You are young and life is long
And there is time to kill today
And then the one day you find
Ten years have got behind you
No one told you when to run
You missed the starting gun
There's an old saying about time. That it is the most valuable thing a person can spend. Spending time with your spouse or partner, spending time with your children, spending time doing the things you are most passionate about defines living. As a planner, I would add that it is also critical to allocate time to planning for the future. Having worked with many families over the past two plus decades, one of the top concerns for people at all levels of wealth is outliving their money. Determining how much money one will need in retirement is a process, one that takes into consideration the constant of the passage of time and a vast array of other potentially positive and negative variables. A proper retirement forecast is also a process that needs to be documented in great detail so that it can serve as a guidepost with each passing year.
The process should include looking at your current financial situation and developing an approach based on your unique goals, time horizon and risk tolerance. The process should also take into consideration all of your known expenses, your potential sources of retirement income and should project what your income may look like each year in retirement.
Expecting the unexpected
We all have our "blue sky" visions of the way retirement should be, yet the future may and often does unfold in ways we can not predict. So, as you think about your "second act," you may want to consider some life and financial factors that can abruptly arise:
You may see retirement as an extension of the present rather than the future.
This is only natural, as we all live in the present, but the future will arrive. The costs you must shoulder later in retirement may exceed those at the start of retirement. As you may be retired for 20 or 30 years, it is critical to take a long-term view of things.
You may have a health insurance gap.
If you retire before age 65, what do you do about health coverage? You may need to shoulder 100% of the cost. Suppose you become disabled or seriously ill and working is out of the question. How will you navigate the shortfall in your anticipated income?
Age may catch up to you sooner rather than later.
You may stay fit, active and mentally sharp for decades to come, but if you become mentally or physically infirm, you will need to find people you can trust to manage your finances and your care.
You could be alone one day.
As anyone who has ever lived alone realizes, a single person does not simply live on 50% of a couple's income. Keeping up a house or even a condominium can be tough when you are elderly. Driving can also be a concern. If your spouse or partner is absent, will someone be available to help you in the future?
These are just some of the blind spots that can surprise us in retirement. They may quickly affect our money and quality of life. However, if you age with an awareness of them, you will be able to manage the outcomes in a more proactive vs. reactive way.
Retirement awareness and understanding
Much has been written about the classic financial mistakes that plague start-ups, family businesses, corporations and charities. Aside from these blunders, some classic financial missteps plague retirees. Calling them "mistakes" may be a bit harsh, as not all of them represent errors in judgment. However, whether they result from ignorance or fate, we need to be aware of them as we prepare for and enter retirement:
Timing Social Security.
As Social Security benefits rise about 8% for every year you delay receiving them, waiting a few years to apply for benefits can position you for higher retirement income. Filing for your monthly benefits before you reach Social Security's Full Retirement Age (FRA) can mean comparatively smaller monthly payments.
Managing medical bills.
Medicare will not pay for everything. Unless the program changes, you may have significant out-of-pocket costs, most notably, long term care.
Actuaries at the Social Security Administration project that around a third of today's 65-year-olds will live to age 90, with about one in seven living 95 years or longer. The prospect of a 20- or 30-year retirement is not unreasonable, yet there is still a lingering cultural assumption that our retirements might duplicate the relatively brief ones of our parents.
You may have heard of the "4% rule," a guideline stating that you should take out only about 4% of your retirement savings annually. Some retirees try to abide by it, but others withdraw 7% or 8% per year. Why is this? In the first phase of retirement, people tend to live it up. More free time naturally promotes new ventures and adventures and an inclination to live a bit more lavishly.
Talking About Taxes.
It can be a good idea to have both taxable and tax-advantaged accounts in retirement. Assuming your retirement will be long, you may want to assign specific investments to a "preferred domain" or "tax location" which means a taxable or tax-advantaged account that is most appropriate as you pursue a better after-tax return for your entire portfolio. Not all assets are created equally, nor are all account types.
Retiring with debts.
Some find it harder to preserve (or accumulate) wealth when you are handing portions of it to creditors. You should also think about not putting college costs before retirement costs. There is no "financial aid" program for retirement. There are no "retirement loans." Your children have their whole financial lives ahead of them.
Retiring with no investment strategy.
Expect that retirement will have a few surprises; the absence of a strategy can leave you vulnerable when those surprises occur.
Having listened to and revisited Time on countless occasions in my life, the message remains, well, timeless. Like other inspiring works of art, it has evolved over the years like a well-designed retirement plan and I particularly love the Greensky Bluegrass version linked below. Pink Floyd pointed out over 50 years ago, time is fleeting and there is no better time than the present to avoid making some classic retirement mistakes. To help you avoid them, take some time to design, implement, review and refine your retirement strategy each year with the help of a trusted financial professional. Like many of life's biggest objectives, retirement outcomes are typically better when addressed as early as possible and carefully constructed in the context of a comprehensive plan.
Written By: Rob Armstrong
Songwriters: Roger Waters / David Gilmour / Nicholas Mason / Richard Wright
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