If you're considering retirement within the next five years or so, or you’ve recently retired, you're in a critical period of your life. During this period you'll be faced with a number of important choices, and the decisions you make can have long-lasting consequences. It's a period of transition: a shift from a mindset that's focused on accumulating assets to one that's focused on distributing wealth and drawing down resources as well as leaving a legacy. It can be a stressful transition, but it doesn't have to be. The key is to understand the challenges, and to recognize the long-term effects of the decisions you make today.
Over the next few weeks, I’m going to be laying out some of the most common challenges that today’s retirees are facing. My hope is that you’ll be more informed about these challenges and how to address them. Also, that the information will give you confidence during one of the most significant transitions of your life. Please feel free to forward these posts to anyone you feel they may benefit.
The first challenge we’re going to address is longevity.
The risk of outliving your savings is a real and present danger for today’s retirees. If you look back over the past century, life expectancy has virtually doubled. In 1900, a male’s life expectancy was forty-seven years of age1. With advances in medical care we are living longer than ever before. While this is a great achievement for our society it does place a lot of stress on retirees when they realize that they need to plan for a retirement that could last 25-30 years! The worst possible outcome, of course, is to not have your income last as long as you do. No one wants to end up financially dependent upon their children or grandchildren, or government programs.
Here are some strategies to consider.
1. Manage Retirement Account Distributions: In order to give your assets the best chance to continue to grow, you’ll want to create the most tax efficient income you can from the different types accounts you have. Although there could be other factors to consider, you’ll typically want to withdraw from taxable accounts first, followed by tax deferred accounts such as 401(K)s and IRAs, and lastly from tax free accounts such as ROTH IRAs. Using this sequencing will give the assets in the tax deferred and tax free accounts more time to grow.
2. Don’t get too conservative: Considering that your retirement could last for 25-30 years, you’ll want to continue to invest for growth to give your assets a better chance at lasting the full span of your retirement. Traditional thinking says that retirees should invest more conservatively and value protection of their principal above all else. For this reason some people actually shift all of their assets to fixed income investments, such as bonds, CDs, and money market accounts. While risk management is extremely important, this strategy completely ignores the effects of inflation, which I will discuss more in a future post. If you get too conservative too soon it could make the latter years of your retirement more difficult.
3. Evaluate Long-term care insurance: A debilitating disease or injury that requires you to enter an extended stay facility such as a nursing home can destroy even the best financial plans. The national median annual rate for a nursing home (private room) is $87,6002. You will need to evaluate whether to take out a long-term care insurance policy that may cover the costs of such a stay or self-insure against the risk. A long-term care policy can provide coverage for in-home as well as nursing home care. Typically, unless you have a chronic condition that makes you more likely to require care, there is no reason to begin thinking about this issue before the age of 50.
4. Annuities: There are many different types of annuities such as deferred, immediate, variable, indexed (I’ll do a more extensive post on all these later) and many of them provide some sort of lifetime income guarantee3, which is why many retirees believe they need one. Annuities are one of the most contentious financial products in the industry. Some “experts” say to NEVER buy an annuity while others believe that all retirees could benefit from using one. My take…IT DEPENDS! One thing I have learned for sure is that comments like NEVER or ALWAYS, have no place in the financial planning process. The truth is that sometimes annuities make sense and sometimes they don’t. Every client’s situation and risk tolerance is different. The key is to get some professional advice on whether or not an annuity is appropriate for your situation.
Because of all the uncertainty, making the transition into retirement can be extremely stressful for many. However, if you understand all the risks and plan for them accordingly, it can be a very rewarding phase of your life.
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1 Us Census bureau
2 Genworth 2014 Cost of Care Survey
3 Guarantees backed by the claims paying ability of the insurance company.