Let’s get real about retirement. Will you have enough to remain comfortable in retirement for 30 years or more? Studies show this is a recurring fear many Americans have - and for good reason. Many Americans are completely unprepared to fund a comfortable retirement, and remain naive about the actual costs involved. As a Fee-Only financial advisor, my number one priority is retirement preparedness so my clients face their future with confidence.
In past articles on retirement, I've written about investment strategies to boost retirement readiness. This time I'll address some planning do's and don'ts for pre-retirees and retirees:
- Don’t get caught short - retain an emergency fund. If you’re still working, retain up to 6 months of your core living expenses for emergencies. If you’re retired, setting aside the equivalent of 12+ months of living expenses precludes liquidating investments on short notice (example: in a down market) if an unexpected need arises – such as medical expenses and emergencies in your family.
- Save, save and save some more. While you’re employed, save every which way you can – be it self-funded IRAs, company 401k plans, 529 Plans (for college-bound children) and after-tax savings. It’s easier to save if you live consistently below your means. Some of my clients struggle with cash flow demands and really only begin to bulk up on savings once their children are grown and they still have some years of employment ahead of them.
- Don't forget to budget for substantial medical expenses in retirement. Medicare doesn’t cover vision and dental. Medicare offers extremely limited long-term care coverage (currently 100 days). Long-term care insurance makes sense for the majority of my clients because their spouses and/or adult children simply can’t replace intensive caregivers. Fidelity Benefits Consulting estimates the average couple retiring in the US at age 65 needs $275,000 to cover out of pocket medical to the end of their lives… and this excludes long-term care.
- Help your family but be prepared to say “no” sometimes. One of the easiest ways to put a dent in your comfortable retirement is by giving money to family if you can’t afford it. If you’re affluent and you can help, great! But if helping out family saps your comfortable retirement, you may have to “just say no.” I’m thinking less about aging parents, and more about adult children. Some able-bodied adult children in their 40s and 50s still rely on their parents for significant support. Continuing to bail them out fosters unhealthy patterns of dependency. If you run low on funds later in life, will they be able and willing to help you? Will you want to be in a position of asking them for help??
- But what if your parents are the ones who need financial help? There are no easy answers here. If you have siblings, relationships quickly can degenerate as some siblings shoulder more of the burden than others. Again, help your parents if you can afford to do so. If not…they may need to consider draining their assets so they have a Medicaid safety net to cover long-term care. We don’t know how long this dire “fall back” strategy will continue to be funded in the government, however. It may make sense to pay for long-term care insurance for your parents so they don’t drain your retirement savings. I secured long-term care insurance for my father 10 years ago (when he was in his 70s) and now he qualifies for help with assisted living/long-term care services and he doesn't need to run down all of his assets in the process.
- Get advice from a financial planner regarding Social Security to maximize your benefits. The Social Security Administration is not responsible for advising Americans on how to maximize benefits. Benefit calculations are complex due to myriad rules. See an advisor (#10, below) for objective input.
- Buy less now…so you throw out less later. Americans like to shop and accumulate; we’re even told it’s patriotic to do so! While great for the economy, some of my clients tell me their possessions and homes have become millstones around their necks. Buying less and reducing possessions is a laudable goal since adult children don’t want your furniture and tschotchkes. Possessions expand to fill the space. Reducing your square footage is a great way to force you to live with less. Your family will thank you when you’re gone!
- We live in “unusual times” that require different retirement planning strategies. We’re living longer in the US than previous generations, our population is aging and fertility rates are declining. The definition of a "comfortable retirement" varies from person to person. TV programs condition Americans to want and expect expansive kitchens, spa-like bathrooms, media rooms, etc. Adult children take longer to mature and become financially independent. On the plus side, retirement no longer always means a clean break with work – some semi-retirees work into their 70s and 80s. Entitlements we take for granted (viz., Social Security and Medicare) may shrink over time in real dollar terms as fewer workers pay into the system to support more and more retirees. Financial planning is now longer an obscure luxury for the rich – it’s essential for many people. It all goes back to saving as much as possible and living below your means.
- Maintain your health. Being out of shape costs money in retirement. We can’t choose our parents for their genes (and our children didn’t choose us) but exercise, sleep and a healthy diet reduce your medical expenses. There are other benefits, too!
- Get input from a Fiduciary advisor. If you’re worried about maintaining a comfortable retirement, you may experience stress. Alleviate this by seeking professional input from an advisor who has a Fiduciary responsibility to put your needs before his/her own. Not sure what that means? Go to https://www.napfa.org/financial-planning/what-is-fee-only-advising to learn why it matters how your advisor is paid. And ask your advisor if he or she is a Fiduciary (or not)!