Baby Boomers – defined as the generation born between 1946 and 1964 – are heading into retirement by the millions each year. The first Baby Boomers reached “full retirement age” for Social Security in 2008, and the last of them will reach this milestone in 2031.
The retirement landscape has changed dramatically since the first Boomers were born. These changes mean that retirement planning is more complex and uncertain than it was for previous generations. Let’s review some of the top retirement concerns if you’re planning for or already in retirement, and some possible solutions for building a secure, comfortable retirement.
How Much Income Will You Need in Retirement?
The first step in building a secure, comfortable retirement is figuring out how much income you’ll need to cover your expenses in retirement. The best place to start for creating this estimate is with what you’re spending today. If you don’t already use a tool like Mint or Quicken to track your spending, consider doing so, even if it’s just for a few months. Or, if you’re computer savvy, you can build your own expense tracker using a spreadsheet program like Microsoft Excel, (Mac-based) Numbers, or Google Sheets.
Some of your current expenses may increase once you retire, while others will decrease or go away entirely. Spend some time visualizing what your ideal retirement will look like, and what you’ll need, want and wish to spend money on.
Income uncertainty is one of the top retirement concerns, and so having an accurate spending projection for retirement is very helpful in building a secure, comfortable retirement.
Longevity and the Risk of Outliving Your Savings
Overall, Americans are living longer than previous generations. We often say that our clients are very likely to live long and robust lives.
But one downside of living longer is that your savings will have to last that much longer. One of the biggest retirement concerns for many seniors is running out of money in retirement.
If your family health history makes it likely that you’ll live longer than average, there are a few smart strategies that you can use to reduce the risk of outliving your savings.
First, work with a financial advisor to build a retirement plan. Your plan should include realistic assumptions about what your income need will be, how long you’re likely to live, and what inflation and investment returns will be, on average. Update your plan regularly, so that it always reflects your current circumstances.
Next, consider delaying when you claim your Social Security benefit. For every year you delay claiming your benefit past your full retirement age and up to age 70, your payment increases by 8%. That means that your Social Security benefit at 70 is 24% higher than it would be at age 67.
Finally, if you’re fairly confident that you’ll live longer than average, consider using some of your retirement savings to purchase an immediate annuity from a highly-rated insurance company. You’ll exchange a single payment for an ongoing, guaranteed stream of income for a specified period of time or for your lifetime. Studies have shown that annuity income makes a retirement plan stronger, especially when you’re likely to live relatively long.
Filing for Your Social Security Benefits
For most Americans, Social Security is the foundation of their retirement. For many, the benefit provides more than half of their retirement income.
The Social Security program provides a monthly income that you can’t outlive, and the payments include automatic cost of living adjustments (“COLAs”) that are meant to ensure that your benefits keep pace with inflation.
What many don’t know is that you have a lot of flexibility in terms of when you claim your Social Security benefit, and the decision can have a huge impact on your income in retirement.
The starting point for determining your Social Security benefit is your “full retirement age”, which is based on the year in which you were born. If you were born between 1943 and 1954 your full retirement age is 66. If you were born between 1955 and 1959, your full retirement age is between 66 and 67. Finally, if you were born in 1960 or later, your full retirement age is 67.
You can claim a reduced Social Security benefit as early as age 62, or you can wait past your full retirement age to claim your benefit, and earn delayed retirement credits, up to age 70.
Given these options, what’s the best strategy? That depends on a number of factors, including your life expectancy and other sources of income in retirement. Consider working with a financial advisor who’s experienced in Social Security planning to help you develop your strategy.
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.
Income Distribution Planning
If you’ve diligently saved for retirement, you’ve probably accumulated investments in a variety of account types, perhaps including a 401(k) or Traditional IRA, a Roth 401(k) or Roth IRA, and/or a taxable brokerage account.
The goal of effective income distribution planning is to pay the least amount of tax over time, so that your net income is as high as possible. Because the tax treatment is different for each type of account, when it comes time to take distributions for retirement income you’ll want to have a strategy for doing so.
For example, in years when your income is low – perhaps because you’ve retired but not yet started Social Security – you may want to take distributions from a pre-tax account like a 401(k) or Traditional IRA, or realize capital gains in your taxable brokerage account. Alternatively, in a year when your income is high – maybe because you’re receiving Social Security, pension income or deferred compensation – it may make sense to take a distribution from a Roth account.
In most years, you’ll take some income from multiple accounts, with the goal of managing your tax brackets. An experienced tax or financial advisor can help you develop a retirement income planning strategy.
Needing Care Later in Life
Depending on your family heath history and your own health and wellness, you may want to plan for the cost of health and personal care later in life.
The most common type of long-term care is personal care – help with everyday activities, called “activities of daily living”, that include bathing, dressing, grooming, using the toilet, eating, and moving around. Long-term care can also include support like meals, adult day care, and transportation services.
People often need long-term care when they have a serious, ongoing health condition or disability. Typically, though, it develops gradually, as people age or as an illness or disability worsens.
The Risk of Investing
Studies have shown that investors respond asymmetrically to investment risk. What does that mean? It means that the pain you feel from a 10% decline in the value of your investments is greater than the pleasure you get from a 10% increase.
Also, most investors don’t know how much investment risk they need to take to achieve their goals, because they don’t have a robust financial plan. With a plan in place, you can ensure that you take no more investment risk than is necessary to achieve your goals.
Investing is inherently risky. If you invest in anything other than cash or government bonds – which most of us need to do – then you’re certain to see your investments fluctuate in value from day to day, or month to month. And those fluctuations in value can be very stressful for some.
Consider working with a financial advisor who’s experienced in building retirement plans for clients like you. Part of the planning process should include measuring your tolerance for investment risk – how you’re likely to respond to your investments fluctuating in value. It should also help determine how much investment risk you need to take – i.e. how much of your portfolio should be invested in stocks versus conservative bonds and cash – to achieve your goals.
And always keep in mind that you’re not just investing to retirement – whether that’s at age 65, 67 or even later – but through retirement. If you plan to retire in your 60s, there’s a real possibility that your money will need to last 20 or 30 years. And that means that inflation can erode the purchasing power of your savings. So you’ll probably need to maintain a reasonable exposure to stocks in your investments, so that your returns keep up with inflation.
Many people have an aversion to contemplating their own mortality, and so it’s no surprise that not everyone has a current estate plan.
An estate plan is nothing more than a set of documents prepared in advance to help manage your affairs in the event of your incapacity or death. An estate plan should be set up with the assistance of an attorney experienced in estate law (resist the temptation to DIY!).
An estate plan typically includes a will, a durable power of attorney, a health care directive, and, possibly, a revocable living trust. The will is the document that addresses the distribution of your assets, and if you have children, appoints a guardian for them. The power of attorney appoints someone to make decisions on your behalf if you’re unable to do so. The health directive outlines the medical treatment you want – or do not want – in the event you’re incapacitated. And the trust fulfills the same purpose as the will, with the added benefit of avoiding the probate process, which may or may not matter, depending on which state you live in.
When people understand the real purpose of estate planning, and its benefits, they’re often very motivated to get a solid plan in place. After all, knowing that your wishes will be carried out provides security, comfort, and peace of mind.