When you retired, you crossed an invisible line in our society. On one side of that line reside all the workers in this country who support themselves by earning wages. On the other side are those who have stopped working and who will rely on other means to support themselves in the period of life we have come to call “retirement.” Regardless of how long ago you crossed that line, you have probably wondered whether you are living within your means. It’s an important question and financial planning for seniors provides the answer.
There are several aspects of financial planning for seniors. The general idea is that your resources need to provide enough income to pay for your expenses for as long as you live. There are several significant threats to your financial security in retirement and you need a solid plan to protect yourself against them.
What are Your Sources of Income?
Consider all of the ways you can create income in retirement. Do you have a defined benefit pension plan from your prior employment? How much Social Security will you receive? Will you earn income from part-time work? Do you own property that will generate rental income? How much have you saved in tax-qualified retirement accounts? Do you have additional savings or investments? You need to figure out how much income all of these sources will generate over your lifetime.
What are Your Expenses?
Next determine your spending in retirement. What are your core or fixed expenses that will not change much over time? Examples are utilities, property taxes, groceries, and insurances. What are your variable expenses that will vary over time? Examples are travel and vacations, home maintenance, appliances, and replacing vehicles. You need to make certain your income resources are greater than your spending.
Want to learn more about retirement planning? Contact our team at Springwater Wealth today to learn how we can help you develop a plan for your financial future.
Threats to Retirement Security
However, financial planning for seniors doesn’t end here. We need to think about what can go wrong. There are several threats to your long-term financial security in retirement, and you need a strategy to counter them.
Inflation
Inflation erodes the purchasing power of your income. Inflation in the US has been relatively muted in the past few decades, averaging 2.45% since 1990 (source Consumer Price Index published by the Bureau of Labor Statistics). But looking back farther (i.e. 1970-1980), we can see periods when inflation was much higher and, as a result, caused a lot of pain for consumers. Financial planning for seniors must include realistic assumptions for inflation in general and health care (which has a much higher rate of inflation) in particular. You need to plan on things getting more expensive.
Taxes
You will be required to pay taxes in retirement. The rate will vary depending your tax filing statues (e.g. married, single, etc.), the source(s) of your income, and the total amount of your taxable income. Given the nation’s chronic budget deficits and the massive national debt, you should be prepared for an increase in your federal income taxes. You should also plan for higher state (e.g. income and sales taxes) and local taxes (e.g. property taxes) because all tax jurisdictions seem to be chronically underfunded.
Hopefully, you will have multiple sources of income in retirement. Another aspect of financial planning for seniors involves using tax-efficient distribution strategies to minimize your taxes throughout retirement. You may need to work with a tax professional to do this most effectively.
Health Care Assistance
What will you do if you are unable to care for yourself? If you need care, realize that whether it is delivered in your home, in a day care facility, or in a nursing home, it is very expensive. According to Genworth, the national average for home care is $4,290 per month. The average for adult day care is $1,625 per month. The average for a semi-private room in a nursing home is $7,513 per month. The costs on the west coast tend to be higher.
If you have chronic, compromising health conditions, if your family history is marked by relatives needing medical assistance, or if you simply expect to live a very long life, you should consider how you will receive health care and living assistance. Will you earmark some of your resources for care? Will you buy insurance to pay for care? Will you spend down your resources and qualify for government-provided care? Financial planning for seniors must include a plan for your care should you need it someday.
Poor Investment Returns
If you are planning to take income distributions from investments to meet your spending needs in retirement, you need to plan for lower returns and prolonged bear markets. The stock market has a long-term historical average return of roughly 10%. But annual returns have varied dramatically. You should not expect future investment returns to be as high. Your plan should work with lower returns.
You need to determine how much of your investments need to be in the stock market in order for your retirement plan to work. You should take no more risk than that. The rest of your portfolio should be placed in more conservative investments like high grade bonds, CDs, money market funds, bank savings, and cash.
You will experience several periods during which the stock market crashes (e.g. October 1987, the Tech Crash in 1999-2000, the Great Recession of 2007-2009, the 2020+ Coronavirus Pandemic). When these events happen matters. The earlier in your retirement they occur, the more damage they can do. Financial planning for seniors includes making sure that you can weather a deep and prolonged bear market.
Living Too Long
How long do you think your retirement will last? The answer depends on how old you were when you retired, how long your ancestors lived (i.e. genetics), and your overall health. If you are unlucky, you may only live a short time in retirement. On the other hand, you might spend more years in retirement than you did working.
It is generally wise to assume that you will live a few years longer than normal life expectancy. According to Social Security Administration, a woman, age 65, can expect to live to age 87. A man, age 65, can expect to live to age 84. So, if you retire at age 65, you should probably expect to live 20-30 years, depending on your sex and the other factors mentioned above. Planning to avoid “living too long” is an important aspect of financial planning for seniors.
Numerous studies indicate that people consider their years in retirement among their most enjoyable. You can ensure that they are by living within your means and countering the financial threats that can arise in retirement.