When you think of retirement, what comes to mind? Perhaps you imagine spending time with loved ones, traveling, or pursuing a hobby. From relaxing beach vacations to sunny days on the golf course, your ideal retirement days may look idyllic.
You may have other thoughts, however, once the reality of paying for your retirement sets in. Then, you may begin to wonder if you’ll even have enough money to last your lifetime.
Currently, you may be five, 10 or 15 years away from when you plan to retire. Chances are you’ve been disciplined about saving for retirement, diligently socking away money in your IRA or employer-sponsored plan, such as a 401(k).
Saving is important, but it’s only half the battle when it comes to turning your retirement dreams into financial reality. A plan for taking income, otherwise known as “de-accumulation” or “distribution,” can be just as crucial for your golden years. While taking income sounds simple, you want to ensure that you have a plan that will help you live the retirement you want – and you don’t wind up a “day long and a dollar short.”
From accumulation to income
Creating a retirement income strategy that addresses when and how to convert your savings into a regular “retirement paycheck” can help guide you through the transition. After all, you’ve probably come to rely on a steady paycheck. You may know exactly how much each paycheck is and what expenses it covers – from housing, groceries, transportation and general bills to dining out, traveling and entertainment.
Now, consider how this income/expense dynamic will play out once you retire. Have you thought about the kind of expenses you’ll have in your golden years? Or about how much income you’ll need, and where it will come from?
Steps to get started
Let’s face it. Retirement can be expensive. That’s why it’s so important to save as much as you can now so you can build your own personal income plan. Here are some steps to help you get started in developing a more “holistic” retirement income strategy:
Identify your retirement needs. Work with your financial professional to estimate the expenses you expect to have once you retire. Be sure to include essential expenses (food, housing and medical expenses) as well as lifestyle expenses (things you want but don’t actually need to survive).
Estimate how much of your pre-retirement income you’ll need to replace in order to meet your needs. This step will help you understand the true cost of the retirement lifestyle you’d like to have. For instance, you may opt for a more modest lifestyle in order to leave more money to your heirs.
Create a “buffer” for potential retirement risks. Retirement can include a number of gray areas that you may need to address. From unexpected health care-related expenses to caring for aging parents, there are many uncertainties. Other key risks to consider are:
Longevity risk – You look forward to a long, happy and healthy retirement. But you also want to ensure you don’t outlive your assets.
Withdrawal rate risk – Draw down your assets too quickly, and you’ll be unable to meet future needs.
Sequence of returns risk – An unfavorable market environment can have a big impact on your retirement savings. If you experience a high proportion of negative returns early in retirement it will reduce the amount of income you can withdraw later.
Inflation risk – This involves potential loss in purchasing power due to rising costs of good and services.
Identify retirement income sources. When you transition from full-time employment to retirement, you’ll no longer receive the regular paycheck you’ve come to depend on. Retirement income sources, such as Social Security, company pensions and annuities can help give you a regular, guaranteed stream of income that may last your lifetime.
Develop a retirement income timeline. Map out how and when you’ll take payments from your retirement income sources. Again, work with your financial professional to help you through this essential step.
The time is now
Your retirement may be one of the longest chapters of your life. Why not plan ahead so you can achieve the future you want? Be proactive and take control of your financial future by contacting your financial professional today.
Retirement requires a lot of careful preparation, but no one is perfect — we sometimes make both financial and planning mistakes along the way. Dodge these five common pitfalls and you can be confident you’ll have what you need to live the lifestyle you want.
1. Mistiming a spouse’s Social Security claim
Sure, you know the benefits of waiting to take Social Security. Benefits decrease by more than 40 percent if you start taking them at age 62 instead of waiting until 70. But where Jeff Gitterman, CEO of Gitterman & Associates Wealth Management, sees people trip up most is on a younger spouse’s Social Security claim.
Let’s say that a husband and wife are 70 and 66 years old. If the husband is taking full Social Security, his wife can take a spousal benefit, which can be up to half of her husband’s benefit. This won’t affect the husband’s benefit, and it allows the wife’s benefit to mature. At 70, she can stop taking half of her husband’s benefit and start taking 100 percent of her own. This is especially important for a younger female spouse because women tend live longer than men. Women also spend more on medical care and are more likely to enter a nursing home.
Money should support your “ lifestyle, not be your lifestyle.
2. Thinking it’s too late to start
Saving for retirement can be intimidating if you got a late start, but don’t let fear stop you from putting away as much money as you can. Start by making sure you’re maxing out your contributions to any current work retirement accounts, especially if your company matches them.
If you’re 50 or older, you can make catch-up contributions. In a traditional or Roth IRA, you can put away $6,500 a year, which is $1,000 more than people younger than 50 can contribute. If you put away money through a 401(k), you can contribute up to $23,000 a year, compared to $17,500 for younger savers.
3. Not picturing what retirement will be like
Gitterman prompts clients to close their eyes and ask themselves this question: “On the first day of retirement, what am I doing?” Frequently, the response is “I don’t know.”
A job gives back a lot of things other than money: accomplishment, leadership, fulfillment and the satisfaction of work completed. If you don’t know how you’ll replace these parts of your life, retirement can feel empty. Taking time to explore what this new chapter of life looks like will not only help you plan for retirement mentally, it will help you plan financially as well — you need to know what your money is going to fuel.
4. Keeping retirement accounts separate in retirement
Maybe you have a 401(k) from an old job in one brokerage house, your current 401(k) somewhere else and a pension in yet another spot. That’s not such a big deal while you’re still working, but when you retire and start taking benefits, it’s easier on you — and your future heirs — if everything is in one place.
That way, you or your financial planner can figure out where to take distributions from, and when the time comes, your executor will have everything in one place, which will make that job easier during what will be a difficult time.
Taking time to explore what this new chapter of life looks like will not only help you plan for retirement mentally, it will help you plan financially as well — you need to know what your money is going to fuel.
5. Putting money before lifestyle
Retirement shouldn’t be about hitting a certain dollar number, but rather about saving enough for the retirement you want to have. “Money should support your lifestyle, not be your lifestyle,” says Gitterman. For some, that means traveling the world. For others, it means working part-time. For some, retirement is as simple as sitting on the beach and reading a book. All three require different funding.
“I have people walk into my office and swear they can’t retire, and then an hour later they’re putting in their retirement papers,” he adds. For many people there is a disconnect between their retirement savings and how much their desired post-retirement lifestyle will actually cost, explains Gitterman. Making that connection can help you time your retirement appropriately and save more — while you’re still working.
If you don’t yet have a financial plan, give us a call. We’d be honored to help you help you look beyond short-term temptations in pursuit of your long-term goals.
A health savings account (HSA)
HSA is a tax-advantaged savings account where you can set aside money through payroll deductions to help pay for medical expenses like copays, prescription medications or other expenses related to diagnosing, treating or preventing illnesses. HSA funds can roll over at the end of the year.
To use an HSA in 2018, you must be covered under a high deductible health plan (HDHP) with a minimum deductible of at least $1,350 for individual coverage or $2,700 for families, and a maximum out of pocket amount of $6,650 for individual coverage or $13,300 for families. In addition, you cannot be covered under any other health plan that is not an HDHP, with limited exceptions. The maximum HSA contribution is $3,450 for an individual, or $6,900 for a family.
Unlike FSAs, HSAs are portable. That means you can carry over unused funds from one year to another. You don’t risk losing money that isn’t spent during the year. If you decide to leave your job or the workforce, you can take your HSA with you.