Retirement is a concept as American as baseball and apple pie. The story goes something like this – get a job, work hard, and when you hit your twilight years stop working to enjoy the good life and spend time with the grandkids. Between getting your first job and playing with your children’s children you buy a house, raise a family, live life, and hopefully save for your retirement.
In real life, the process is usually a bit more complicated. Life can be expensive and throws everyone a curveball every now and again. If it’s not a career change or a health issue, it could be saving for college or a divorce. And while all this is happening you need to plan for retirement. Unfortunately, too many Americans are not taking retirement seriously. It shows. According to the 2013 Report on Economic Well-Being of U.S. Households:
- Only 11% of respondents not currently retired reported giving “a lot” of thought to financial planning and retirement, 16% a “fair amount,” and 49% “a little” or “none at all.”
- The lack of preparedness is not just a result of poor planning, but also a lack of resources. Only 18% of respondents reported having a traditional “defined benefit” plan (pension) while 31% reported having no pension or savings at all.
- Of those ages 55 to 64 who have yet to retire, 24% expected to work full time as long as they could, 18% expect to work part-time after retiring from their job, and 9% plan on retiring then becoming self-employed. Only 18% expect to work full-time until a set date where they discontinue work.
- 30% of Americans 60 and older and 24.5% of 45-59 year olds expect to continue working into the traditional retirement years
Unless you are unusually wealthy, you need to be a part of the 11% who put “a lot” of thought to retirement planning.
As a part of this process there are four key questions you need to ask:
What will my expenses in retirement be?
The expenses with living a post-employment lifestyle can be much different than the one you have in your working years. Entertainment and travel increase while other expenses (work clothes, commuting) decrease. You will want to spend both time and money spoiling the grandkids, and dine out on a more regular basis. Having an understanding of what retirement will look like for you and what it will cost is important.
What amount of debt will I carry into retirement and how will I cover the cost?
Ideally, you want to have zero debt on your last day of work. If, however, you are like most Americans, you will have some debt in your retirement years. The amount of debt held should be modest in relation to your assets and available cash flow. The higher your monthly debt service is, the less you have for retirement spending.
Do I have a plan for dealing with healthcare costs in my retirement years?
While your actual cost for healthcare can vary greatly from individual to individual based on health and the age you retire, the numbers are daunting. According to Fidelity, the average couple retiring today at age 65 will need $220,000 in retirement to cover medical costs. Basic Medicare will cover about 80% of approved costs. Unfortunately, it is much more complicated. In most cases it is financially beneficial to have supplemental coverage.
It is essential to have an understanding on what insurance coverage is best for your individual situation and how you will pay for any out-of-pocket expenses. Besides the monthly premium expenses, there are deductibles, co-payments and expenses related to any medications you may need. If you are hospitalized there are strict payment rules as well.
Do I have enough assets (pensions, 401k, IRAs, brokerage account, etc.), to cover life expenses in a post-working world?
With many of us living into our 90s, retirement can last 20, 30, or even 40 years. More important than the total value of your assets is the sustainable income stream your assets can create to fund your retirement lifestyle. As every situation is different, there is no correct amount you need to have saved at retirement. By projecting your expected expenses it is possible to determine if you do, in fact, have enough assets for the retirement you desire.
A successful retirement cannot be built without plan. At Magellan Financial we have developed a retirement planning methodology over the last 25 years that has assisted many pre-retirees and retirees to make better decisions by understanding their financial situation. To schedule an initial consultation or learn more about how Magellan Financial can help you retire successfully, please call us at 610-437-5650 or email us at Rob.Cahill@WFAFiNet.com.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC, a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company. Magellan Financial, Inc. is a separate entity from WFAFN.