Ideally, financial security should be your primary goal for retirement, which means three things:
(1) your expenses should be manageable, (2) you should have adequate income and (3) you should have some money to invest.
Easier said than done. Retirement planning is particularly complicated for our middle-aged
baby boomers. They have to deal with financial pressures that past generations have not had to
deal with—such as supporting kids in college while at the same time providing help to
aging parents. Being the middle of a sandwich pushes many to postpone their retirement planning. Other economic changes that have impacted retirement planning have been (1) the erosion of the traditional company retirement plan, (2) the discarding or replacement of defined benefit plans with defined contribution plans and (3) unstable job paths, e.g., job hopping, downsizing, relocations, mergers and bankruptcy.
Answering three key questions can help you form the base structure for planning your retirement.
(1) When can you or do you want to retire?
Mental attitude and financial resources will determine the answer.
(2) What kind of lifestyle do you want after retirement?
Your economics will define and allow you to choose from a basic, comfortable or luxurious retirement.
(3) Do you want to move when you retire?
There are many locations and housing styles. Consider as well family dynamics and logistics.
We all hear bits of advice from our friends and family about retirement strategy. Some of those things may even be accurate, but some ideas are based on retirement myths.
Myth 1: Plan 10 to 15 years out. Busted—Planning for 25 years of retirement is far more realistic because advances in medical care and healthier lifestyles extend the average
single 65-year-old man by another 15 years and woman another 19 years (studies and averages—not guarantees; only God gives those).
Myth 2: Loyalty and retiring with one company leads to the best benefits.
Busted—Staying with one employer at lower pay only to increase your pension will reduce your retirement benefits. Changing employers may increase your salary and your retirement benefits from any fixed plan maintained by that company upon vesting. Even a raise of 5 percent could be enough to justify switching to a new job. Be aware that changing jobs too often may impact vesting requirements and prevent building large sums in fixed pension plans.
Myth 3: The Government guarantees pension benefits. Busted—If a company’s pension fails, the Pension Benefit Guarantee Corporation only pays a fraction of company benefits owed, possibly one-fifth. In addition, major benefits such as severance, vacation or sick pay are not covered and disappear if a company’s pension plan collapses. To be safe, check the safety of your employer’s retirement plan.
Myth 4: Preserve your capital. Busted—Preserve your capital is a given, but more importantly, hedge your buying power. Inflation rates of even 4.5 percent reduce the buying power of your income, so it becomes important to grow existing capital while generating additional income. How? By working part time and staying within the Social Security earning limits while continuing to invest in growth assets. Don’t let retirement stop you from earning and saving.
Myth 5: Taxes are less when you are retired. Busted—If income decreases, retirees may drop into a lower tax bracket. If the effective tax rate, which has consistently risen, continues
to rise, then you may pay more in taxes after retiring. Moral of the story: Retirement income may put you in a lower bracket, but don’t assume less will go to taxes.
Myth 6: Social Security will fill the hole. Busted—Many people think that Social Security will cover the shortfall in their savings and retirement benefits. Some even think that Social Security will cover most of their retirement expenses. All I can say is “no way Jose.” The intent of Social Security was to meet basic retirement income needs. To maintain your current standard of living in retirement, studies indicate that you’ll need 70 percent to 80 percent of your old working salary. Social Security will most likely be around for a while but may have reduced benefits in the future.
Myth 7: Medical bills will be covered by company insurance and Medicare. Busted—Under Medicare, you can’t collect until age 65, and they pay, on the average, less than half of senior healthcare bills. The continuous and annual double-digit rise in insurance-premium costs will push employers away from covering the high-premium policies that future retirees currently get. Realistic and practical strategies would be to take care of your health, allocate some money for health insurance, and check out health maintenance organizations (HMOs).
Myth 8: Housing Costs Are Less. Busted—Even if your mortgage is paid off, by the time you retire, you will still have to pay property taxes, hazard insurance, property maintenance and dues if in a co-op or condo, which all are expected to increase in cost. According to the Bureau of Labor Statistics, people 65 and older actually spend a greater percentage of income (31 percent) on housing than those between 45 and 64 (27 percent). Many retirees, on fixed incomes, are being forced out of their homes simply because of the ever-increasing property taxes and maintenance required to care for a property. Consider downsizing to a smaller property and/or taking advantage of reverse mortgage financing. You may lower housing costs with the possibility of walking away with some cash.
Housing is a primary if not the most integral part of your retirement planning. Housing options can be: (1) staying in your current residence, (2) moving to a new residence, (3) retiring in your second or vacation home, (4) moving in with an adult child or (5) moving to a retirement community.
Considerations:
(1) Are there compelling reasons to retire at home?
(2) Is your current house accessible and comfortable?
(3) Is your neighborhood changing for the better or worse?
(4) Can you afford your home? Even if your home is paid off,
you have to pay real estate taxes and insurance. Reverse mortgage financing can be a savior.
(5) Are you centrally located?
(6) Should you sell or rent out your old house? If you sell your home see if you can avoid the capital gains tax §121. Explore the possibility of renting your home for cash flow.
(7) Should you buy or rent your new residence? Buy if you want the potential for equity build-up and tax benefits. Rent if you have a short-term game plan or the monthly rent is lower than owning.
(8) What type of housing suits you? A house, condo, retirement village or planned community?
(9) Where do you want your retirement home to be located? Some relocation factors to consider are: cost of living, climate, medical care, state and local taxes, proximity to family, culture and recreation.
Looking ahead, how do living expenses generally change in retirement?
(1) Housing costs decline about 25 percent to 50 percent often due to paying off the mortgage or trading down to a smaller and less expensive abode.
(2) Retirees spend more time at home, so utility costs rise.
(3) Business-clothing and travel expenses generally drop 20 percent to 35 percent because of not working.
(4) Medical expenses increase (take care of yourself).
(5) Fun and leisure expenses increase (whoopee).
(6) Food costs stay about the same.
(7) Most seniors drop life insurance premiums or scale them down.
(8) Many children of retirees have finished their schooling, so educational expenses decrease.
(9) Grooming and beautification costs will increase slightly.
(10) Risk tolerance decreases along with saving and investment activity.
I feel like a bit of a hypocrite for ending this way, but “If you fail to plan, you plan to fail.” I better get going.
By Carl Guzman
Carl Guzman, NMLS# 65291, CPA is the founder and President of Greenback Capital Mortgage Corp., a Zillow 5-star lender. http://www.zillow.com/profile/Greenback-Capital/Reviews/?my=y. He is a residential and reverse mortgage financing expert and a deal maker with over 26 years’ industry experience. Carl and his team will help you get the best mortgage financing for your situation and his advice will save you thousands! Contact www.greenbackcapital.com or [email protected].
