We recently met with Herman to discuss retirement planning options.
Herman nervously laughed and said, “I figured you’d just tell me to keep working, live below my means and that we could not afford to retire.”
It’s not that simple. Retirement means different things for different people and it’s not only about money. Often, it is about security, power, comfort and fear.
Although there are many good reasons to keep working, people have health issues, become burned out, or job opportunities go away. Under these circumstances, one must assess options, determine what matters most and how to afford life under these specifics.
Furthermore, people want to be very precise with retirement planning. Be careful with answers that deliver “false precision.” There are too many variables to have an exact answer. Instead, we attempt to build in a “margin of safety.”
Herman asked what this meant.
We explained that when retirement planning is done correctly, you anticipate the unanticipated and recognize things pop up over a 30-year retirement.
Specifically, we suggested that Herman start tracking his budget a year or two before actually retiring. In the process, he should separate between necessities and discretionary items. Most retirees spend a similar amount in retirement as you did while still working—it is just on different items.
We also asked Herman to consider what would happen if his health deteriorates. Increasingly, Americans are living decades with chronic illnesses with abnormally high costs. What happens if co-pays, drug costs or physical therapy are higher than anticipated? It is not unusual for health-related expenses to increase 6% to 10% per year—well in-excess of official inflation rates.
What happens if opportunities to work past age 65 don’t exist? What happens if instead of living to age 82 you live to 95? Herman’s eyes got wide as he contemplated a 30-year retirement.
Depending upon specific circumstances, it is a matter of evaluating where you are and what matters most so you can logically assess how to fund it or arrange your life in a manner that works.
In doing so, one of the first things anyone should do is assess social security benefits. Will you claim early benefits at age 62, wait until the age for full benefits, or delay until age 70? Social Security is complex, offering thousands of variations. It is complicated enough that we subscribe to an analytical database that allows us to plug in client specifics and run unlimited possibilities.
Do you have a teacher, railroad, municipal or corporate pension? How much will that provide and will you take a single life or joint life payout? Or, do you have the option of rolling the benefit to an IRA? Have you determined if you will be subject to a pension offset?
How long will you live? If a couple both make it to age 65, statistically there is a 90% chance one will make it to age 80 and a 48% chance one will live to age 90.
Life span is always a difficult variable when giving professional advice. If you know exactly when you’ll depart this earth, then it is just a matter of relatively straight-forward math. However, if you’re unsure if you’ll pass away at 75 or 95, then the math will be considerably different. It is significantly more difficult once you start assessing joint life spans.
Where will you live? Will you stay in the house you raised four kids in? Or, will you downsize to an apartment, a much smaller house or a retirement community? Will you live in a high-cost state or one with no state income tax?
How will you get around? Will you have public transportation available to you or some other transportation service?
What will happen if you require long-term care? The average stay in long-term care is about three to four years.
How much can you withdraw from your retirement savings without depleting it? Do you want to leave an inheritance to someone?
As we ran through numerous issues, Herman stepped back realizing there was much to consider. In the process, he recognized there is no one-size-fits-all retirement. However, given enough time and a logical, proactive plan he could start assessing the variables. This would give him the best opportunity for a comfortable retirement relative to his specific needs and family circumstances.
