The Complication of Retirement

By: Ian Maddox, CRPS®

You thought work was complicated?  Try retiring.  During your working years your financial well-being was tied to your employment: your paycheck, your health insurance, your life insurance.  Maybe even your social network and gym membership. Unfortunately, when your employment stops much or all of these benefits disappear.  If they do continue, they don’t come cheap.  In many ways you are left to fend for yourself.  So what do you do?

In the years leading up to retirement there are a few important things to consider: Income, Health Care, Asset Protection/Estate Planning and your Retirement Purpose.  For some, these subjects may be familiar.  Often, however, an individual or couple will discover that they have not addressed or are unfamiliar with one or more of these concepts.   Let’s dig a little deeper.

Income

Obviously the bills don’t stop just because the paychecks have; in retirement you will need to build a consortium of income. The sources to consider can include: Pensions, Social Security, Investment Accounts, Deferred Compensation, 401(k) or IRA accounts, certain Insurance Contracts, Real Estate or part time work. Typically people have access to at least two of the items listed.

You will need a plan for drawing money from various accounts, in which order to draw it and at what rate.  The current industry standard safe withdrawal rate is 4%, so if you have $300,000 in an IRA you can expect a $1,000 per month gross income without a high probability of running out of money.  In my professional experience you can actually manage a higher distribution rate and have done so with numerous clients.  Does this require more risk?  Yes.  But let’s be honest, some people need more income.  When I distribute a dollar to a client I seek to match most or all of that dollar with dividends coming into an account.  The goal is to delay touching principle for as long as possible.  Other financial professionals may have different strategies when it comes to distributions.

What about Social Security? It is not as simple as flipping a switch on your 62nd birthday.  You have options that could impact your total lifetime benefit.  I would encourage anyone facing retirement, and especially those who need income, to seek professional advice.  Can you handle this on your own?  Yes, but there are a lot of moving parts.

As to expenses, some people are disciplined with budgeting while others run “fast and loose”. Budgeting should be taken a little more seriously in retirement.  First, you are done working. No more paychecks. Second, there is a direct correlation between how much you spend and how long your nest egg will last.  Your financial foot needs to fit in your financial shoe whether you have $2 million or $200,000.

Health Care

Many people do not realize that the single greatest cause of bankruptcy in the U.S. is related to medical expense.  This is why insurance is so important.  In retirement you will have access to public insurance (Medicare) and private insurance (Medicare Advantage, Medicare Supplement or employer sponsored) or a combination of both.  What about the ACA or “Obamacare”?  The short answer is: don’t worry about it.  It only effects Medicare recipients minimally and to their advantage.  So far.

I am not going to discuss specific plans that are available to Medicare eligible retirees (They differ state by state).  What IS important for me to communicate is that health care is expensive.  Controlling behavior can help greatly—exercise, diet, etc.  A healthy lifestyle, however, only delays the inevitable.  As you age your lifestyle expenses will drop and medical expenses will rise; the cost of medications, procedures, office visits and surgeries add up.  Beyond that the average annual cost for Assisted Living in Birmingham is $35,000 and full Nursing Care can exceed $75,000.  There is private insurance that can help with these expenses but it isn’t cheap either.

You should also be aware that your Medicare coverage will be deducted from your Social Security check AND it is means tested. The more you make the more you pay for Medicare.  This won’t affect most recipients but if you file a joint return and your total annual income exceeds $170,000 you should expect a higher Medicare premium for the following twelve months.

Asset Protection/Estate Planning

If something is lacking in a family’s retirement planning this is usually where we find it.  The term “Asset Protection” is sometimes a veil for insurance sales or perhaps an attorney setting up a trust.  Don’t get me wrong, insurance and trusts are powerful tools when deployed correctly.  This isn’t, however, my biggest concern.  Some Retirees have not even addressed the basics of estate planning.

I recommend the following documents to all retirement age clients: Last Will & Testament, Durable power of attorney, Advanced Directive/Health Care Proxy/Living Will (different names for similar things).  There are many good attorneys in town that can handle this quickly and for little expense.  In my experience having these basic estate planning documents in place saves a world of stress when dealing with the loss of a loved one.

As far as life insurance is concerned a retiree may or may not need it.  Covering the cost of final expense with insurance is great, but from there it gets complicated. Here are some specific areas insurance can help in a retiree’s financial plan:  you or your spouse have a strong desire to gift a specific amount to heirs, church or charity, you have considerable wealth (insurance can help defer or pay taxes and be used to fund trusts), your only source of guaranteed income is from Social Security (some forms of insurance can be used to create a “Personal Pension” plan), or you are very risk averse.  In my professional opinion a typical middle or upper middle-class retiree does not need to load up on life insurance.  Just ask yourself; “What risk am I insuring against”?

Retirement Purpose

What are you going to do with your time and resources in retirement?  I don’t mean dreaming of golf courses, tropical beaches, shopping or spending time with grandkids.  I mean really thinking through your purpose.  A retiree is starting fresh.  It’s like being a teenager again.  Seriously.   Having collected six decades of wisdom, a careers worth of experience, time on your hands and hopefully some financial flexibility, you have an opportunity to serve your community like never before.

A word of caution worth mentioning.  Don’t retire until you are ready.  I have seen too many clients, often men, leave the workforce only to return.  Either they didn’t create purpose for their retirement, missed the “business” of work or truly felt they could best contribute to society in this way.  A few might even be forced back due to financial constraints.  This is the least desirable situation and brings up an important point.  In today’s brutally efficient marketplace it is less likely you can return to work and recreate your pre-retirement status or income.  All the more reason to measure your steps and plan ahead.  With proper planning retirement can be a beautiful thing.

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

 

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