Frequently Asked Questions
A: Some people have more money than they will ever spend, but most retirees are not in that position 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. The best projections are created using retirement planning software that can run hundreds or thousands of scenarios, using randomized investment returns. This type of retirement planning will give you a range of outcomes, the most likely outcome, and the probability of not running out of money.
A: There are two main considerations in retirement planning. The financial side and the “what do I want to do with the rest of my life” side. We recommend finding a financial advisor who can help with both. The non-financial side is often referred to as “retirement life coaching” and can really help people make the transition into retirement.
Most pre-retirees are more focused on the financial aspects. Consequently, most financial advisors use a variety of programs to determine the likelihood of a retiree outliving their money. The output of any retirement planning program can only be as good as the data you put into it. So, you need to provide your financial planner with reasonably accurate numbers in the following areas:
- Planned Spending – Core retirement living expenses. How much do you plan to spend in after-tax dollars each month/year. Large one-time expenses – including things like cars, home remodeling, a child’s wedding, etc. Expenses that end during retirement (e.g., mortgage)
- Financial Assets – 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: 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: A rule of thumb suggests approximately $5,000–$7,000 per person, per year beginning at age 65, depending on your health and family history. Women typically incur more healthcare expenses than men during retirement ($150,000 for women vs. $135,000 for men).
The estimated healthcare costs include premiums for Medicare parts B and D, which account for about a third of retirement healthcare expenses. The remaining two-thirds come from deductibles, co-pays, and medical services not covered by Medicare. Long-term care expenses are not included but should be part of retirement planning.
A: Social Security 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 every year after that up to a maximum FRA of 67 for those born in 1960 or later. You can start collecting 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 by 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 should start collecting early (62) if you are in poor health but defer as long as you can (70) if you or your spouse expects to outlive the average life expectancy.
Remember that 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.
A. You should consider investing more conservatively (i.e., reduce volatility) in accounts from which you are taking withdrawals. The higher the withdrawal rate, the less volatility you should assume. For example, you should target lower volatility in an account that is distributing 5% per year compared to an account that is distributing 1-2% per year. The risk is that the money withdrawn after an account has declined will never have a chance to participate in the inevitable market rebound. It’s also a good idea to have some “safe” money from which you can take withdrawals for a few years in the event of a significant market decline. This pool of safe money enables you to let your more volatile investments rebound before you need to sell any of them.
Many retirees have accounts they do not plan to touch for many years, if ever. Those accounts can remain invested more aggressively for the prospect of growth.
A: You are a good candidate for annuities if:
- You and/or your spouse are in good health and have longevity in your family
- Less than 60-80% of your desired retirement income is covered by guaranteed income sources (e.g., Social Security or Pensions)
- You have a few years until you need to begin taking income. This allows you to buy the annuity and let the level of guaranteed income grow.
A: Having a will or trust can be an integral part of retirement planning. A will indicates which beneficiaries are to receive which assets, and who, as executor, will oversee your affairs after you’re gone. Using an attorney to draft your will minimizes the chance that anyone will successfully be able to contest it. A handwritten will is valid but should be notarized and witnessed. You can also get a basic will from a legal forms store or online at a site like legalzoom.com.
A will is certainly better than not having any estate planning documents. However, the problem with a will is: 1) it can be challenged in court, 2) your heirs will likely have to go through probate, a potentially expensive and time-consuming legal process, and 3) you lose confidentiality because your financial affairs can become public record.
Most people with significant assets use a revocable living trust as opposed to, or in addition to, a will. This set of documents is typically presented in a three-ring binder and costs two to three times as much to create as a will. The trust enables you to name beneficiaries and a “successor trustee” who takes over when you are no longer capable. The main advantage of the trust, compared to a will, is your heirs get to avoid probate, your affairs remain private, and it is much more difficult to contest a trust than a will.
The other advantage of a trust is it can remain intact and continue to hold and distribute assets for many years after your passing. For example, you can instruct your successor trustee to distribute assets to your children when they reach a certain age or distribute the assets over a period of years. Another popular retirement planning strategy is to name an income beneficiary, who gets the income from your trust after your death, for instance, a spouse from a second marriage. Then, residuary beneficiaries, such as children from a first marriage, get the assets after the income beneficiary dies.
