Every retirement is different. Yet, some issues and questions are common to almost all everyone’s retirement.
Many of these questions need to be answered even by those who say they never plan to retire and want to keep working well past when most of their age cohorts have left the work force.
Most retirees have the same big picture goals. They want to establish and maintain financial independence without working for compensation. That means they want to maintain their desired lifestyle without risking running out of money. They don’t want to become dependent on others. They want to achieve all that despite the fluctuations that are almost certain to occur in the investment markets.
To achieve those goals and others you have for retirement, be sure your plan answers these questions. It doesn’t matter the stage of retirement you’re in, even if you’ve been retired for years. Some of these questions should be reviewed each year.
When should I start Social Security?
Social Security benefits are a key part of almost every retiree’s income. Surveys of retirees show that the longer one is in retirement, the more important these benefits are. That’s partly because other sources are being spent and partly because Social Security is the only inflation-adjusted source of income most retirees have.
Many people take it as a given that they’ll begin their benefits as soon as retirement begins. That might or might not be the best choice. It’s especially important for married couples to coordinate when each begins benefits to maximize their joint lifetime benefits.
You can explore what the results would be under different scenarios. Use some of the Social Security calculators available online or work with a financial advisor who does Social Security planning.
How flexible is my spending?
Retirement is full of surprises. When there is unplanned spending or a decline in income, adjustments have to be made. You can borrow (if possible), sell some assets, or reduce spending.
You always should know how much you’re spending. More importantly, know how much spending is fixed and how much is flexible. Some spending is in a hybrid category. You might be committed to it for a period of time but eventually can reduce or eliminate it. Or you might have to incur the expense at some time but can defer it for a while.
If there comes a time when you need to make up for a shortfall, you’ll know which spending can be eliminated or deferred.
How will I turn my resources into reliable lifetime cash flow?
Many people focus on retirement income, so they focus on earning interest and dividends on their nest eggs. Instead, cash flow is what matters. You shouldn’t worry about whether you’re spending income or principal, as long as you aren’t running a high risk of spending down your assets.
A good idea is to purchase an immediate annuity or a deferred income annuity (longevity annuity) with a portion of your assets. Either of these will guarantee you a fixed annual payment regardless of how long you live. A good strategy is to put enough money into an annuity so that when combined with Social Security you have enough guaranteed income for life to pay your fixed living expenses.
The rest of your assets can be invested to earn a total return (not just income). You also have to determine the maximum amount you’ll spend each year. Spend too much annually early in retirement and you risk running out of money later. Run some scenarios or work with a financial planner to determine your expected investment returns and the amount you safely can spend.
Which Medicare choices should I make?
Medical expenses are a significant expense for most retirees and increase as a percentage of spending over time. Your out-of-pocket expenses for medical care can be reduce by making smart Medicare choices. Because the costs and options change annually in most areas of the country, it’s a good idea to review your choices each year during open enrollment.
Many people enter retirement believing Medicare covers all or most retirement medical expenses. It doesn’t. There generally are two broad choices.
One choice is to stay enrolled in traditional Medicare Part B. That main advantage of traditional Medicare is you can select your own medical providers. But traditional Medicare has a lot of coverage gaps. If you go that route, you also should buy a Medicare Supplement (Medigap) policy to cover at least some of the gaps. You also should buy a Part D Prescription Drug policy. In most areas of the country, there are multiple choices for Medigap and Part D policies. Be prepared to spend some time determining the policies that are best for your needs and budget.
The other choice is to enroll in a Medicare Advantage (Part C). These plans are more restrictive about your choices of medical providers and services. But they often provide more coverage and lower out-of-pocket expenses than a combination of traditional Medicare plus a Medicare Supplement and a Part D policy.
Will my spouse be protected?
The most overlooked issue in retirement planning is to plan for the period when one spouse passes away. It doesn’t matter which spouse passes first. The other is likely to have to deal with a range of financial and nonfinancial changes. See my article for details.
When one spouse passes away, one Social Security benefit ends. If the deceased spouse received a pension, it might be reduced or eliminated. Some living expenses might increase.
A surviving spouse also is more likely to need long-term care, because the other spouse won’t be around to help with care or household jobs. Having a plan to pay for long-term care is essentially to planning for the years when one spouse is living alone.
This list doesn’t cover all the issues that need to be addressed in your retirement plan. But it covers essential points that should be addressed in every plan and reviewed annually.
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