Financial Planning for Retirement

Financial planning isn't my expertize; I earn my money another way. However, recently I received a request for some help in that area. Here is what I provided to that individual. Disclaimer - I'm not a financial professional.

Financial Planning for Retirement – Checklist for those within 10 years of retirement

As we approach retirement we should look at our financial plans and make adjustments. Once in retirement, income from employment is replaced by income from pensions or social security plus the draw-down of our savings and retirement investments.  This may require changes in spending habits.  

It is helpful to review our financial plans and then to make adjustments prior to retirement. Earlier is better than later simply because we have time to adjust our spending and savings. Retirement at 65 means it is possible to live for 30 years in retirement, with our only income from pensions and various savings. Retirement offers new possibilities, and most experts recommend we plan and prepare for that 30 years in retirement.  What are we going to do for 30 years? What will it cost? How will we deal with old age health issues? Where will we live?

The early retirement years may offer travel and other possibilities while we are relatively young and healthy. These things can be costly and must be planned for. Our health in later years will degrade and we may see less opportunity for travel, etc. and much higher health care expenses. These possibilities should be included in our financial plans.

Many experts recommend that we retire debt free. In other words, pay down our mortgage and other loans prior to retirement. However, personal situations do vary. Here are a few things to consider:

Financial Liabilities which will require retirement income:

1.       Mortgage

2.       Student Loans

3.       Credit card debt

4.       Auto or other loans

5.       Taxes on income

Basic Living Expenses In Retirement:

1.       Mortgage and real estate taxes or rent

2.       Condominium or HOA fees

3.       Homeowners or Renters Insurance

4.       Long Term Care Insurance or special savings for this purpose

5.       Utilities (gas and electric)

6.       Phone

7.       Groceries

8.       Household expenses

9.       Clothing

10.   Auto insurance, gasoline and repairs

11.   Health Insurance premiums

12.   Out of pocket dental and medical expenses

Discretionary Expenses in Retirement

1.       Entertainment

2.       Cable TV

3.       Dining out

4.       Travel and vacations

5.       Smart phone and other electronic packages

Unusual Retirement Expenses

1.       Unusual trips or purchases

2.       Unusual Medical costs

3.       Home maintenance expenses (furnace and HVAC, fireplace, water heater, roof, windows, exterior trim, bathroom and kitchen fixtures, plumbing, appliances, etc.)

4.       Emergencies

Life Insurance. Insurance is one of the realities of modern existence. Most of us have life insurance. Approaching retirement it is prudent to re-evaluate our insurance needs. Life insurance is generally purchased to cover large financial liabilities in the event of our death. As we reduce our financial liabilities, life insurance requirements may become much smaller and we may be able to reduce our life insurance needs. Things for which we might want the proceeds of life insurance in retirement include:

1.       Mortgages

2.       Student Loans

3.       Other debts

4.       Funeral costs

5.       Additional funds for surviving spouse

Long Term Care Insurance. According to the U.S. Government Department of Health and Human Services “70% of people turning age 65 can expect to use some form of long-term care during their lives. “ Long Term Care Insurance or LTC is an important aspect of retirement planning. Here are some websites that can help:

Click to go to New Window> http://longtermcare.gov/

Click to go to New Window> http://www.aaltci.org/


Longevity Insurance. As the human lifespan is extended, there is a possibility we may outlive our financial resources. After completing our financial plan if that is a possibility what to do? Some 401(k) or 403(b) plans allow the purchase of  a deferred income annuity. On July 1, 2014 the U.S. Treasury Department and IRS announced tax rules that would allow the use of up to 25% of their 401(k) or IRA balances to purchase a deferred income annuity. The goal of these annuities is to provide a lifetime income stream later in life. “A longevity annuity is an income stream – a type of “deferred income annuity” – that begins at an advanced age and continues throughout the individual’s life.”

Financial Assets Available as Income in Retirement. These should be considered:

1.       Pension

2.       Social Security

3.       Savings

4.       Retirement Accounts – 401(k), 403(b), IRAs and Roth IRAs

5.       Annuity

6.       Other (rental income, etc.)

Financial Planning 101. Planning for a 30 year retirement is not a trivial exercise. Here are a few things to consider:

1.       What will be my annual basic expenses at the age of 65, 75, 85 and 95?

2.       What will be my sources of income and the amounts at the age of 65, 75, 85 and 95?

3.       What will be my discretionary spending each year from 65 to 75? What about thereafter?

4.       Where will the money come from?

5.       Will there be enough to support my retirement plan?

6.       Have I included inflation in my plans? Have I included reasonable returns in my plans for my retirement accounts?

7.       Have I considered rising health care costs as I age?

8.       Have I considered unusual expenses, my health and my family’s health history in making my plans?

9.       Do I have a long term care plan?  Do I have the necessary funds for this?

10.   When will I draw from my retirement accounts? At present, the Internal Revenue Service requires that we each draw from our 401(k), 403(b) and other IRAs, but not our Roths beginning at the age of 70-1/2.  IRS Publication 590 “Individual Retirement Arrangement” provides detailed information.