heres-how-to-live-the-retirement-of-your-dreams

Here’s How to Live the Retirement of Your Dreams

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12/14/2018

While lots of retirees can’t wait to leave the daily commute behind and jump into the permanent vacation they’ve worked toward for years, leaving the safety of a steady paycheck can be a real leap of faith. That’s why it’s important to pre-plan for money challenges before you raise your glass of bubbly at your retirement party.

To find the best solutions for your unique situation, seek out a financial advisor, recommends Alex Clarkson, financial representative and president at Matawan, NJ-based Newbury Advisors. “A good advisor will guide you in the right direction, while making the process as stress-free as possible so you can enjoy a happy retirement,” he says.

It’s ideal if you start working with an advisor with as much time as possible before you retire – think 10 years or more rather than one year. “Procrastinating’s common for many people, but you can set yourself back many years this way,” says Lance Leimberg, CFP, CHFC, CRPC, a private wealth advisor at Mount Laurel, NJ-based The Koenig and Leimberg Group.

Consider that with life expectancy continuing to rise, if you retire at 65 and live till 90, you could spend the same amount of time in retirement as you did during your working career. If you kick in the possibility of rising taxation and healthcare costs, plus inflation, your purchasing power will decrease each year. 

You can mitigate that by having various revenue streams. Social Security, of course, is one that you’ll need to decide what age to turn on. “Social Security is cumulative money out of the system over your retirement, so you need to weigh your options,” says Anthony J. Caputo, ChFEBC, branch owner and senior vice president of investments at Matawan, NJ-based Calton. “The faster you turn on the government pension, for example, the longer you save your own money. When you spend the government’s money, it allows you to also grow funds in qualified retirement accounts or an IRA that you could potentially grow tax-deferred, leaving you the ability to leave behind a larger legacy.”

Your financial advisor will likely perform a Social Security analysis for you and your spouse, if applicable, using life expectancy tables, to determine what’s the best way for you (or you as a couple) to take Social Security. “This is a fixed income stream from the government, and there are several ways to take it,” Caputo says. “For example, instead of taking Social Security right when you turn 62, if you can afford to delay it a few years, that will result in a higher monthly payment for you down the line. Say the difference between 62 and 66 is $500 a month; that could offset your Medicare Part B costs.”

The flip side, Caputo says, is that if you take Social Security at 62, you save your personal nest egg for longer. “Lots of people say, ‘I’ve paid into this system my whole life, and I don’t know how much longer I have,’” he says. “That’s why it’s important to discuss your personal situation with your financial advisor to determine how best to stretch your dollars.”

Pensions are also a big help to many, Caputo points out, but lots of us just don’t have them these days. “And even if you do have one, a pension is like your starting salary in retirement,” he says. “Imagine never getting a raise after that. That’s a big driver to add stability and a guaranteed income within your retirement assets.” 

Most pensions, Caputo adds, do offer a slight cost of living adjustment or one that lags the average rate of inflation, which could inhibit your ability to keep pace with the economy over a period of years.

“There are multiple financial products out there that will give people a lifetime stream of income like life insurance and annuities,” according to Clarkson. 

You can talk to your financial advisor about how a whole life insurance policy may benefit you. “You can find a tax-efficient way to take out a loan to use a life insurance policy,” Caputo says.

Here are five financial areas to consider before retiring, so you can live the post-work years of your dreams.

Your income and spending levels no longer match up

This type of disparity is a common issue for retirees, Clarkson says, because when people first retire they tend to spend more money than they’re bringing in with Social Security, pensions, annuities and other income streams. “These are the active years,” he says. “Newer retirees go on vacation and eat out much more during early retirements because they want to enjoy this time while they’re still healthy.”

The smartest thing to do as you approach retirement is to map out a budget that shows exactly what your monthly income and expenses will be. “It’s crucial for retirees to have a financial advisor help with this task,” Clarkson says. 

A financial planner will ask you to list all of your recurring monthly, quarterly or annual payments. “My true opinion on a budget is that it needs to literally be done over a month,” Caputo says. “Write down every expense, even $1.50 for coffee or $5 at the dry cleaner. We often don’t pay attention to ancillary expenses, but these can be the most detrimental. Then we can review and ask, where can we cut back?”

Your monthly expenses generally break down into three areas. First, monthly essentials – that’s line items like food, housing, transportation and healthcare. Monthly non-essentials include things like gym memberships, Netflix or cable, or other subscription-type services. Then there are your required non-monthly expenses that you pay quarterly or yearly, like property taxes, insurance premiums and home warranties; it’s a good idea to divide these amounts by 12 to include equal payments in your budget.

It’s helpful to also have a sense of the big picture, so gather the last six to 12 months of your bank account and credit card statements, along with your last two pay stubs and your prior year’s tax return, before you meet with an advisor. Your advisor will work from an itemized spreadsheet of all your possible costs, to provide you with a solid budget plan of exactly what you can afford when you retire.

