A couple of years ago, we wrote an article called The Best Is Yet to Come, which explained why retirees are happier and more content than younger folks. One factor fueling retiree happiness is financial security. To that end, we help people plan for retirement so they will not have to worry about every expenditure. In today’s column, we give an overview of the most common retirement planning questions.
- How do I know whether I have enough money to retire?
Some people obviously have more money than they will ever spend, but most retirees are not in that situation and, therefore, need a plan. Some people use spreadsheets, which can give a false sense of security because they assume a consistent return on investments each year. There are too many variables, such as one-time inflows/outflows, inflation, and the variability of investment returns. The best projections are created using financial planning software that can run hundreds or thousands of scenarios, using randomized investment returns. This type of planning will give you a range of outcomes, the median (most likely) outcome, and the probability of success (i.e., not running out of money).
For more details on this topic, read: Retirement Planning – What’s the Best Plan
- What are the steps to create a retirement plan?
Financial advisors use various programs to determine the likelihood of a retiree outliving his or her money. The output of any software program will only be as good as the data you put into it. That’s called the “garbage in, garbage out” principle. So you need to provide your financial planner with reasonably accurate numbers in the following areas:
- Planned Spending:
- Core retirement living expenses – How much you plan to spend in after-tax dollars each month/year, and
- Large one-time expenses – This includes items such as cars (if you pay cash), home remodeling, a child’s wedding, etc.
- Do you have expenses that end during retirement (e.g., mortgage)?
- Financial assets – You will need a list of all your accounts (e.g., 401k, IRAs, cash in the bank, real estate) and all your liabilities (mortgages, car loans, consumer debt).
- Retirement income sources – List the expected amount and potential start dates for Social Security, pensions, annuities, rental income, and part-time employment. Also, list expected one-time inflows such as selling a piece of real estate or an expected inheritance.
You can expect your financial advisor to ask you about your risk tolerance, preferences, and past experiences.
A good article related to this topic is: Why Volatility Matters
- How much will I spend in retirement?
Most people’s spending remains at about the same level as pre-retirement. The adjustments to pre-retirement spending typically involve one of these:
- Changes in the amount of travel spending
- Changes in healthcare costs, especially if you are retiring prior to age 65 when you will be eligible for Medicare.
- Changes in your housing costs based on downsizing or paying off your mortgage.
- Expensive new activities or hobbies (e.g., golf, shopping)
A good article related to this topic is: Spending Less than Planned in Retirement
- How much should I budget for healthcare costs in retirement?
I recommend approximately $5,000–$7,000 per person, per year beginning at age 65, depending on your health and family history. A study by Fidelity estimated that the average 65 year-old couple will spend $260,000 on healthcare over the course of their retirement. I tried to find other estimates that were lower, but most other estimates I found were higher. That $260,000 includes your premiums for Medicare parts B and D, which account for about a third of your total retirement healthcare expenses. The remaining two thirds comes from deductibles, co-pays, and medical services not covered by Medicare. Long-term care expenses are also not included in the $260,000 figure.
For more detail on this topic, read: Healthcare Costs in Retirement
- At what age should I collect Social Security Benefits?
The program was designed for workers to start collecting at their Full Retirement Age (FRA), which is 66 if you were born during or before 1954. Your FRA increases by 2 months for every year after that up to a maximum FRA of 67 for those born in 1960 or later. You can opt to collect as early as age 62, but your benefits are reduced by approximately 6.25% for every year prior to your FRA. On the other hand, your benefits will increase at 8% each year you delay benefits beyond your FRA. You can defer up to age 70, in which case your benefits would be 32% higher than the age 66 amount.
You will collect the same amount whether you start receiving benefits at 62, 70, or any age in between if you live to the average life expectancy for someone who is already 65. You should start collecting early (62) if you are in poor health, with reduced longevity. You should defer as long as you can (70) if you or your spouse expects to outlive the average life expectancy.
It is important to remember than when one spouse dies, the surviving spouse keeps the larger of the two benefits. So, it is a good idea for the spouse with the highest benefit to let his or her Social Security increase as long as possible so that the surviving spouse will have the largest benefit.
For a more detailed explanation, read: Breaking News on Social Security
NOTE: Part 2 of FAQs about retirement planning will follow next week.