(Note: this is part three of a series; read Financial Journey Part 1: Milestones for 18 – 34-Year-Olds and Part 2: Milestones for 34 – 55-Year-Olds)
Planning for the post-retirement phase of your life can be some of the most exciting — and most challenging — aspects of financial planning and the financial journey.
Will you be traveling the country in an RV? Settling down to help lend a hand with your grandchildren? Picking up a new hobby that you never had time for before, like painting or woodworking?
Then, of course, you’ll need to make sustainable plans for your financial journey no matter how long you live. Today, if you reach age 65, you can expect to live until age 84 if you’re a man, or age 87 if you’re a woman, according to the Social Security Administration.
We spoke with John Pak, a CFP® and Retirement Income Certified Professional® with Otium Advisory Group who specializes in financial planning for seniors, to find out what cards people need to play in order to enjoy a long and fulfilling retirement
If you worked and paid into Social Security throughout your life (or were married to someone who did), you know that you’ll be eligible for benefits when you retire. But did you know that precisely when you decide to start taking out these benefits has a big impact on how much you’ll get?
You can technically start taking out your benefits at age 62, however, be forewarned: if you do this, you’ll only earn 75% of the benefits due to you each month, for the rest of your life.
“My recommendation would be to activate the benefits between age 66, or your full retirement age, and age 70, when there is little to no incentive to wait past this age,” says Pak.
Waiting until at least this age ensures that you receive 100% of the benefits due to you. And if you can hold out until age 70, you’ll even receive an extra monthly bonus for the rest of your life. “For example, if your benefit at full retirement age is $1,000, your benefit delayed until age 70 would be $1,320. (8% x 4 years delayed = 32%),” says Pak.
Make plans for which Medicare plan you’ll be on
Sorting through your Medicare options can be confusing. After all, there are at least four different options to choose from — and that’s even before you consider supplemental Medicare plans, dental plans, and vision plans from private insurance companies.
- Medicare Part A covers hospital and nursing home stays
- Medicare Part B covers doctor’s visits
- Medicare Part D covers prescription drugs
- Medicare Part C — also known as Medicare Advantage — covers parts A, B, and D
Pak offers some advice: “I believe it comes down to this: what’s more important to you? The price of the total package, or the services offered within each package, or both?”
Order of retirement account distribution
“The first step in determining when to start drawing from retirement accounts is knowing your fixed monthly expenses in retirement,” says Pak. “Then, match up your fixed income sources (e.g., social security benefits, pension or wages) to determine the deficit or surplus. If there is a shortage, timing won’t be an issue because you’ll need to tap into your accounts immediately.”
Once you do decide to start withdrawing from your retirement accounts, it’s a good idea to consult with a fee-only financial advisor. Figuring out the precise order of how much to take out of which accounts at what time can be a Gordian knot of its own.
By seeking out professional advice on how to do it correctly, you can ensure that your pot of retirement money will last as long as possible and stay as intact as possible for your heirs.
Scope out your long-term care options
While many seniors can remain at home indefinitely or stay with family, many will need long-term care at some point.
Long-term care isn’t cheap. And what’s worse, it’s not even covered by Medicare. According to a 2017 survey from Genworth, here is what you can expect to pay each month for various forms of long-term care:
- Adult day health care: $1,517
- Assisted living facility: $3,750
- Home health aide: $4,099
- Semi-private room in a nursing home: $7,148
So, how to pay for this hefty price tag?
“Consider whether you should transfer the risk to an insurance company through a long-term care policy or self-insure, depending on your net worth,” says Pak. “I’m afraid the decision isn’t as easy as asking yourself if you can afford to pay $86,000 per year.”
Consider your legacy – an enduring element of your life-long financial journey
Planning for how to distribute your estate can be as simple or as complex as you want it to be. At a bare minimum, it’s a good idea to make sure that all of the beneficiary forms for your investments, bank accounts, and other assets are up to date.
As a next step up, consider writing a will. Seeking out legal help can be well-worth it to make sure everything’s crystal clear and that your friends and family don’t get into squabbles later on.
Finally, “for a more effective plan, I would recommend having a basic trust, at a minimum. This will run you about $1,500,” says Pak.
Consider moving your investments into more conservative — but not too conservative — options
Pak advises his clients to choose what’s most important to them in their investments as they move up to and through retirement: “growth, safety, or income? There are two that can be maxed, never three. Most folks in this stage will lean towards safety and income.”
It’s a good choice. For most people without billions of dollars in the bank and who have small spending needs, the wild rides of the stock market can mean that your retirement accounts can tank overnight. And that’s bad news if you’re relying on those retirement accounts to support you.
“Depending on your time horizon and risk tolerance,” says Pak, “I would recommend maintaining a stock portfolio [between] 25% and 60% of the total allocation because inflation risk can be a silent killer for conservative portfolios.”
Financial planning going into and through retirement can be complex. Rather than worrying about earning and saving more money, now you’re suddenly flipping the switch and figuring out how to make do with what you already have.
That doesn’t mean you need to go it alone, though. Finding a good fee-only financial advisor can help you navigate through these choppy waters and turn golden years for your financial journey.
Source: John Pak, CFP and RICP