First, retire your debts
They may be called the golden years,
but soon-to-be retirees who don't get their financial affairs in
order before signing off may find the only gold around is in the
plating on their 25-years-of-service watches.
As the countdown to retirement enters its final
few years, experts say, they should be getting rid of debt, paying
off home loans, looking at insurance options and figuring out realistic
budgets that will allow them to live well without depleting their
savings completely. It may sound like a tall order, but it's the
best way people can make sure their post-work lives are more rewarding
than the jobs they left behind.
"Retirement isn't what it used to be,"
says Ross Levin, author of The
Wealth Management Index. "People are living longer.
They aren't necessarily working for the same companies forever.
They don't have that pension plan and they're more dependent on
their own savings."
The key, he adds, is for people to find a balance
between what they want and what they can afford to have.
"Clients are looking for ways to feel fulfilled
when they retire," Levin says. "But the two biggest mistakes
we see in financial planning come from clients that spend too much
and clients that save too much."
Pay off remaining debt
The best way to end up right in the middle is to start thinking
about debt first. Most seniors don't need that albatross hanging
around their necks after retirement. Credit card balances require
monthly payments, for instance, and those become tougher to make
when Fridays no longer bring paychecks with them.
"Pay it off and figure out where the credit
card debt came from because if you retire and build up credit card
debt, you're a dead duck," says Meg Green, a certified financial
planner based in Miami. "To retire with a bunch of debt --
you won't be able to sleep at night. It's not fun."
Consider using savings to wipe away most or
all of the debt as soon as possible, provided doing so won't mean
living off bread and water at 70. Once that's done, feel free to
charge -- as long as the balances don't start creeping back up again.
That way, you can get air miles and other rewards that will come
in handy for those trips to Tampa, Fla.
Kiss your mortgage
As for larger obligations, such as home mortgages, the best
time to say goodbye is just before retirement. The move makes sense
for all the debt-related reasons mentioned above, but also because
of some tax-related ones.
Remember that in the last few years of a mortgage,
most of the monthly payment goes toward principal, rather than tax-deductible
interest. Because the standard deduction is worth several thousand
dollars, people late in a home loan who have no other deductions
to itemize will often find the standard deduction to be their best
option. As a result, someone near retirement who is, say, 27 years
into a 30-year fixed-rate mortgage, generally doesn't get any benefit
from keeping the loan.
"If it's feasible and it looks like you
have more than enough savings, you should go ahead and pay off the
mortgage," says David Morganstern, a certified financial planner
at Capital Management Consulting in Portland, Ore. "The tax
deduction is almost negligible."
Taking that step will free up more money to
live off of, too, because monthly benefits checks will no longer
have to go toward debt service.
"We like to get that satisfied so that
all of the money coming in -- pensions, Social Security -- is income
and doesn't have to go toward the mortgage," Morganstern says.
Count on Social Security
-- a little
How much will that income be? That depends on how late in life
a retiree decides to quit. The good news is that there will be some
money coming from the government each month if you've been working
all your life, despite all the talk of revamping the Social Security
system that's been making the rounds during the past few years.
"The fear is that Congress is going to
take away Social Security and that's just not true," says Carolyn
Cheezum, public information specialist at the Social
Security Administration. "You've earned it and the money
will be there for you when you retire."
When you retire determines the size of your
benefits overall, as well as the size of each monthly check: The
earlier you retire, the less money you receive, the later you leave,
the more you receive. A middle-of-the-road person would retire between
65 and 67 and receive average benefits, while somebody who worked
until age 70 could expect to receive more cash.
Because it can be difficult to decide when retirement
makes the most sense, concerned seniors may want to check out the
Social Security Administration's Retirement
Benefits booklet. It provides more information about the
choices available to people. Someone a few years from retirement
can also get a better idea of what their benefits will be by ordering
Earnings and Benefit Estimate Statement, which provides an individualized
look at their earnings history.
Company pensions kick
In addition to Social Security income, some elderly workers
can count on company pensions for retirement money. Most benefits
are paid out in the form of an annuity -- a fixed monthly payment
for the rest of your life. The formula used to calculate the annuity
typically includes your final salary, years of service and a fixed
percentage rate, often 2 percent.
