Planning Your Rest-of-Life: 10 Steps to Financial Security in Your Retirement Years

NOVEMBER 2008

10 Steps to Financial Security in Your Retirement Years

If you're approaching retirement, chances are good your radar picks up on the many stories and advertisements out there about how to retire comfortably. There's a lot of good information being published but also many ideas that may not work for you or are simply self-serving hype. Confused or worried? You're not alone, especially in these chaotic times. So how do you decide what's best for you?

The goal is easy to say, harder to do. You want enough income to pay for your living expenses for the rest of your life, no matter how long you live. At all costs, you want to prevent being broke at age 85, when you can't push "rewind" on your life or your finances. To stack the odds against this risk, here are ten steps that are easy to understand - you just need to put in the time and effort to make them happen. Remember, most good things in life aren't easy or free!

Take care of your health by implementing some simple steps regarding nutrition, exercise and stress management. If you do a good job in these three areas, there's a good chance you could live to see your 90s, maybe even 100. By effectively managing your health, you'll significantly reduce the odds that you'll get wiped out by medical and nursing home expenses, and you'll increase the odds that you'll be physically able to work as long as you want. Studies suggest that a couple aged 65 will need about $225,000 to pay for out-of-pocket medical expenses over the course of their lifetimes. However, only about $67,500 would be spent on Medicare premiums, with the rest - about $157,500 - spent only when you get sick. Now that's powerful motivation to keep healthy!
Protect against the risk of catastrophic conditions. Start with adequate medical insurance. This can be challenging before you're eligible for Medicare at age 65, due to either high premiums or preexisting conditions, but you need to make sure you have adequate coverage. Once you're age 65, premiums reduce significantly, and insurance companies can't deny coverage for preexisting conditions. This may be a good reason to work until age 65, if you can get coverage through work. Develop a strategy that minimizes the threat of large long-term care expenses, which aren't covered by most medical insurance policies. This may or may not include the purchase of long-term care insurance.
Consider working as long as you can, to age 70 if possible. This isn't as unrealistic as it sounds; if you live to age 90, you'll still have 20 years of retirement to enjoy. Working keeps you engaged with life, and you might get employer-sponsored medical insurance. Stay healthy so you can continue to work, and keep your skills and contacts up-to-date. Working later in life doesn't need to be a punishment; if you don't like your current work or are feeling used up, look for a more fulfilling job, work related to an interest or hobby, and/or part-time work.
Max out your Social Security income by delaying benefits as long as you can but no later than age 70. The reason? For many people, it could be the only guaranteed lifetime income they'll receive, your own personal pension! Social Security has special advantages - it's indexed for inflation, and for many people, it's not subject to income taxes. Note: If you're married, it might make sense for the higher wage earner to delay benefits but the lower wage earner to start drawing benefits early. You can analyze your situation on Social Security's website: www.ssa.gov.
Be prudent when withdrawing retirement savings; you don't want to outlive your resources. If you must tap your savings before age 70, use just the interest and dividends. If you invest in a prudent mixture of stocks and bonds, your annual income should range from 2.5% to 4% of your portfolio; 3% is a good target. Consider withdrawing principal from your savings only at age 70 or later. Also consider buying an immediate annuity (not a deferred annuity) from a highly-rated insurance company with part of your savings (from one-third to one-half). This is longevity insurance - in case you're lucky enough to live to 100. This may not be necessary if you have significant lifetime income from a traditional pension plan or if living off just the interest and dividends provides enough retirement income for you. With the rest of your portfolio, withdraw the principal cautiously; annual withdrawal rates of 4% to 5% are good rules of thumb.
If you have significant lifetime income from a traditional pension plan, delay starting benefits until they've reached their maximum. Usually this is the normal retirement age under the plan, which is often age 65 but sometimes earlier. Many plans let you delay starting your benefits even if you've retired early. If you're offered a lump sum in lieu of the lifetime income, carefully investigate the pros and cons. For many people, it's the wrong choice.
If you're not an investment expert, keep your strategy very simple. For a large chunk of your retirement savings, consider investing in highly-rated target retirement date or balanced no-load mutual funds; asset allocation percentage to stocks can range from 25% to 75%, with the remainder in bonds or cash. Make sure expenses are low - less than 1% of assets.
Adjust your living expenses to match your income from wages, investments and Social Security. Spend just enough to meet your basic needs, and buy only what truly makes you happy. Redeploy any assets that no longer meet your needs, such as a home that's too big or collectibles you no longer enjoy; these could be traded for assets that generate income.
Become a student of retirement. Learn more about the details of these steps. Most people underestimate how long they'll live and how much money they'll need, so you'll need to figure out how much money you need to generate a lifetime retirement income. Learn how to tell a good investment from a bad one.
Build your professional team to help with these action steps. This could include a financial advisor, investment expert, tax accountant, insurance agent, health professional or estate attorney. Make sure they're both qualified and motivated to have your best interests at heart.

So now you have it - a simple plan for financial security. There are many details involved with these strategies; most are easier said than done. Look for future newsletters which elaborate on the steps described here.

These steps are designed to help you survive the financial equivalent of Hurricane Katrina - events like the fall of 2008. During the last 21 years, we've had four major financial crises (the crash of 1987, the S&L bankruptcies of the early 1990s, the tech bubble, and the recent meltdown). It's likely that you'll be retired for 20 years or more, so it's inevitable that more crises will happen during your retirement years. It's smart to be prepared!

Everyone needs a basic guide for important life decisions, and this list is a good place to start. You might modify or refine some steps to fit your situation, and be sure to include your spouse or partner in your planning. While this information should work for most people, other strategies might work as well. Find out what works for you!

This is your life and your future; put in place solid plans, and you can focus on enjoying your rest-of-life. Have confidence that you can live until age 90 - or even 100 - and still enjoy life. Good luck!

Welcome to
our newsletter!

This newsletter gives you an overall strategy for security in your retirement years. Look for future newsletters where we'll elaborate on the critical subjects that are summarized here.

Our Promise to You

We fulfill a need for trusted, unbiased strategies that you can use to plan your rest-of-life (aka retirement). We rely on the latest research and analyses, and we'll keep it simple! And that's all we provide - we don't sell investments, insurance, or health products.

Steve Vernon spent over 30 years as a consulting actuary, helping large employers design and manage their retirement programs. Now he's president of Rest-of-Life Communications, where he specializes in providing unbiased, trusted information about retirement.

Steve recently produced an engaging and informative DVD/workbook titled The Quest: For Long Life, Health and Prosperity (Rest-of-Life Communications, 2007). In the DVD, he interviews 12 experts in the fields of finance, health and life planning, and 13 people from all walks of life. It's an engaging and informative 'seminar-in-a-box.' The Quest DVD provides details on implementing all the ideas discussed here and identifies helpful resources. For more information, including how to order, visit www.thequestdvd.com. It is also available on Amazon.com.

In addition to the DVD, Steve also wrote a 400-page book that goes into more depth on the topic of retirement, including the ideas outlined in this newsletter. Live Long & Prosper! Invest in Your Happiness, Health and Wealth for Retirement and Beyond (John Wiley, 2005) is available on Amazon.com.

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For information on keynote addresses, workshops or presentations on retirement issues, visit Steve's website at www.restoflife.com, or email him at steve.vernon@restoflife.com