Planning for your retirement income is a very difficult and challenging task. You absolutely cannot mess it up, as you no longer have the time or resources to make up for a mistake. You need to do it right the first time.
With that in mind here are the TEN different factors you need to keep in mind when creating your retirement income plan. Each is important, and if left uncovered, could create havoc in your finances during your retirement.
1. You May Live a Long Time
We all know that people are living longer; but what does that mean to you?
Assume that a husband and wife make it to age 65 together. Statistically, they have an 85% chance that at least one of them will live another 20 years, to the age of 85. Other studies tell us that the average joint life expectancy is age 92 (half will live longer. )
This means that you need to anticipate making your money last a long time. Small mistakes early on can compound into large mistakes over that many years.
2. Expect to Spend a Lot of Money on Healthcare
Fidelity did a study, and they project how much a married couple , age 65, should expect to spend on their healthcare total during their retirement years. They assume that each person is on Medicare, but they also assume that no long-term care is needed.
How much would you guess this hypothetical couple will spend on their healthcare in total over the rest of their lives? Remember that Medicare covers a ton of medical bills.
The answer, according to Fidelity, is $240,000! That’s right, a cool quarter of a million dollars. Over 25 years of retirement, that’s about $10,000 per year. If you need long-term care, it’s just a lot worse than that.
3. Watch Out For Inflation For the past several years, inflation has been almost non-existent. Well, those days are over. Just one trip to the gas station tells us that inflation is back to visit.
I’m sure you remember the late 1970’s and early 1980’s when being on a “fixed income” was the kiss of death. With inflation raging and prices going up every year, a fixed income bought less and less every year.
At just 6% inflation, prices double every 12 years. When you realize you are going to spend close to 25 years in retirement, that means prices (at a 6% inflation rate) will double twice. That means you need four times the income to buy the same stuff at the end of your retirement compared to the beginning of your retirement.
Inflation is like a stealth missile that you don’t see coming until it’s too late to do anything about it. The time to plan is now!
Planning for your retirement income is a very difficult and challenging task. You absolutely cannot mess it up, as you no longer have the time or resources to make up for a mistake. You need to do it right the first time.
With that in mind, here are the fourth and fifth of ten different factors you need to keep in mind when creating your retirement income plan. Each is important, and if left uncovered, could create havoc in your finances during your retirement.
4. Social Security Benefits
There is no doubt that we will see some very impactful changes to Social Security Benefits in the near future. The simple math of the population bubble (better known as the “Baby Boom” generation) tells us that changes to Social Security Benefits are coming. It is imperative that you begin to lay the ground work now to prepare for these changes. I am recommending that anyone in or near retirement should prepare for the coming changes by setting aside funds to supplement any reductions in future benefits. These funds should be positioned in Guaranteed Income Accounts so that the amount and length of your withdrawals can be guaranteed. Remember, NEVER position money that is needed for guaranteed income in a non-guaranteed account. The sooner you begin this planning the better. Positioning funds as early as possible means they will have more time to grow. Having more time to grow means that you can set aside less money to accomplish this goal!!!
As President Roosevelt (1935) once said, “We can never insure 100% of the population against 100% of the hazards of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.”
Note that president Roosevelt did not infer that Social Security was framed to provide full income for retired Americans, only that it was designed to prevent poverty in old age. Your approach to Social Security should be to determine how much annual income you need to live comfortably in retirement and then position your assets to fill the gap between your retirement needs and potentially shrinking Social Security Benefits.
5. You’ll Need A Housing Plan (or Two)
As you are well aware, home values across the entire country have dropped in the last few years-in some areas significantly. This may impact you in several ways. Perhaps your home no longer provides as great a backup retirement income plan as you may have anticipated. Or, perhaps you’ve considered relocating to a Senior Community but have delayed that move to sell your home when prices recover.
It’s not likely we’ll return to the over-valued housing bubble of 2006 anytime soon. Looking ahead, the rate of house appreciation is likely to revert closer to the long-term norms (pre-2006) of .75 to 1% per year over the rate of inflation. In today’s environment, taking on a modest mortgage and paying it off before retirement is the goal. At that time you may have the option to downsize your residence or use the equity to help fund your retirement income via a reverse mortgage or stay in your home until you pass away and let its equity serve as an inheritance for your heirs.