You want to pay off credit card debt

People with credit card debt should try to have it paid off before they reach retirement, Clarkson advises, especially because high interest rates and fluctuating balances may make it hard to budget. “However, the reality is that many won’t pay off this debt, but you should still continue to make payments on time,” he says. “A proper budget will help keep credit card debt from getting out of hand.”

A good rule of thumb, Caputo says, is that if you can’t afford to pay for something with cash, don’t use your credit card. In fact, paying with credit made shoppers more likely to spend money, often buying impulse items, according to a study published in The Journal of Consumer Research.

In some cases, credit cards can make sense, especially if you can score one with rewards points. If you know you can pay the card off monthly, the extra rewards can be great. Additionally, store chains like Rite Aid, CVS and Petco all have rewards programs that offer up to 5% back on your purchases, so sign up when you’re a frequent shopper.

You don’t have enough money to make mortgage payments

There are many ways to reduce mortgage payments in retirement. “Refinancing and reverse mortgages are two ways that can help retirees get a more affordable mortgage payment,” Clarkson says. “You should ask your financial advisor about these methods. When cash is short and you already have the lowest payment you can get, try to pay the bare minimum the company will take.”

Caputo notes that a reason for not paying off the mortgage before retirement might be if you’re in a higher income bracket and need the write-off. “This decision is so individualistic,” he says. “Another example is if your mortgage debt percentage is lower than the interest you’re earning, you may want to keep the loan.”

Of all Caputo’s clients, he says, the couple or household that carries the least amount of overhead is the most comfortable. “That’s why I urge people to pay down the mortgage, say by doing bimonthly payments,” says Caputo, who says paying the mortgage down or off often gives retirees great peace of mind.

You want to budget for healthcare costs

Healthcare is a necessity for all retirees – and yet medical debt is also the number-one cause of personal bankruptcy, according to Nerd Wallet, especially if you’re uninsured, underinsured or you use out-of-network providers and then experience a catastrophic health event.

 

 

“Healthcare costs should hands-down be a top priority for retirees.”
Alex Clarkson, Newbury Advisors

“Healthcare costs should hands-down be a top priority for retirees,” Clarkson says. “Seek the advice of a financial advisor to budget for it correctly. For example, you could try to change your Medicare plan to one that’s more affordable.”

Between the ages of 60 and 65, before you become eligible for Medicare, though, Caputo says, health insurance premiums could run you $1,000 a month per person. “Shop for plans before that point so you can add an estimate of that monthly expense into your budget,” he says. “Don’t forget to add dental, eye care and hearing expenses to your budget, too.”

A health savings account (HSA) that you can start at any time is a “good extra savings vehicle that can be applied toward qualified medical expenses in a tax-efficient manner,” Caputo says.

Try to use in-network providers when possible – you can ask your doctor for an estimated cost of service or procedure before you schedule an appointment. You can also opt to use generic prescription drugs or ask your doctor if he or she recommends a mail-order pharmacy or a big-box retail chain that offers a larger prescription package at a discount. You can even ask your doctor if there’s an effective over-the-counter drug that will treat your symptoms.

You want some of the good life

However you define the good life – whether it’s dining out or vacationing in Hawaii, taking dancing lessons or buying an RV to traverse the country – you’ll need the funds to do it.

“Most people don’t want to live bare bones, so before you retire, define how you want to live by identifying your needs vs. wants so we can develop a realistic idea of the amount of money you need to live,” Leimberg says. “This is common sense, but a lot of people struggle with it. What’s the difference between a goal and a dream? A goal is well-defined, as in, ‘I want to retire at 55 on $80,000 a year.’ That’s how to save for the retirement you want.”

 

 

“What’s the difference between a goal and a dream? A goal is well-defined, as in, I want to retire at 55 on $80,000 a year. That’s how you save for the retirement you want.”
Lance Leimberg, The Koenig and Leimberg Group

Most new retirees get active by vacationing, visiting their families, dining out or taking up new (and expensive) hobbies. As you work on your retirement budget with your financial advisor, you’ll need to think about ways to reallocate money from line items that are less important to fund your fun lifestyle.

“Some will be obvious, like transportation costs related to your work commute,” Caputo says. “Those will just go away.” However, if you want to travel more or buy an RV, is downsizing to a smaller or less expensive residence a viable option for you?
 
“The best plan is to plan ahead and use that budget to your advantage,” Caputo says. “You have the money and you’re spending it. Now, you just need to figure out how to do what you want within that budget. For example, you could save for your big vacation over six months and eliminate some dinners or movies out.” 

Overall, retirement is both an exciting and scary time, especially if you’re not sure how you’ll cover all your bills and have some fun. However, if you partner with a savvy financial advisor well in advance of when you’d like to retire, you’ll be able to achieve the golden years of your dreams. 

“A solid budget paired along with proven income streams will ensure your retirement lasts and is enjoyable,” Clarkson says.

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