Chapter 17
IN THIS CHAPTER
Avoiding the mistakes of those who retired before you
Improving the quality of your retirement by planning ahead
When putting together your retirement and estate plans, you have many steps to take. While there are often similarities, no one’s plan is exactly the same as another’s; everyone’s has unique elements. The details of plans are changing as folks live longer and are more active. Even so, many people make similar planning mistakes; these mistakes may mean the difference between a satisfying retirement and an unsatisfying one. You can discover some important lessons from other people’s mistakes.
Although some information about retirement and estate planning is easy to find, other information isn’t — and most of the mistakes people make result from wrong assumptions or misinformation. In addition, some elements of financial planning involve as much art as science. Sometimes the intuitive answer isn’t always the best answer.
In this chapter, we discuss the recurring mistakes we’ve seen over the years. Correcting these actions won’t make for a complete financial plan. But when you avoid these mistakes, you’ll be a long way down the road to a satisfying retirement.
Many studies of retirees have been conducted. These studies often contain interesting information, but one fact comes out over and over again: Despite the differences in retirees and what they did in retirement, the retirees most likely to be satisfied in their golden years were those who were financially prepared.
Retirement seems to be more satisfying for retirees who limit their financial surprises. Those who go into retirement with a decent idea of how much money they’re able to spend in retirement and how long their assets will last — and then adjust their expected lifestyle accordingly — aren’t likely to be disappointed. On the other hand, those individuals who enter retirement without aligning their expectations with their finances are likely to face unpleasant surprises and be dissatisfied.
Thanks to higher limits on the amount exempt from taxation, fewer estates pay federal estate taxes than years ago. That doesn’t mean it’s safe for you to forego having an estate plan, however. You have plenty more to plan for than just federal taxes. And you don’t have to be rich to benefit from an estate plan either. A good estate plan is important for everyone because it
A few generations ago, the average retirement didn’t last long. A person retired at 65 and, on average, died around age 70. Since then, life expectancy has increased while the average age at retirement has decreased. What many people don’t realize is that each year you stay alive your life expectancy increases. At your birth your life expectancy may have been, say, 73. But once you made it to young adulthood, your life expectancy increased to the late 70s.
For men age 65 today, life expectancy is about 85. That means about half will live to 85 or beyond. A number of them will live past 90. Should all of today’s 65-year-olds base their retirement plans on a life expectancy of 85, half of them will have underestimated their life spans and be at risk of running out of money.
Financial planners generally recommend that married couples plan on at least one spouse living to age 90 or 95. Those aged 80 and older are the fastest-growing demographic group. As an example, consider a married couple in which both people are age 62 today. There’s a 95 percent chance at least one of them will live to age 75, and a 65 percent chance at least one will live to age 85, according to the Center for Retirement Research at Boston University. There’s a 40 percent chance at least one spouse will live to 90, and a 15 percent chance one will live to 95 or older.
Inflation is a slow, steady destroyer of wealth, and too many folks overlook its effects on their retirement plans. During their working years, most people receive regular salary increases that keep pace with inflation, and sometimes folks are promoted or switch jobs so that their incomes increase faster than inflation.
All that ends with retirement. Too often, people estimate their living expenses in the first year of retirement and conclude that their portfolios can support that level of spending for their life expectancies. They overlook how inflation will eat away the purchasing power of that income. They have to increase the withdrawals from their savings over time to maintain their standard of living. You may not need to increase your amount of spending each year — some items will rise in price while others fall each year — but over time prices overall are likely to rise.
For example, at an inflation rate of just 2 percent annually, after ten years you need more than $12,200 to have the purchasing power that $10,000 had at the start. After 15 years, you need about $13,500 of withdrawals for the purchasing power of $10,000 at the start of retirement. Twenty years raises the equivalent withdrawal need to $14,850. These numbers reveal only the effects of the reduced purchasing power of the dollar resulting from inflation. Increased withdrawals also may be needed because of new expenses, such as higher spending on medical care.
