Planning now will make a difference later. Whether retirement is on the horizon or you’re already retired, now is the time to work closely with Peterson Wealth Advisory to develop a plan for financing the years ahead.
You've worked hard, you've saved, and you've planned but it can be overwhelming trying to figure out how to make your money last 25 or 35 years. That’s why it’s important to create a financial plan designed to achieve that objective.
Parts of your plan will be familiar because the same principles you used to build your wealth—balanced, diversified, low-cost, long-term investing—also dictate how you should invest during retirement.
You will also face some new decisions that will call for guidance and advice from a financial expert: What kind of investment mix will suit your risk tolerance while still allowing your assets to keep up with inflation? How much can you safely withdraw from your portfolio each year? How do you minimize the impact of taxes on your wealth?
Careful advance planning and ongoing consultation can help you answer these questions and enjoy the kind of retirement that you've always considered desirable. As part of a four part series I will be discussing how to manage your retirement. This month’s issue will help examine present circumstances and adjusting your investments.
EVALUATE YOUR CURRENT SITUATION
For many people, retirement can last a long time. According to the U.S. Department of Health the current life expectancy for men in the United States is 75 years and 80 for women. But these averages understate an important fact: As cited in one of my previous newsletters, life expectancy increases as you grow older.
- A 65-year old man has a 41% chance of living to age 85 and 20% chance of living to age 90.
- A 65-year old woman has a 53% chance of living to age 85 and a 32% chance of living to age 90.
There’s a reasonable possibility that your retirement could last 25 to 30 years. That’s why it’s critical to make sure you’re prepared.
Keep an eye on cash flow: Once you’re retired, it’s essential to watch your cash flow and estimate your income and expenses each year. This practice can help us spot potential financial problems and make adjustments that will help keep your retirement plan on track.
Estimate your income and expenses: When you estimate your expenses, it can be helpful to separate them into nondiscretionary and discretionary categories.
• Nondiscretionary: These are basic expenses, such as food, mortgage payments, insurance premiums, taxes, gasoline, and utilities.
• Discretionary: These are optional expenses, such as travel, hobbies, gifts, and charitable contributions.
When considering your sources of income, include such things as Social Security benefits, pensions, veterans’ benefits, royalties, real estate contracts, rents from investment properties, dividends, and interest.
Depending on your age, you may also need to include the required minimum distributions (RMDs) that you must take from your traditional IRAs and qualified retirement plans such as a 401(k)’s. Federal law mandates that you generally must start making withdrawals from these accounts by April 1 in the year after you turn age 70 1/2. Remember that withdrawals made from a tax-deferred plan before age 59 1/2 may be subject to ordinary income tax, plus a 10% federal penalty tax.
Using your estimated expenses and sources of ongoing income, we can determine approximately how much you will need to withdraw from your investment portfolio each year.
REVIEW YOUR INSURANCE COVERAGE
Large, unexpected expenses can damage the best-laid retirement plans, but adequate insurance coverage can help protect you against many of these expenses. That’s why you’ll want to make sure your coverage is sufficient on all your policies.
Medicare: During your retirement, you also may incur insurance costs specific to retirees. For example, retirees age 65 and older qualify for Medicare health insurance, but must pay a monthly fee for the coverage. And because Medicare doesn’t cover all health care costs, most people purchase Medigap insurance to fill the holes in Medicare coverage.
Many states offer a Medicare managed care plan as an alternative to regular Medicare coverage. While these plans may cover some expenses that Medicare doesn't, they limit participants to certain doctors and hospitals.
Medicare Part D: Prescription drug coverage through Medicare was introduced on January 1, 2006. Known as Medicare Part D, the program gives recipients a choice of drug plans, provided by private companies, which are designed to suit a variety of medical and financial needs. Visit the Medicare website (www.medicare.gov) for details about the plans and tools to help you determine which one suits your needs. Read the fine print – most policies limit many medications to generic prescription medications.
Long-term care: Medicare provides little help if you require long-term assistance with everyday activities. Consequently, many retirees purchase long-term care insurance to try to prevent having their savings devastated, should they require such care. Long-term care insurance can be complicated and expensive but we are here to help evaluate the coverage appropriate for you.
Life insurance: While providing for the needs of a spouse or immediate family, life insurance can also be a valuable estate-planning tool. Depending on your level of wealth and the type of capital, a life insurance policy can be used for buy-sell business agreements, estate taxes, and liquidity needs.
There is also the scenario where you may not require a life insurance policy any more. It depends on factors including the amount of assets you have saved, pension or other income that would cease when you die, or major debts such as a mortgage or loans for children in college.
If you own a cash-value life insurance policy, you have several choices: Cash it out and incur taxes; exchange the cash value of the policy, tax-free, into an annuity; or keep the policy for estate planning purposes.
Annuities: These are insurance products designed to pay income as long as you live. Certain annuities allow you to name a recipient of the income after your death. Many retirees purchase annuities to provide ongoing income that supplements Social Security and pensions.
Some annuities make fixed payments, while others make payments that increase over time. Some generate variable income based on the performance of the underlying mutual funds you select. Keep in mind that variable annuities are subject to market risk.
The trade-off for many annuities is that, upon your death, any remaining principal stays with the company issuing the annuity and is not available to your heirs. The upside is that, if you live long enough, you may exhaust the principal. Annuities can be complicated, expensive, and restrictive. Consider these as a last resort.
REVIEW YOUR LIVING SITUATION
Retirement is also a time to look at your living situation. Begin by asking yourself how well your current home works for you. Things to consider include: size, upkeep, physical limitations and accessibility, property taxes, insurance, etc.
Downsizing to a smaller home allows you to free up cash. In addition, capital gains of up to $250,000 ($500,000 for a married couple) from the sale of your house are free of federal income tax. Your savings may be even greater if you relocate to an area with lower living costs and low (or no) state and local income taxes.
