There are two times during a flight when there is the least margin for error: takeoff and landing. We’ve already talked about the checklist pilots go through before takeoff. Landing a plane requires a lot of steps, as well: checking weather conditions, lining up with the runway, getting clearance from the control tower, putting down your landing gear, etc.
Landing a plane is similar to the last few years before you retire. You’re getting ready for a big life change, and there isn’t much room for error. In fact, you’re in something financial planners call the “fragile decade,” which constitutes the last five years before you retire and the first five years after retirement. During this time, market movements can have a profound effect on your retirement portfolio.
While you can’t “plan away” every possibility that could come up, you can be more prepared to retire by taking key steps and answering the big questions before you arrive.
That being said, we see five core questions that people preparing for retirement should answer.
1. Where Will You Live?
While most of the questions on our list are financial in nature, this one is an essential starting point. A homebase is an essential element of retirement (even if your homebase is an RV).
The question of where you’ll live begins with two basic options: stay put or move. Then each option comes with a list of questions:
|If you plan to stay where you currently live…||If you plan to move…|
|– What customizations might you need to add to your house down the line to accommodate aging in place (i.e., handrails in showers, wheelchair access, etc.)?
– What kind of support system do you have in your area (family, friends, health care)?
– Is it easy to get out of the house and enjoy leisure activities in your neighborhood?
|– What considerations are most important for where you move? Climate? Proximity to loved ones? Ease of getting around? Proximity to health care? Price? Cost of living?
– How big of a house do you need?
– How long do you plan on living there?
– Can you find a place to live that gives you a better deal tax-wise than your current home?
2. Does Your Planned Retirement Age Make Sense?
No matter if you plan on retiring early or working as long as you can, you need a solid strategy in place. If you don’t have one yet, there’s no time like the present. Sit down with a financial professional who can help you build a retirement strategy so you can be ready to retire when you want to retire.
One example we’ve seen come up is with people who want to retire at 55, but all their money is tied up in IRAs, which aren’t available (without a penalty) until you’re at least 59½*, and Social Security doesn’t start until 62 at the earliest.
A financial strategy creates a bridge between one income source and the next. In this situation, it would help you bridge the gap between the end of your working life at 55 and when you are ready to start pulling from your IRA or claim Social Security.
Speaking of Social Security…
3. When Will You Claim Social Security?
When it comes to claiming Social Security, delayed gratification is often the preferred choice. After years of paying in, it can be tempting to claim immediately without giving it much thought. You can claim as early as sixty-two, but the longer you delay, the greater your monthly payment. You can delay until age seventy.
The answer is not always so straightforward though. When looking at the entire population, Social Security aims to pay you the same amount whether you claim early or later. So even though you’ll receive more per month by delaying, you’ll receive fewer checks than someone who claims earlier. One great way to look into this decision is by using the Social Security Administration’s Retirement Estimator, which can give you a rough estimate of how much you can expect to get.
Deciding when to claim is an important decision – you need to consider your health, spouse, and retirement goals. With few exceptions, you can’t decide to claim at sixty-two and then change your mind and decide to wait a few years. Once the decision is made, it’s made.
That’s why optimizing your Social Security decision is part of the planning process we go through with our clients. We look at the breakeven point for you while factoring in your personal circumstances.
4. How Much Will Healthcare Cost You?
Many people enter retirement expecting healthcare costs to continue as they did before retirement. But you’ll find some pros and cons when Medicare kicks in.
Many people believe that when you become eligible for Medicare at age sixty-five, all your healthcare costs will be taken care of. While Medicare is a great help to retirees, it has it’s pros and cons. Namely, it takes care of some expenses, but doesn’t cover others, namely supplemental insurance premiums, deductibles, co-pays, and don’t forget the donut hole (coverage gap). We recommend getting a Medicare supplemental plan through your insurance company that will cover the gaps Medicare doesn’t.
Throughout retirement, the average 65-year-old couple could pay almost $490,000 in health-related costs, according to HealthView Services. It’s important to understand how potential healthcare costs can impact your financial life in retirement.
When thinking about the costs you’ll have to pay out of pocket, review your coverage, deductibles, and supplemental costs. Another useful tool is the AARP Health Care Costs Calculator, which projects approximate healthcare costs based on your current health status.
Healthcare has been the subject of much debate recently. It’s likely we could see a shift in healthcare laws in our lifetime. With this in mind, you should stay on top of changes in healthcare laws and their impact on your retirement.
5. Are You Ready for the Potential Costs of Long-Term Care?
It’s easy to just deal with “the now” and avoid addressing long-term issues, or rationalize that some things are just too far off to worry about. But as you consider how to prepare for retirement, long-term care is one issue you should address right away.
The majority of medical expenses occur in the last three to five years of life, and a large portion of those expenses often come from paying for long-term care. If you don’t have a plan in place for addressing long-term care costs, this is can be a huge set back.
One option is to look into long-term care insurance (LTCI), a device of asset protection and choice. It protects you from having to deplete your assets paying for long-term care, and it gives you and your family the choice of choosing where you want to be taken care of.
Is LCTI a good fit for you? Let’s examine three types of retirees.
Retirees with few assets – These retirees don’t have assets to protect and often can’t afford the premiums of LTCI due to limited income. That’s why Medicaid was created – to help this group pay for long-term care and other end-of-life expenses.
Retirees with many assets – These retirees can afford long-term care on their own without worrying about running out of money. People in this group often don’t need LTCI, but may want it.
Retirees in the middle – This group needs to consider LTCI. They have assets to protect and enough income to afford the premiums, but if they had to pay for long-term care out of pocket, it would likely put a strain on their resources. If you fall here, LTCI could be a wise investment.
When you think about how to prepare for retirement, these are just a few essential questions. Each question qualifies as a separate planning topic when you meet with a good financial planner. If you haven’t met with a financial planner, you might not cover each topic – or you might not cover each one in the depth it deserves and requires.
Really, these topics are just the tip of the iceberg, but if you answer them, you are on your way to a smooth landing when you reach retirement.
Want to talk about how we can help you prepare for retirement? Drop us a line.
* Section 72(t) provides a limited exception to this rule.