Moving smoothly into retirement
Retirement is on the horizon. You've planned diligently
for the day you can quit working and start enjoying your post-employment
lifestyle. But the actual mechanics of moving from collecting a
paycheck to retiring on your savings and, for some lucky retirees,
a pension, is more complicated than you might think.
Which assets do you tap first? How much money can
you withdraw? Where do you get medical coverage? Finding the answers
to these questions can befuddle the most conscientious retiree wannabe.
Kevin O'Fee, managing director of Retirement Planning
Services at New York Life Investment Management in Parsippany, N.J.,
likens retirement planning to the Mona Lisa and transitioning into
retirement to a Picasso abstract. Da Vinci's signature portrait
is well-defined and structured, while Picasso's abstract works are
just as beautiful, but more difficult to interpret.
The first question to answer as you head toward retirement is when
should transition planning begin? Most experts say to start preparing
and researching at least a couple of years before you intend to
leave the workforce. The more time you leave for preparation, the
easier it will be to meet your goals.
"You need to take as much of the mystery out
of your retirement as possible," says Jim Bell, president of
Bell Investment Advisors in Oakland, Calif.
Once you decide your timetable, then it's time to
look at three specific retirement areas and how you plan to meet
1. Income needs: What income streams can
you expect? Do you have a pension? How much is it and will the
amount vary on when you retire? Also look over your personal retirement
accounts. This includes 401(k) plans, individual retirement accounts,
both traditional and Roth IRAs, as well as your savings and stock
2. Expected expenses: Conventional wisdom
is that a retiree needs 80 percent of his salary to retire comfortably.
However, the actual amount can vary considerably depending on
what type of life you're going to lead.
If you're planning to travel widely, that could
increase what you'll need beyond the 80-percent mark. On the other
hand, if you plan to work part-time for a while after your official
retirement, you might not need as much cash upfront. Similarly,
if you sell the family home and downsize to a condo, that could
lower your retirement income needs. The living expense difference
could be even more dramatic if you move to a small home in another
region with a lower cost of living. The point is to make a realistic
appraisal of how much money you'll need.
3. Life expectancy: Back when Social Security
was instituted, people were lucky to live to 65. Now many of us
are living into our late 70s, 80s and even 90s. Remember that
annual life expectancies are medians, not averages. If you're
healthy, you could live way beyond your age group's life expectancy.
How long you anticipate living will impact how much money you
will need for retirement. Obviously, the longer your life, the
more years you'll be retired and the more income you will need.
Your answers to the questions raised in these areas
should give you a reasonable idea of whether your planned retirement
schedule is doable. If so, then it's time to look at some specifics
to move from working to retiring.
Financial responsibilities can lessen during
retirement, reducing or eliminating the need for certain kinds of
coverage, particularly life insurance. For most retirees, the kids
are no longer financial dependents and your spouse will inherit
your retirement income upon your death. That means you may be able
to get by without a life insurance policy. Don't overlook your home
and auto coverage. You may be able to cut back here, too.
But those premium reductions
might be offset if you purchase a long-term care policy. New York
Life representative O'Fee is an advocate of such insurance. "For
some people, it is the right thing to do," O'Fee says. "I
just bought some and I just turned 47."
Steve Vernon, however, believes that such insurance
is a bad investment since it requires you to spend enormous sums
for coverage you might not need. Vernon, author of "Live
Long and Prosper: Invest in Your Happiness, Health and Wealth for
Retirement and Beyond," recommends skipping the long-term
care policy and saving what you spend on insurance premiums, between
$1,000 and $2,000 annually. That way, he says, if you do require
long-term care, you can just tap that savings account and the money
will belong to you no matter what.