Many retirees today face the prospect of a retirement that, could conceivably last for 30 or more years. Ideally, planning for retirement would begin as soon as a person starts working, and would extend throughout the working years, adapting to changes and shifting priorities, as the person’s life and needs unfold.
However, retirement planning, doesn’t stop at retirement.
Instead, the focus shifts from accumulating a nest egg, to how best to spend and preserve assets, to ensure they will last a lifetime.
The Goals of Retirement Income Planning
By the time your retirement approaches, chances are, you have worked long and hard to finally reach this point in your life. Whether you will be able to live the life you want, after retirement, depends on how well you have planned, saved, and invested for your long-term financial security.
It also depends on the strategy you choose to distribute and preserve money you have saved for retirement.
The information I am sharing, is designed to help retirees meet 6 important goals. These are:
1. ensuring continued growth of assets
2. generating lifetime income
3. protecting savings while simultaneously making withdrawals from those savings
4. minimizing taxes
5. covering health care expenses
6. leaving a legacy for heirs and beneficiaries
Let’s take a brief look at each of these goals.
1. Ensuring Continued Asset Growth
While a retiree’s first thought may be to move savings into conservative investments once retirement arrives, ensuring the continued growth of assets, is critically important. This is because, of the always present risk of inflation. Even an inflation rate as low as 3 percent can cut a retiree’s purchasing power by half in about 22 years.
The Importance of Diversification
While some retirees may be concerned about investment risk, once they retire, such risk can be managed through diversification. Essentially, diversification is simply another way of saying not to put all your eggs in one basket.
It entails buying a mix of stocks, bonds, and investment funds that suit an investor’s objectives.
Remember, different asset classes, offer varying potential for growth—and different levels of risk.
For example, stock funds, while offering the greatest potential for long-term growth, also tend to undergo the greatest short-term price fluctuations. On the other end, short-term investments, such as money market funds, tend to offer relatively low returns, but are very safe.
To ensure continued growth while reducing overall risk, retirees can spread savings among investments with different levels and types of risk and return potential. In other words, retirees should diversify assets, by spreading their savings among stocks, bonds, and money market/stable value investments. This can also help ensure, that assets will grow at a rate that keeps up with or exceeds inflation.
2. Generating Enough Income
Many retirees fear they will outlive their money. As seniors are living longer, coupled with increasing medical costs, this can jeopardize even the best planned retirement. At this point in their lives, many retirees are concerned with making their money last a lifetime.
Owning investments that continue to grow, and perhaps pay interest and dividends, is critically important, especially since clients will need money to live on, for 20 or more years of retirement.
3. Protecting Savings
For many people, accumulating a nest egg for their retirement years, may seem like the most difficult part of retirement planning. However, an equally challenging task is protecting that nest egg, while simultaneously withdrawing from it during retirement. Most retirees will therefore have to limit annual withdrawal rates, to a conservative amount, depending on inflation and investment returns, among other things.
The amount that retirees can withdraw from savings, also depends on factors such as other sources of income, the amount of capital saved and how it is invested, as well as life expectancy. It also depends on whether they plan to leave any assets to their heirs, the amount of life insurance owned, and their ability to cover possible uninsured medical and long-term care expenses.
4. Minimizing Taxes
Unfortunately, just because a senior has retired, does not mean they can stop worrying about taxes. Maximizing the amount of money that they receive from savings and investments, while minimizing taxes, will continue to be important goals after retirement.
And, while some people assume, they will move into a lower tax bracket, this may not always be the case. When Social Security, pensions, and personal savings and investment earnings are factored together, many people may find themselves in the same or even a higher tax bracket, as when they were working. And, if a retiree returns to work or open a business, their tax bracket could change again, causing them to be pushed into another, higher bracket. Earning additional income could also cause part of a person’s Social Security benefits to be subject to income taxation.
5. Covering Health Care Costs
Perhaps the biggest concern (and uncertainty) for many retirees is planning for the cost of health care expenses. While many retirees enjoy good health throughout their retirement, others may suffer the many chronic diseases, that become increasingly common with aging. Health care is often one of the largest expenses in a retiree’s budget.
Long-Term Care Needs must also be considered.
A chronic illness that requires long-term care is perhaps the biggest event many retirees worry about facing—and paying for.
For many people, this concern is a key motivator in building as large a retirement nest egg as possible, given that a year’s stay, in a semi-private nursing home room, currently costs around $90,000, on average.
Other people, however, choose to purchase long-term care insurance, to hedge against the possibility that an extended illness could wipe out their retirement nest egg. Unfortunately, some people underestimate the costs involved, and mistakenly believe that Medicare will pay for such expenses. Medicare does not pay for long-term care costs.
Relying on Medicare for health coverage
Retirement typically means the end of group medical insurance benefits. While some retirees may be covered by private health insurance, through their former employers, this benefit is slowly being eliminated by many companies.
Such employer cutbacks are leaving most retirees with Medicare as their sole source of health insurance once they reach age 65. Unfortunately, Medicare Part A, which covers inpatient hospital care, and Part B, which helps pay for doctors’ services and other outpatient care, typically do not cover all a retiree’s health care expenses. Because of deductibles, copayments, and other limitations, there are many “gaps” in traditional Medicare coverage.
One-way retirees can fill these gaps, is by purchasing Medicare supplement insurance, also known as Medigap. Many others are benefitting from Medicare Advantage Plans, for more comprehensive coverage.
6. Leaving a Legacy
Finally, a retirement plan must also consider the type of financial legacy a person wishes to leave. Many retirees will be concerned with ensuring the financial security of their families and loved ones. Others, who are charitably inclined, may wish to give certain assets to a designated charity or may want to support their community or another group with whom they share a common interest.
Importance of Having an Estate Plan
To ensure that assets are distributed as intended, proper estate planning is critical. Without a customized estate plan, assets will be distributed according to the probate laws in a person’s state of residence and may not reflect a seniors wishes.
Retirement, therefore, is a crucial time for seniors to establish or reevaluate their estate plans to ensure that assets will be transferred as intended. Updating beneficiary designations for retirement accounts, granting a power of attorney to make decisions when incapacitated, naming an executor to carry out a retiree’s wishes, and establishing a will and/or trust are all important steps seniors can take to ensure their intended financial legacy becomes a reality.
Those are the 6 goals for your retirement income plan. If there are any questions, I can answer for you about your retirement or health coverage plan, please free to reach out to me at 404-335-8798.
Blessings to you and your family and I hope this information helps you achieve a comfortable retirement. Thank You.