Rethinking retirement: Will you be able to meet your goals?
Chances are, your retirement will look very different than your parents’ or grandparents’ retirements. First of all, many of us are living longer and can potentially expect a retirement that stretches 30 years or more. Second, gone are the days when the typical retiree whiled away the hours in a rocking chair. Many retirees today live incredibly active and adventuresome lifestyles. Finally, the concept of retirement itself is being redefined. The “cliff-like” retirement experience of calling it quits at age 65, with gold watch in hand never to work again, is being redefined with more and more retirees launching second (or third) careers or starting their own businesses.
With all of these changes to retirement as we know it, it is critical to plan carefully to help ensure you have enough income to live the retirement you expect and deserve.
The elephant in the room – the cost of health care
It’s only human nature. When most of us are saving for retirement, we envision the lifestyle we want to enjoy: travel, vacation homes, doting on grandkids. Sounds nice, right?
The reality is a significant portion of your retirement income will likely go to pay health care expenses. The average retiree spends about $4,300 per year on out-of-pocket health care costs. [SOURCE: Center for Retirement Research at Boston College] As you age, those health care expenses are likely to go up. Medicare pays a portion of health care expenses once you hit age 65, but it doesn’t cover routine dental or vision care, nor does it pay for long-term care. Careful budgeting for health care costs is essential in retirement income planning.
Plan for a decades-long retirement
When the government created Social Security in 1935, the life expectancy for American men was only about 58 years. [SOURCE: Social Security Administration].
My, how times have changed. Today, many of us are living much longer, healthier lives. Many retirees can now expect to experience a decades-long retirement. That requires a hard look at how all those years of retirement will be funded.
Think in terms of a “retirement paycheck”. Calculate exactly how much money you expect you will need each month to live the lifestyle you desire. That analysis will require a close look not only at savings, but also required minimum distributions from retirement plans, such as an IRA or 401(k) plan. How long can you expect those distributions to last?
Also, weigh the pros and cons of when you begin taking Social Security. If you are healthy and can reasonably expect to live many years in retirement, delay taking Social Security until age 70 if you can, when you will receive the maximum benefit. Taking Social Security at age 62 decreases your benefit by 25 percent. [SOURCE: Investopedia]. Work with a qualified financial advisor to develop a plan that is right for you.
Align your lifestyle desires with your income realities
While many retirees don’t need as much as income as they did during their working years, it all comes down to lifestyle. An aspiring world traveler is likely to need much more income in retirement than someone who simply wants to putter around the garden. Planning for retirement income requires careful consideration of what you want retirement to look like and what that might cost. Be aspirational, but also be reasonable, especially considering likely health care costs and your own longevity.
Many retirees mistakenly presume that downsizing from a home they have lived in for years and raised a family in will result in a windfall. That’s no longer always the case. Many smaller condos, lofts and townhomes can cost just as much if not more than that big house in the suburbs. Don’t assume downsizing in square footage means downsizing in housing costs.
Retirement redefined – continuing to work in retirement
Finally, for more and more retirees, retirement is, well, not exactly that. Many retirees are choosing to continue to work. For some it’s a part-time job to stay engaged. For others, it’s a new career in a field or occupation that aligns with a personal passion. They think of it as “retiring from the work I need to do to do the work I want to do.” Having that ongoing income obviously helps to fund retirement lifestyle ambitions.
Even better? Recently passed federal legislation called the SECURE Act repeals the age restriction on contributions to traditional IRAs. That means people who are working can now make contributions to IRAs after reaching age 70½.