By Michael J. Searcy
Most everyone realizes that there will come a day that they can no longer generate income for living expenses from employment. For some, it’s a welcome event. For others, it’s a curse. Now, assuming you are in the “welcome event” category and want to quit working for a living someday, here are some items to consider in your planning:
1. Track your expenses. Know what you actually need in after-tax money every year to live the way you have chosen for yourself. Don’t use some hypothetical percentage of current income that the “gurus” predict you will need. Figure it out. If you are not tracking these expenses on a regular basis with some type of accounting system (preferred and suggested), then start tracking today (even if you use a pad and pencil). Past expenses can be a good indicator of future needs. It will be hard to predict where you are headed without knowing where you have been.
2. Don’t forget unusual, one-time, or periodic expenses that will come up and require extractions from your portfolio. Consider the replacement of your vehicle. It may be paid for today but you may need to replace it sometime in the future. Estimate when that will be and then determine about how much you will need and when you will need it. This becomes part of your annual budget, even if you make the actual extraction seven years from now. A few other items that come up with our clients include things like: a child’s or grandchild’s wedding, a new roof or other major home maintenance item, visiting children and grandchildren who move away, special anniversary trips or other life events.
3. Future health care and insurance costs need to be estimated, especially if you work for a company who heavily subsidizes your current insurance premiums. Talk to an agent who specializes in retiree health insurance to get your estimates.
4. The need for Long Term Care requirements can crush the best retirement planning plans so be sure to consider this variable. Either plan to self-insure it and set the money aside for this contingency or insure against it with a traditional insurance company.
5. Decide your probability for longevity. In essence, figure out your “best guess” as to when you might die. If married, then make a best guess of who will live the longest and base your planning upon that age. Nobody really knows how long someone will live. The average “mortality tables” might indicate in the mid-80’s or early 90’s but those figures are based on the prior generation, or maybe two prior. With new discoveries in medical care, most people believe that they might live longer than their parents so consider this. The longer you plan to live, the more you have to accumulate.
6. Determine the date you plan to stop working for a paycheck. Historically, most people have used age 65 as that magic number but we are now finding people planning to be productive longer. Often this is because they are fearful of outliving their resources. Sometimes, they want to keep being productive and enjoy their current career position, so they just stay put. Some just plan to make the date coincide with when they plan to take Social Security.
7. Are you planning to take Social Security? Although we all expect Social Security to be around for us, the facts indicate that it might but may very well provide different benefits. When Social Security was established, it was a safety net for those few individuals who lived exceptionally past normal life expectancy, which was age 65 at that time. Now that people are living longer, there is much discussion as to the solvency of the system. Nobody knows what will happen with this social benefit but I suspect it will stay around but with different rules. If it becomes “needs based” then those who have been more successful in life (at least financially) might not get any or may get less than others who are really in need. So, it’s up to you whether you plan on getting any of these benefits. Because we don’t really know, our recommendation to clients age 50 or over is to consider it but for those under age 50, it’s probably a bigger risk to count on it for financial security. Nobody has the right answer here but it has to be considered in your planning. You also need to carefully plan when you take benefits because this could be a critically important decision.
8. Figure out what you believe is a long-term (30+ years) average annual rate of return you can assume for the duration of your investment portfolio. Part of this analysis is related to your ability to tolerate risk in the earlier years and prudence in not accepting too much risk in your later years. If you are not sure, consider a moderate risk or balanced portfolio average for the duration of the time period. The advisory community has different views on this subject but most agree that less risk in those later years makes prudent sense. If you want to compare the price of purchasing something today vs. purchasing the same item in a prior year, visit USInflationCalculator.com.
9. Locate all of your assets. Find every account you have. Identify the location, the account number, the amount and determine current ongoing additions. This could be an old pension from a prior employer, an old 401k or 457 plan you left at a prior employer, all your current IRAs, TSAs, 403(b)s, personal accounts, CDs, stock certificates, savings accounts, insurance policies and inheritance accounts.
10. Assume a reasonable rate of inflation. What is a loaf of bread, a can of beans, and a gallon of milk going to cost in 20 or 30 years? Inflation has fluctuated wildly over different periods for different reasons. Lately, it’s been much less than in prior years. Consider what you feel comfortable using in your personal planning. Perhaps the last 30-year average is the right number. However, considering the amount of government debt, it’s possible that the government may attempt to inflate its way out of this debt. Clearly, nobody has the answer here so you have to make an informed decision.
11. The only money you have to spend is what’s left after paying the taxes due. Determine an appropriate tax bracket, keeping in mind that some of your investments will be subject to dividend income, capital gains and ordinary income, depending upon its composition. For example: If you have a traditional 401k or IRA, your tax bracket will be based upon your extraction amount from these accounts. However, if you are drawing some of your living expenses from after-tax accounts or ROTH IRAs, your average tax bracket could be less.
12. Plan for inheritances that are meaningful to you. When I see the bumper stickers on motor coaches, boats and other recreational vehicles that says “We are Spending our Children’s Inheritance” I just smile because it’s not a bad plan, but it’s not for everyone. Some of us want to leave something to our kids or grandkids to make their lives a little easier, richer, or provide opportunities that otherwise may not be possible. If you are in the camp that wants to leave a financial legacy, then you need to factor it into your planning. It may be as simple as planning to live to age 100 and then dying early with some money left over to a formal plan backed by a life insurance policy.
13. Determine and factor in any special needs requirements. Some of us have children or siblings with special needs that will require long-term financial help that has a probability of lasting well beyond our lives. In those situations, seek the advice and counsel from someone working in the special needs arena. Although our firm has a sub-specialty in this type of work and works with numerous special needs families, don’t assume that every financial advisor does. Seek out qualified, experienced help.
14. What happens when if you are incapacitated? Actually, this should be part of your estate planning but it runs coincident with your financial security in retirement. Who steps in to handle your affairs? Protect you? Make sure the decisions are the same as you would have made? Manage your investments?
15. Everything changes so keep up-to-date. Sometimes the biggest mistake someone makes is developing a wonderful, thoughtful and workable plan only to let it get stale and fail to keep it in line with current economic events or attitude changes. Therefore, be sure to take a peek at the plan every couple years and make sure it still works in light of changes that life brings to all of us.
While you may or may not be dissatisfied with your current service provider and how they are helping you prepare for retirement, there are many reasons to consider a second opinion. If you have been frustrated by the uncertainty surrounding your financial affairs, consider having another financial professional review your strategy. Talking to an impartial source can also be helpful when reviewing your financial plan or a new financial product. We would be glad to offer you a Second Opinion of your portfolio to make sure you are on track for a successful retirement!
- Download our free app for your SmartDevice, available on the Apple and Android market - this interactive calculator shows you how various sources of income could affect your needs and wants for retirement or college planning.
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Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.
The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.
Originally published on September 26, 2016 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.