As with most transitions, the key to
smoothly moving into retirement is preparation. As you make the shift from
accumulating wealth to spending down your savings, it can be hard to juggle the
many moving pieces of your strategy. But pre-retirees must be careful to avoid
common saving and investing pitfalls that can derail their plans. To help
ensure a successful retirement, follow these five steps.
1. Know what you spend
Knowing how much money you will need each
year to facilitate the lifestyle you want is essential to your financial
independence in retirement. And it’s critical to figure this out before retiring,
yet many fail to do so.
Without knowing what you need, how can you
ever know if you have enough saved to
retire? Making this mistake could mean running out of money or facing a
dramatic decline in your standard of living early in retirement.
The solution is to track what you spend
before retiring and adjust for any changes you expect to make in retirement,
such as more frequent travel or paying off your mortgage.
2. Look up your life
expectancy
According to the Social Security
Administration, the average 65-year-old man will live to age 84,
while the average 65-year-old woman will live to age 86. Medical advances
continue to extend life expectancies, yet despite the statistics, too many
pre-retirees believe they won’t live past age 75.
Living a long life is wonderful for many
reasons, but it can mean outlasting your assets if you don’t plan properly. If
a 65-year-old couple needs $50,000 per year in retirement and lives 10 years
longer than they planned for, that’s an additional half a million
dollars—and that doesn’t even account for inflation.
To make sure your retirement
savings last as long as you do, it’s better to be conservative
when estimating how long you’ll live — to err on the side of assuming you’ll
live longer. This is why I often create financial plans for clients assuming
they’ll live to age 95 or longer.
3. Plan for long-term care
costs
The average yearly cost for a private room
in a nursing home in New York in 2012 was $125,736 according to the Department of
Health and Human Services. That cost is expected to rise to $197,328
by 2022. Just a few years in a nursing home could easily derail even the
best-laid retirement plans. And HHS estimates that 70% of people turning age 65
will eventually need some form of long-term care.
There are ways to plan for this potential
expense, including buying long-term care insurance or setting enough money
aside to self-insure. One strategy that won’t work is relying on Medicare to
cover the cost. The program pays for only a limited amount of care.
4. Reconsider your risk
I recently met a client who was in
reasonably good shape to retire but had 25% of her savings in a single stock.
That particular company had experienced a rough couple of years while the
S&P 500 saw strong gains. Sadly, she had missed out on a great run in the
stock market by not diversifying, and she took an unnecessary risk.
The stock market is a fickle animal and
shouldn’t be underestimated. Things can move quickly in both directions, so
it’s important to have an appropriate strategy as you enter retirement. As you
transition from saving to spending, you have less room for error with
investments. Pre-retirees should re-evaluate their investment strategy and
consider the risks they are taking.
5. Anticipate inflation
(hint: stay in stocks)
The crash of 2008 left many investors
shellshocked. I’ve come across several people who are approaching retirement with
almost all of their money in cash. They tell me that they’ve done the math and
that their savings are more than adequate. But there’s one glaring problem:
They haven’t accounted for the effects of inflation. Since many people will be
in retirement for more than 20 years, inflation must be a consideration.
According to the U.S. Inflation Calculator,
it would take nearly $70,000 today to replicate living expenses of $50,000 for
someone who retired in 2000. While inflation may be just 1%-2% a year now,
there is no way to predict what it might be in the future. The best way to
protect yourself is to keep at least some portion of your portfolio invested in
stocks, which have proven to be one of the best guards against inflation over
long periods of time.
*This article was originally published on NerdWallet.com
Learn more about my services at www.sbvfinancial.com
