Any experienced mountaineer will tell you that the most dangerous part of a climb is the descent. More serious accidents and fatalities happen when climbers are descending than when they are climbing upward. There are lots of reasons for this.
Climbing can be very physically demanding, and alpinists often descend with very little energy, making them less able to navigate the route down.
Climbing is also mentally taxing due to lack of sleep, lack of oxygen, and the high stress of navigating dangerous terrain. In addition, once a climber has summitted, there’s a natural tendency to relax mentally, which can prove deadly. Climbers sometimes race against weather systems and the onset of darkness to reach the summit and then return to base camp. Downclimbing in the dark and in bad weather greatly increases the risk of an accident.
Conceptually, navigating retirement is a lot like descending from a summit. After spending decades “climbing” financially, you’ve reached the summit. As is the case with mountaineering, the transition from ascending to descending happens quickly. Climbers can rarely afford to linger on the summit. Similarly, retirees quickly transition from accumulating assets for retirement to spending down those resources.
Just as the descent is dangerous for climbers, the descent for retirees brings many risks. You may have thought the struggle to reach the summit (i.e., saving and investing) was hard. But the route ahead is actually no less challenging. Let’s consider the hazards you face in retirement and how to safely navigate around them.
Social Security
Now that you’re retired, you may realize how valuable Social Security is as a source of income. It’s not so much the amount of the benefit you’ll receive, although that may be significant. Rather it’s that there is no other income source quite like it for retirees. Social Security is guaranteed by the federal government. It’s paid for as long as you (and your spouse) live, and it’s adjusted for inflation so that you don’t lose purchasing power.
However, Social Security does present some risks. If you don’t manage it well, you may end up receiving far less in benefits than you’re entitled to. The longer you wait to take your benefits, the higher they’ll be. You can delay receiving your benefits up to age 70, and most people should do so.
Have you heard of the Social Security “tax torpedo?” If your income in retirement is above certain thresholds, you’ll end up paying income tax on a substantial portion of your Social Security benefit. You can avoid getting hit by this torpedo through strategic income distribution planning between the ages of 59 ½ and age 72.
Charitable Gifts
Let’s imagine that you’re charitably inclined and that you plan to continue to support those organizations in retirement. There’s a hazard and an opportunity before you.
You could take distributions from your qualified retirement accounts, pay the necessary taxes and then make a cash contribution to your favorite charities. But, if you’re 70 ½ or older, that’s not the best way to make your charitable contribution.
Instead, you can make a qualified charitable distribution (or “QCD”) directly from your retirement account to a qualified charity. These distributions are excluded from your taxable income and they help satisfy your annual required minimum distribution (or “RMD”). You should discuss this strategy, and the rules for QCDs, with your tax professional.
Medicare and IRMAA
If you’re 65 or older, you’re typically on Medicare for your health insurance. You might think there’s little to think about other than selecting a Medicare plan and possibly a Medicare supplement plan (or, alternatively, enrolling in Medicare Advantage). However, there’s a hazard here, too, and it can result in substantially higher Medicare Part B and Medicare D premiums.
If your modified adjusted gross income (or “MAGI”) is above certain levels, you’ll have to pay an Income Related Monthly Adjustment Amount (or “IRMAA”). The standard premium for Medicare B in 2021 is $148.50 per month. But, if your income is above $222,000 (for a joint tax return), your premium is $297 per month. Also, Medicare looks at your tax return from two years ago. So, the decisions you make about your income and investments this year will impact your Medicare premiums two years from now.
Staying on Route
In the mountains, there are no signs, no fences, no bright yellow tape, and no lights marking the path. Mountaineers have to navigate using a map, compass and GPS, together with their familiarity with the terrain.
In retirement, there are also no warning systems, guardrails, or speedbumps to keep you on track. You have to navigate your retirement with analytical tools (like software programs), written financial plans and good financial sense. Increasingly, retirees are opting to rely on guides, like a financial advisor.
The way to stay on track – in the mountains and in retirement – is to frequently confirm that you’re on track to your destination. Mountaineers check their navigation tools as soon as they have any concern that they may have deviated from their route. Retirees should do the same thing, if they have any concern that they may not be “on track”. Staying “on track” in retirement means confirming periodically that your resources remain adequate to support your spending over your entire lifetime.
The hazards for retirees come in the form of unplanned large expenses, unexpected inflation, living “too long”, lower-than-projected investment returns, and higher tax rates. You can navigate, or perhaps even avoid, these hazards by planning for them. Review your resources and your spending on both your core living expenses and your anticipated discretionary spending. If you find you’re off track, you can take early corrective action and head in the right direction again.
Long-Term Health Care
If we’re fortunate, we’ll remain healthy, active and alert well into our later years. But just as climbers slow down as they get older, we all slowly decline in retirement. Physical and/or cognitive impairment is one of the greatest risks in retirement.
What will you do if you’re no longer able to care for yourself? Who can provide the care you’ll need? How long will you need it, and how will you pay for it?
Long-term care, provided at home or in a facility, is expensive. In Portland, Oregon, care at home can cost $5,800 or more per month, assisted living $4,800 or more per month, and a private room in a nursing home $12,000 or more per month. In Santa Cruz County, California, the costs are $6,300, $6,800, and at least $12,500, respectively.
So, it’s a real hazard that you’ll need care, that it will be expensive, and that it will last a long time. Make sure you have a plan for the possibility that you may need care someday.
Estate Planning
It’s said that there are bold climbers and old climbers, but there are no bold and old climbers. Old climbers knew when to back off and retreat when the dangers became too great. They reached old age by making smart decisions in the mountains, together with a bit of luck. However, even old climbers eventually pass away.
Those who successfully navigate retirement will also eventually reach the end of their lives. This final chapter presents still more potential hazards. What kind of care do you want at the end of your life? Who should make decisions for you about your health care and your financial affairs? What will happen to your estate, and who will administer it? Do you want a religious service, or a celebration of life?
Rather than leaving these important issues to chance, you should create an estate plan. Your plan should include a will, health care power of attorney, power of attorney for finances, an advanced health care directive and, for many, a revocable living trust. You should also consider writing a letter to your loved ones explaining anything that’s important to you that isn’t in your formal estate plan.
Final Thought
Climbing the route that begins when you start working and reaches the summit when you stop working is hard. It’s a time of diligent saving and smart investing. But the descent route that starts at the summit and ends when you pass away is no less arduous. It’s a period of prudent spending and planning. Make sure that you plan for and navigate around the hazards that lie ahead.
Guides for Retirees
If you need help staying on course in retirement, consider working with a Certified Financial Planner™ (CFP®), Certified Public Accountant (CPA) or a Chartered Financial Consultant® (ChFC®) or an RICP (Retirement Income Certified Professional®). Advisors who hold these designations have met rigorous educational, experience and ethics requirements.
If you’re looking for help with navigating retirement, contact us today to see how our team at Springwater Wealth can help you.