been working on your plan for a while.
The most frequent question I get is “did we miss opportunities by starting our planning so late?” The answer is no. Whatever you are trying to accomplish is achievable. Some retirement vehicles or tools require a longer time horizon, but some are specifically designed to cater to those with a shorter time frame. The key is to take the first step and sit down with someone who will look at your whole retirement picture—not just how to invest.
Build a plan and then, talk about how to invest to achieve your goals, including a plan “B” if things don’t go as expected.
Ready to Start Planning?
The South Star Wealth Management team believes that retirement planning is a critical component of your financial wellness. Working together, we will help you clarify your expenses, prioritize your objectives, and build a plan supported by your portfolio that will support a long and full retirement. Contact us today to schedule an introductory meeting.