Retirement signals the beginning of a new lifestyle. Long before you clock out for the last time, consider whether you are financially ready to pursue the life that you envision for yourself.
Do you want to travel every year? Are you planning to spend more time in your garden, or do you want to downsize your lot? Are you properly insured?
Just as you would plan for a trip, it’s even more important that you plan for retirement — the longest vacation of your life — with eyes wide open.
10 steps to a worry-free retirement
Here is a checklist of considerations you should revisit as often as necessary before taking the retirement plunge.
- Prepare a balance sheet
- Get rid of debt
- Conduct a house check
- Assess life insurance needs
- Think about long-term care insurance
- Consider variable annuities
- Oversee estate planning
- Ditch college expenses
- Look at the big picture with a planner
- Prepare a budget
1. Prepare a balance sheet.
Certified Financial Planner Bob FitzSimmons, who runs a firm in Lincoln, Neb., recommends preparing a balance sheet showing your assets and liabilities to determine your net worth. Assets include personal possessions of value, such as cash, real estate and investments. Liabilities are your debts and legal obligations. You can prepare your balance sheet on an Excel spreadsheet, a notepad with columns or Bankrate’s net worth work sheet.
2. Get rid of debt.Head into retirement with no debt on the balance sheet. “That’s the ideal world. It’s psychologically the most comforting,” says FitzSimmons. If you have debt, and retirement is on the horizon, go after the debts with the highest interest rates first. “You shouldn’t go into retirement with excessive credit card debt,” says FitzSimmons. Credit cards usually have the highest interest rates, with car loans generally coming in second. Rates on home equity loans are a little higher than for a mortgage. Pay off the mortgage last because it presumably has the lowest interest rate.
Planners generally advise that you look at the effective rate on your mortgage (which takes the mortgage interest deduction and real estate taxes into account) versus the after-tax yield on what you could earn with the money you would otherwise use to pay off your mortgage. In retirement, however, you don’t have employment income but savings to use to pay the mortgage. Tapping into retirement accounts could have serious tax consequences. Bankrate’s story, ” Keep the mortgage or pay off the house,” sheds light on this subject.
3. Conduct a house check.
If remodeling takes place pre-retirement, think about future needs. Barbara Krueger, a senior housing marketing specialist in Del Mar, Calif., and founder of www.seniorresource.com, recommends doorknobs and faucets with lever handles that are easier to maneuver. Consider installing a shower with a low threshold and a shower seat.
Thinking of moving? Stairs are often a concern. Many people look for a house with only one floor, but this doesn’t mean that you can’t be comfortable in a two-story house during your senior years. “If there are no landings and no changes of direction on the stairway, you can install a chair elevator, which is a lot less expensive than a standard elevator,” says Krueger. Big houses are another issue because of the maintenance that comes with them. “Just as many people will downsize so that the kids can’t come back to live,” she adds.
4. Assess life insurance needs.
Term and permanent life insurance are expensive at retirement age. “The theory is that by that time, you’ll have some liquid capital for your executor and have most of your expenses paid off,” says Certified Financial Planner H. Mark Saunders, president of Saunders Retirement Advisors in Richmond, Va. “You don’t have to replace a salary, and if the right decisions are made when electing your pension options, your spouse will be able to continue the pension and, of course, part of the Social Security.” Term insurance is generally recommended for young people who have debt, dependents and few assets. Nevertheless, a life insurance policy may be necessary for estate planning or other purposes.
5. Think about getting long-term care insurance.
“If you have a horrendous long-term care event and need nursing home care for 10 years, can you afford it without making anybody destitute because you have plenty of money?” asks Certified Financial Planner Michael E. Kitces, director of Financial Planning at Pinnacle Advisory Group in Columbia, Md. Even if you can, long-term care insurance might still be something to consider. Kitces says purchasing a plan is a prudent way for people to manage the risk of losing their assets. It’s not inexpensive, though, and it’s best to make the purchase when you are in your 50s to avoid even higher rates. Kitces says that for some people, the decision to purchase this insurance has less to do with protecting assets than to ensure a certain level of quality and flexibility of care.