6. TAXES IN RETIREMENT
The income tax cuts enacted in 2001 and 2003 are scheduled to end at the end of this year. The 33% and 35% tax rates are increasing to 36% and 39.6% respectively. Furthermore, the present 15% long-term capital gains tax rate is scheduled to return to 20%, while dividends will return to ordinary income rates in 2013-with a top rate as high as 39.6%. On top of those increases, capital gains will be subject to an additional 3.8% Medicare tax imposed by Health Care and Education Reconciliation Act of 2010 for single tax payers with income over $200,000 ($250,000 for married taxpayers.) All combined, the total capital gains tax rate is scheduled to be 23.8% starting on January 1, 2013.
- IRA TAXATION
IRA accounts will continue to be the highest taxed asset in your estate. Since IRA’s distributions are taxed at the recipients INCOME tax rates, the increase in these rates will increase the hammering that these accounts will tax.
The more money that goes to Uncle Sam, the less that ends up in you and your family’s pocket. If not planned for properly, most IRA accounts will be subject to the 36% or 39.6% tax rates when passed to spouses or children. This means only 60% of your IRA account goes where it is supposed to go—Your Family. To avoid this “haircut” it is imperative that you explore your estate planning strategies, the goal of which is to keep 100% of your IRA dollars where they belong-in your family.
- ANNUITIES
Annuity income from a non-qualified contract is considered a combination of return of principal and earning, and only the earning are taxed as ordinary income. If the annuity is purchased with pre-tax dollars in a qualified contract such as a 401(k) or traditional IRA, the entire payout is subject to income taxes since the contributions were never taxed.
7 . PLAN FOR LONG –TERM CARE ASSISTANCE
With a longer life comes the greater likelihood of needing assisted living or long-term care. According to the Genworth 2011 Cost of Care Survey, assisted living averages $30,000 a year and nursing homes average more than $70,000 a year per person. For a couple, this kind of care could cost far more than their annual household income during their highest earning years.
Medicare pays for acute care, not long-term residency. Medicaid pays for long-term care but requires that you “spend down” your assets before coverage kicks in. Many of today’s Seniors who have not prepared adequately may have to move in with their adult children. In fact, one quarter of Baby Boomers already have an aging parent living with them. Consider the impact of longer lifetimes in just one household, with potentially two generations of Senior co-habitation.
One of the ten things you should know is that the sooner you start thinking, researching, preparing and structuring your long-term care plan, the more time and choices you’ll have to meet your personal needs and desires.
8. TRANSITION YOUR GOALS
The retirement income phase differs from the accumulation phase of investing because, once retired, you no longer have the investment timeline to help you recover from the impact of a down market. Your goals should revolve around what it is you want your money to do for you in retirement. Is the purpose of it to be comfortable and secure or to live in luxury? It is essential that you transition your assets from growth-seeking investments to more conservative investments and guaranteed savings plans. Failure to change the structure of a portfolio from risky growth strategies to guaranteed savings strategies is the biggest mistake that we see.
9. DISTRIBUTION STRATEGIES
Saving for retirement may seem like an insurmountable challenge in and of itself. It’s like standing at the foot of a tall mountain and beginning the slow, steady climb towards your retirement savings goal. However, once you reach the top of that mountain and are ready to retire, you face an even bigger task: figuring out how to take the sizeable nest egg you’ve accumulated and dole it out over what may be a very long retirement. If you’re not careful, you could end up running short of money midway through your descent.
10 . THE PARADIGM HAS SHIFTED TO INCOME PRODUCTS AND STRATEGIES
The three strong legs of the retirement stool are not the only things that have changed in the 21st century. The way we design a retirement income portfolio has changed as well, with a shift from an accumulation mindset to distribution mode.
The closer you get to retirement and once you are in retirement, it is prudent to start limiting your downside exposure in exchange for upside potential as you transition to the income distribution phase. Consider allocating your assets among different types of products.
Product allocation is basically the strategy of transferring some of the risk of assets to an entity (such as an insurance company) in exchange for limiting the upside potential. Product allocation ranges from conventional savings vehicles to annuitized payout instruments.
t is certainly worth considering strategies to place assets in insurance vehicles such as annuities that are designed to convert a lump sum of cash (or a series of premium payments) into a guaranteed stream of lifetime income (guaranteed by the financial strength and claims-paying ability of the insurance company.) This strategy essentially moves a variable income resource into the reliable income category. Some of the more retirement income-oriented products you may wish to consider include a systematic withdrawal plan from growth investments, lifetime income annuities, life insurance and long term care insurance.
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