Kiplinger's Personal Finance Magazine July 1, 2019
Commentary
As a professor at
The American College of Financial Services and the co-creator of the Retirement
Income Certified Professional (RICP®) program, I'm often making lists of what I
think everyone needs to know about planning for retirement. And, on a personal
level, as someone who is approaching retirement myself, those lessons are really
hitting home.
So, here is my
current list of what I'd like to shout from the mountaintops -- the five things
you must know before you retire.
1.
Knowledge Is Gold
Making smarter
retirement decisions means more retirement security. Research from Morningstar
found that informed (versus naïve) decisions in just six different areas of
retirement planning can increase retirement income by 31% -- and there are a
lot more than six planning areas. Think about what that means: If you invest
time to learn your options, you can improve retirement security. That's
powerful. You don't have to win the lottery or hope that Aunt Sally remembers
you in her will -- just learn about Social Security claiming, choosing the
right Medicare option, or the role of guaranteed lifetime income.
If you want
something to get you started, watch these Retirement Income 101videos,
or take the Retirement Income Literacy Quiz.
If you're inclined to seek advice, find an adviser who really understands the
issues faced at this time of life, like an adviser who has earned the Retirement Income Certified
Professional (RICP®) designation.
2.
Look Before You Leap
Warning: Haste
makes waste. So, don't give up a long-term job before you know what's next and
that you can afford it. This may sound obvious, but a 2018 Bankrate study indicated
that 58% of baby boomers claimed ignorance of how much money they needed for
retirement. There are many reasons to look before you leap, but here are two.
First, giving up a career often means giving up valuable additional retirement
benefits, especially health insurance.
Second, if you
decide that you miss work or miscalculated how much money you needed to retire
(or never calculated it in the first place) finding a comparable job with the
same wages at an older age is hard.
3.
Levers of success
Pre-retirees
looking to improve their retirement plans should understand that there are
three main levers that have the most impact on retirement security: retirement
age, Social Security claiming age and spending levels in retirement.
- Retirement age. A study from the Stanford
Longevity Center found that three months of additional
work generates the same increase in retirement income as saving an
additional one percentage point of earnings for 30 years. That fact
screams "keep working!" Avoid burnout by taking vacations,
change your attitude, avoid your boss or choose a role with less income
and less stress -- but keep working if you can.
- Social Security claiming age. If you're not
living under a rock, you've heard the advice that deferring Social
Security will improve your retirement security. Believe it. About
two-thirds of retirees get more than half their retirement income from
Social Security. If you're in this group, your Social Security claiming
decision is the most important retirement decision that you will make. For
example, an individual with a full retirement age of 66 will receive 76%
more by claiming at age 70 instead of age 62.
- Spending levels matter. Reduce retirement
spending and your resources will last longer. If you do this right you may
not have to destroy the lifestyle that you've become accustomed to. Some
options to consider: Stop buying the stuff that doesn't really mean much
to you; become a thriftier shopper (read all those lists of
ways to save money in retirement); and/or move somewhere where the cost of
living is lower. (See 27 Cheapest Places Where You'll Really Want to
Retire.)
4.
Living on your own dime is nerve-racking
Living primarily on
withdrawals from your retirement portfolio is not for the fainthearted. Today,
many individuals go into retirement with Social Security benefits, a
significant account balance in their 401(k) plan, and a few bucks in the bank.
It's unlikely that Social Security will cover living expenses (especially for
those who claim Social Security at 62) so this means figuring out how to
generate additional income from 401(k) plan withdrawals. How much you can
afford to take out each year depends upon a lot of moving parts, including how
the portfolio is invested, how volatile investment returns are, how long
retirement will last, and whether you are willing to cut back on withdrawals if
the market is down.
Given what I know,
I'm not willing to have most of my retirement income coming from withdrawals
from a volatile portfolio -- because I want to sleep at night. Pre-retirees
should think about ways that they can increase the types of regular income that
will last a lifetime, regardless of how long they live. The first place to look
to accomplish this is to defer Social Security to age 70 to increase the stream
of monthly income. Another is to choose an annuity form of payment from a
company retirement plan, or purchase a commercial annuity.
5.
Answer the 'what ifs'
So far we've been
talking about the easy stuff, but the hardest part of planning for retirement
is preparing for the "what ifs," like what if you live much longer
than expected? What if you or your spouse has a serious health care issue? And
what if the stock market tanks in the first five years of retirement?
Here's a helpful chart that
we use in the RICP® program that addresses solutions to the 18 risks that need
to be addressed while retirement planning. Your plan isn't complete until
you've addressed these issues.
There are many
twists and turns in the retirement road map, and I'm looking forward to sharing
the knowledge I've learned over my career teaching financial advisers how to
help their clients better prepare for their retirement years.
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This article was
written by and presents the views of our contributing adviser, not the
Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
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