When you leave your job, your pension benefits
stay in the company-sponsored plan, where they can be claimed at
age 65. Some pension plans can be tapped even earlier. However,
like Social Security, your benefit may be reduced because you will
be receiving benefits over a longer period.
Seniors who don't know if they have benefits
coming to them can find out by contacting the Pension
Benefit Guaranty Corporation.
So now that you know how to eliminate debt and figure out how
much income to expect, what else is there left to do but polish
up the golf clubs and tell the boss what he can do with his memos?
For one, make sure the financial foundation you've laid is protected.
Budgeting wisely can provide some security, and the right kind of
insurance can provide even more.
You may have heard the rule of thumb that says a retiree's expenses
tend to be 70 to 80 percent of pre-retirement expenses. Unfortunately,
that's not always the case. Whether you plan to retire at age 55 or
75, you may have to think about compromising on some things to keep
from eating up all your savings soon after leaving the office.
Retirees can live on substantially less than what they were
living on before, "but not at the same lifestyle," says
Michael Nieswiadomy, a professor of economics at the University
of North Texas who co-wrote the book Expenditures
of Older Americans.
Most retirees spend less on clothing and gasoline
because those are employment-related expenses. But at the same time,
out-of-pocket spending on health care goes up.
"After that, everything's a choice as far
as what you choose to live on and ultimately how long your assets
last," Nieswiadomy says.
If seniors want to enjoy the style of living
they're accustomed to -- dining out, taking vacations, yakking long-distance
with the kids -- they should be prepared to shell out almost as
much in retirement as they did when they were working.
"To an awfully large extent, what people
spend depends on how much they can afford," says H.K. Hebeler,
a retired Boeing Aerospace executive whose Web site, Analyze
Now, offers retirement planning advice and tools.
Hebeler says that he used to think the best
way to estimate one's spending needs in retirement was to make out
a detailed budget.
"But the problem is that you don't have
a lot of visibility about the future," he says. "When
you're 55 or 65, you can't really see what it's going to be like
when you're 75 or 85."
Hebeler advises the soon-to-be-retired to draw
up a detailed budget and then throw in a couple of scenarios: taking
two trips annually to see each child, paying unexpected medical
bills, forking over $500 for a new water heater. He also recommends
keeping aside at least a year's worth of living expenses as a contingency
Insurance needs change
Still, serious problems can foil even the best-laid plans. That's
why soon-to-be retirees should consider insurance as a way to find
some peace of mind. The three major types of coverage that are most
worth looking at are long-term care insurance, Medigap insurance
and life insurance.
Long-term care insurance helps to cover what
Medicare doesn't. This can include long-term nursing, and rehabilitative
and day-care services at home, in a community center or at a nursing
home. It's insurance for the middle class. The poor and the wealthy
don't need to bother: Medicaid pays for the poor, the wealthy can
pay for themselves. Learn more about how long-term care insurance
The same goes for Medigap insurance, which pays
for some out-of-pocket medical expenses, such as deductibles and
co-insurance. A few Medigap policies also pay for outpatient prescriptions.
Life insurance is a third option. When you are
deciding whether to buy it, says Harold Skipper Jr., professor of
risk management and insurance at Georgia State University, "the
underlying question at every age is, 'Will my death create significant
financial hardships for people I care about?' If the answer to that
question is no, either because it wouldn't create a hardship or
you don't care about them, you probably don't need to buy life insurance."
If you are married or have a domestic partner,
for example, your savings, pension and Social Security income might
offer sufficient support after your death. In that case, your demise
might not create a significant financial hardship.
A final word of caution: Don't go overboard,
"My guess is that there's a lot of people
in their 60s and older who have more insurance than good financial
planning would suggest they need," he says. "On the other
hand, there are plenty of people who don't have enough. My advice
is to be skeptical. Never buy anything without comparing with one
or two competitors."
By following these steps and taking care of
loose ends before retirement, experts say, soon-to-be retirees will
find the Golden Years a little brighter.
Lucy Lazarony , Holden Lewis
and Michelle Samaad contributed to this story.