6. Consider variable annuities.
While the consensus of detractors is that these insurance products are designed to enrich insurance firms more than investors, they do have a place in some portfolios. “We are seeing more variable annuities that are designed to create sustainable income in retirement without requiring immediate annuitization at the time of retirement,” says Kitces. To convert to an immediate annuity, or to annuitize, means you are turning over your cash balance to the insurance company in exchange for a guaranteed series of payments over a specific time period. Kitces says only a small percentage of deferred annuity contracts actually get annuitized. “The rest of them are either held until death or people take withdrawals from the assets,” he says. “People can now take advantage of regular withdrawals and living benefit riders on the newer contracts as a different option to generate income during their retirement years.”
7. Oversee estate planning.
Everyone needs an updated will, power of attorney and advanced medical directive. Saunders says the biggest mistakes he sees are with accounts that circumvent the will, such as joint accounts that transfer on death, IRAs, pension plans, life insurance proceeds and annuities. The executor of the estate may be left with no funds to carry out the decedent’s wishes. Yet many accounts are best distributed directly to people as beneficiaries rather than through the estate. For instance, if IRAs and certain retirement accounts list the estate as the beneficiary rather than a person, the ultimate beneficiary loses the advantage of being able to stretch the payouts over long periods of time.
“I recommend that people review their wills and accounts at least every five years,” says Saunders. “They should know who the beneficiaries are on the will and other accounts. A letter of instruction to the executor detailing who should receive which personal heirloom is not binding, but a great assistance to a family in mourning, which usually includes the executor.” Providing an inventory of personal data such as Social Security number, date of birth, bank account numbers, lawyers, insurance policy numbers, the location of a copy of the will and prepaid burial arrangements will allow loved ones to grieve without additional stress.
8. Ditch college expenses.
The time to fund your children’s college educations is when they’re small — not when they’re matriculating and you’re counting down to retirement. “Nobody should ever divert retirement contributions toward college funding for their children,” says Certified Financial Planner Joe Baker, president of ALCUS Financial Group, based in Mount Pleasant, S.C. “There are so many more options available to fund college for your kids than there are to fund your retirement,” he says. Your children can take advantage of student loans, grants, scholarships, student work programs and they can pay their own way by working while going to college as students did in the good old days. “If your child went to a school that cost $450,000 a year, that $200,000 college funding goal would pale in comparison to the amount that you would need to save to fund a 20 or 30-year retirement goal,” says Baker. Max out a Roth IRA each year instead.
9. Look at the big picture with a planner.
Before planning a date to retire, see a financial expert and get a broad comprehensive perspective on your whole financial situation and determine if everything is in order and you are really ready. “This can range from re-evaluating your portfolio — are your investments structured in a way that’s appropriate for someone transitioning into retirement — to insurance issues,” says Kitces. There are a lot of questions to ask that require answers: Are you still paying for disability insurance you won’t need any longer? How will your health insurance be handled during the bridge years between when you retire and when you are eligible for Medicare?
10. Prepare a budget.
Prepare a paper budget or spending plan to give yourself an idea of what your actual living expenses will be once you are not working. “There are some expenses that go away once you are not working,” says FitzSimmons. Food costs may go down if you used to eat lunch in a café or restaurant daily, commuting expenses will decrease, and if you were required to wear business attire, these expenses will be eliminated as well.
“What a lot of people overlook is the possibility for extensive travel, and this can be very important in the equation for some people,” says FitzSimmons. Think about where, and how often, you will want to travel. If you live in a cold climate, you may want to spend a few winter months in Arizona or Florida. Your current financial situation may not provide for travel or winters in warm climates. “There may be a need for additional ‘fun money’ that comes from working part-time,” says FitzSimmons.