Friday, 19 February 2016
It's easy to dream about retirement.
All that sleeping in followed by bliss, spending more time with the grandchildren, and perhaps pursuing a passion project.
But the best way to ensure that your post-career dreams don't turn into financial nightmares, is to do some meticulous planning after having a series of hard reality checks—not just with yourself, but also with your family and financial planner.
Jennifer Williams, a BBVA Compass financial planner, says that the earlier you can start preparing and crunching numbers, the better. "Most people don't really understand how much they have to save to live the retirement lifestyle they want," she says. "Looking at those numbers can be very devastating to some people, and so the earlier you look at it, the more you can mentally prepare. You can save more, adjust your spending habits, make smart purchases along the way, and just realize what you want to do in retirement."
A 2014 AARP study reports that 43 percent of workers 50 and older say they began saving too late for retirement. One way to make sure you're on the good side of that statistic, says Williams, is to consider the actual costs of your lifestyle choices. Will you simplify? Will you travel? Will you sell or buy a business? And most important, how much will your health care coverage and expenses cost you? If you're retiring before Medicare kicks in at 65, you'll be shouldering more of your own health care burden, as few companies offer retiree health coverage benefits these days.
So what goes into a retirement plan? While everyone's situation is different, the best way to understand what you have and what you need for retirement is to talk to a financial planner. You'll need to consider:
Not only the costs you anticipate, such as monthly insurance premiums, but the ones you don't, including accidents, long-term care, or chronic illness. The AARP study indicates there is a major gap between that point at which people think they should begin saving for health care costs, and when they actually begin saving. Among workers over 50, 68 percent believe one should begin saving at 35 years old or younger, but only 28 percent of non-retirees began saving at that age.
What are your goals during retirement? Will you work, play, volunteer—or a combination of all the above? How will being home affect others around you? Career coach Juliet Murphy says one of the most essential conversations to have with your family is what the day-to-day will be like—even seemingly insignificant details, like who handles the television remote and what programs to watch. "They're small things but they become big problems," Murphy says. "Sometimes even the best couples end up with divorce," she says, because for many years, at least one person was out of the house. The dynamic changes radically upon retirement.
Are you taking care of grown children? Grandchildren? Your parents? Cutting the financial cord usually begins with a difficult conversation. If you're financing your grown children, who could in theory be supporting themselves, you may need to wean them off your dole. If you're supporting other relatives who are truly dependent on you, you'll need to factor in what your obligation is, and if there are any programs or organizations that can help lessen the burden.
Sometimes it makes sense to simplify and move to a smaller place that requires less maintenance, where you don't have to spend as much on utilities, and where your monthly mortgage might be lower. Williams says to factor in all the costs—including the move itself and any home modifications required. There's also a consideration about a transitional home, in case you need to sell one before buying another: Buying a new place contingent on the sale of your old one has gone the way of the dodo.
Murphy says to get your retirement in order first before you notify your boss. Don't allow so much notice that you might be forced out too early, but try to allow enough for a smooth transfer of knowledge and any training you might be able to contribute to fill the gap when you're gone.
If you plan on taking some sort of job afterward, what will that be? Will you need additional training to become current in the industry? Will you need licenses or certifications? Murphy specializes in helping people "rebrand" themselves. What's the brand-new you? When you have clarity on that, it's easier to sell your services to clients or a new employer.
Before you know if you have enough to live off, you have to understand your goals and how much money you'll have each month. This is a critical conversation to have with your financial planner. Williams says to consider vehicles, charitable contributions, family gifts, and investments. Sometimes you'll realize you have to work longer, save more, eliminate debt, sell property, or wait for more Social Security to ramp up before you can leave your job. You also need to know the tax implications of early withdrawals on your 401(k), and how bringing in other income can affect your tax bracket. "We'll include all of that in our plan and we can assume a rate of return, so we also have to consider their asset mix and what their risk tolerance is because you still have this bucket of money that's supposed to last for at least 30 to 40 years, depending on how long you live and when you retire," Williams says.
"I'd say if you're going to start early, review the plan annually with your advisor," Williams says. Life may throw a curveball or two, and perhaps just before you're ready to announce your retirement, something doesn't go as planned. "The earlier you can get in front of it, you can manage expectations," Williams says.
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