Retirement has a lot of uncertainty, but one thing most people think they have control over is when, and even if, they’ll retire. Some people have a certain age in mind for retirement. Others say they’ll retire when they feel like it or are tired of their jobs. Still others say they’ll never retire or will shift to part-time work before completely retiring.
The truth is that for many people the date of retirement is out of their control. A McKinsey & Co. survey found that 40 percent of current retirees had stopped working before they planned to. The main reasons for earlier-than-planned retirement are health and layoffs. (See Chapter 3 for more information.)
Today you may be healthy, like your job, and plan to work for a long time. But an accident or major illness could render you unable to continue your current job, or any job, full time. Perhaps your employer will offer a financial incentive to retire sooner. In the worst case, you may be unable to work at any job.
Of course, you may be able to retire sooner than you thought possible because of good fortune such as a successful entrepreneurial venture or the result of long-term investment returns. Some folks inherit more money than they expected.
In this book, we focus on helping you become and remain financially independent in your senior years. Financial independence can make retirement easier and make a satisfying retirement more likely. But your finances aren’t the only things to focus on during retirement planning — and they may not even be the most important contributor to a successful retirement. The evidence is that other factors greatly influence both your happiness in retirement and your longevity. So don’t overlook nonfinancial matters when planning your retirement.
The following are the nonfinancial keys that we’ve observed to be key to a successful retirement:
Financial independence is a tool to help you spend time doing the things you really want to do. It isn’t an end in itself and shouldn’t be the main focus of your time. Part of your retirement planning should be devoted to how you spend your time.
When you’re married, you don’t retire alone, and your retirement plans affect your spouse as much as they do you. When one spouse retires, the adjustment is often as great for the other spouse as it is for the retiring spouse. Remarkably, many people don’t seem to realize this, and a number of couples don’t discuss retirement plans with each other in detail. Make sure you avoid this mistake and coordinate your retirement plan with your spouse.
A Fidelity Couples Retirement Study conducted by Richard Day Research had some interesting findings:
Check out Chapter 3 for more information about discussions you should have with your spouse when setting up your estate plan.
One of the great myths of retirement is that everyone moves to Florida or Arizona after retiring. The truth is that most people stay in the same general area they lived in during the decades before retirement. High percentages of older Americans say they would like to remain in the same home, or “age in place,” as long as possible. While understandable, the goal often isn’t practical. You need to consider certain issues, such as cost and effort of maintaining the home and the challenge of living in a larger home. (Chapter 8 has information to help you with housing decisions.)
When aging in place, you take on a couple significant responsibilities with your larger home:
The challenge of living in the home: Most homes people live in at retirement aren’t built for people who want to age in place. In other words, they aren’t senior friendly. At some point most people become less mobile and more prone to slips and falls. Also, arthritis and other conditions can make simple tasks such as opening doors and cabinets difficult. Many of these difficulties can be overcome by having the home refitted to be “senior friendly.” However, a refit can be expensive and time consuming.
Having your home refitted for senior living before you immediately need the changes is a good idea. You can plan the changes you want and shop for good prices from contractors. You also may be able to do a lot of the work yourself. Too many people wait until their physical condition changes and then they need the changes made in a hurry.
Another of the myths that many folks believe is that most medical expenses in retirement will be covered by insurance or the government. Some think their employers will continue some version of their medical insurance coverage into retirement. Others believe Medicare covers everything for beneficiaries or is similar to the employer coverage they’re used to.
Don’t fall into this trap and make this mistake. In retirement, you’re on your own for a great deal of your medical expenses and for long-term care. A reasonable estimate of your different health expenditures and how they’ll be paid or insured needs to be part of your retirement plan.
During your senior years, you need to consider the following:
The Medicare eligibility rules can be confusing, especially regarding the procedure and the timing for enrollment. The result of this confusion is that too many people pay penalties for signing up late. So you want to make sure you don’t miss any initial enrollment dates for the different Medicare plans. Chapter 11 walks you through the entire Medicare process and what you need to know.
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