Almost 10,000 Americans turn 65 years of age each day. Most are poorly prepared for what lies ahead. We have isolated seven questions that everyone must answer BEFORE they retire. These questions are:
1. When Will You Retire?
2. Where Will You Retire?
3. When Will You Take Social Security?
4. What Will Your Health Insurance Coverage Be?
5. How Much Risk Do You Need?
6. What Will You Do?
7. How Will You Handle “The Unknowables”?
When you retire holds the place of priority among the list for obvious reasons. Once you stop working, you start withdrawing and depleting your accumulated pool of financial resources. One fun fact: the average retirement age in the U.S. has changed very little over the past half century. Age 63 has remained the average retirement age largely because the early date for Social Security kicks in at age 62. What has changed is life expectancy. We have written extensively on this topic recently. For many individuals, planning to live past age 90 is realistic.
It is not uncommon for retired couples to relocate after a few years in retirement in order to be closer to family. Living costs in South Carolina are quite different than they might be in other parts of the country. Perhaps you plan to downsize but stay in the area. If so, don’t expect to reap a real estate windfall in that process. Our experience tells us that this generally amounts to an exchange of value from an older, larger property into a smaller, equally as expensive home.
As we mentioned earlier, many individuals start collecting Social Security at or around age 62. For most, this will end up being a financial mistake. Delaying your start date for Social Security increases your monthly benefit by over 8% each year that you wait from age 62 to 70! There are of course many factors that weigh on the decision, but if you can delay, in most cases you should.
Healthcare expenses of all kinds can be a heavy burden in retirement. Yes, many of these expenses will be covered by Medicare or Supplemental Insurance, including continuing coverage from your employer. All said, however, a significant portion of healthcare costs will not be covered by any type of insurance. Research points to more than $200,000 in uncovered medical expenses between age 65 and death for the average retired couple.
How Much Risk?
Investing means taking a risk; Not investing also means taking a risk. Cost of living increases, (inflation), are the silent enemy in retirement. An individual turning age 65 this year has experienced an average inflation rate of 3.5% per year during their life. Almost everything that you buy costs more each and every year. If your resources don’t keep pace, your lifestyle has to decline.
What Will You Do?
Retirement can be a time for reinvention and regeneration. Many of our retired clients find great meaning by doing volunteer work, mission work or just engaging more directly with their children and grandchildren. Some even opt to continue working part time. Whatever the case, having sufficient activities to fill your time is crucial to a satisfying retirement.
Retirement is full of surprises, and many of these can’t be anticipated or known in advance. There will be financial surprises, of course, but also psychological and physical surprises. These surprises, or unknowns, will likely take both positive and negative forms.
Planning for retirement is indeed multi-faceted and complicated but can reap handsome and long-lasting returns. The best time to start is five or more years prior to retirement. The second best time is…today. Ready for a real conversation?