‘Avoiding the Avoidance’ is Key to Getting Started

Key Takeaways:
  • Start retirement planning early to avoid financial stress.
  • Understanding your net worth and creating key estate planning documents are critical steps in preparing for retirement.
  • Long-term care and healthcare costs are rising, so it’s essential to plan for liquidity and explore insurance options to protect your assets.

 

When we are young, retirement is something we may dream about, perhaps envisioning a life relaxing on the beach or travelling the globe. Never do we have gauzy visions of sitting down with a financial advisor to figure out how to pay for retirement. 

Which is likely the reason so many people avoid retirement planning until they look in the mirror one day and realize they are “retirement age.” The reality of retirement planning presents hard questions and conversations we often would prefer to avoid. 

But avoiding that avoidance – in other words, planning for retirement far enough in advance to put finances and resources in place to pay for the lifestyle you want – can help you enjoy your retirement years with minimal financial worries and maximum confidence. 

Getting Started: Avoiding Avoidance 

One of the first things to accomplish with your financial advisor is to determine your net worth. It is surprising how many people in the pre-retirement years – even those with significant means – have no idea what their net worth is or even how to calculate it.  

Simply put, net worth is determined by adding up all your assets and subtracting the amount of your liabilities.  

Assets include such things as bank accounts, retirement accounts, investments, real estate, vehicles and personal belongings. Assets may also include business holdings, depending on the entity structure of your business.  

Liabilities include anything you owe, such as mortgages, personal loans, outstanding taxes, business loans, vehicle loans, consumer debt and more. 

When determining your net worth for retirement purposes, it’s extremely helpful to also identify where your wealth is and how you might plan for liquidity during your retirement years. 

Once you have a determination of your net worth, it’s important to put together key estate planning documents such as a will, power of attorney and healthcare proxy, as well as family trusts and life insurance trusts. Retirement planning and estate planning go hand in hand, which is likely one reason so many people avoid doing it. It’s complicated, and sometimes downright intimidating. 

Moreover, family dynamics often discourage people from putting their retirement plans and estate plans together. It’s hard to have certain conversations, like who will inherit the family home or how long you will continue to fund your grown children’s lifestyles. 

But the time for avoidance is past. Now, it’s time to plan. 

How Retirement Planning has Changed 

Retirement planning has changed in recent years, in part because the business world and lifestyle expectations have changed. Finances – and financial planning for retirement – are much more important now than they were when our parents retired. Many people are retiring earlier and living longer, meaning their money has to last longer. And pensions are, for the most part, gone, leaving most retirees completely responsible for funding their retirement years.  

Additionally, inflation has pushed up the cost of daily living for everyone, including retirees. So, from a financial standpoint, it is essential to understand what your current costs are and what they are going to look like in retirement. 

To get started, now that you have determined your net worth you can plan the various income streams you will have in retirement. These can include distributions from a 401(k) or SEP IRA, dividends from investments or payouts from the proceeds of a business sale. It may also include Social Security, but beware – Social Security is more complex than you may imagine, so talking with an advisor is a good idea. If you draw too early, you could end up foregoing 8% annual increases up to age 70. 

To get started, determine your current living expenses and project them out into the future with an honest assessment of inflation. Divide your expenses into “buckets” such as daily living, what you’ll need for fun, charitable contributions, gifts for children and grandchildren, etc. 

Above all, don’t forget to include a bucket for healthcare, as you will likely need more of it as you age. Which brings us to a discussion that almost no one wants to have. 

Long-term Care Costs 

Long-term care costs have increased rapidly in recent years, and will continue to rise as seniors become a larger percentage of the U.S. population. More than half (56%) of Americans turning 65 today will develop a disability serious enough to require long-term service and support. While we all would like to think we won’t be included in that 56%, it’s better to be realistic. 

Long-term care insurance is hard to qualify for unless you are in very good health, and expensive unless you buy it at a young age. Medicare does not pay for a long stay in a nursing home! People who buy long-term care plans in their 60s are seeing high increases in rates, making this type of coverage less and less realistic. 

However, there are options: 

  • If you have enough money in a Health Savings Account, you can use those funds to pay premiums on a long-term care policy. This leaves your other income from retirement accounts, Social Security and investments free to fund your living expenses. 
  • Additionally, premiums for certain qualified long-term care policies are tax deductible. 
  • Some life insurance policies can include a long-term care rider (at an extra cost) that would enable the policyholder to draw down the policy assets to pay long-term care costs if the need arose. If there was no need for long-term care, the policy would still function as a life insurance policy, paying beneficiaries in the event of the policyholder’s death. 
  • Certain tax strategies can be utilized to accomplish risk management goals by focusing on qualifying products available to retirees, and coordinating them with the revenue stream from a variety of sources that most retirees will have. The effect is a stretching out of the retiree’s assets and ability to pay for lifestyle and healthcare needs over the years. 

Healthcare and long-term care planning are areas where a retiree must look at life insurance from a liquidity standpoint. Certain assets are more liquid than others, and can help ensure the ability to withstand sudden healthcare or long-term care costs. For instance, you may have significant home equity, but that only matters if you’re planning to sell or re-mortgage the home. However, stock market investments can be sold fairly quickly, generating cash you may need. 

This is why it is important to include a discussion about liquidity planning as part of your retirement and estate planning. 

Revisit your Retirement Plan  

Once your retirement plan is in place, if you are still in the work world be sure to revisit the plan every two or three years and update it if there have been any major changes in your life. 

Even if you are already retired, it’s worthwhile to review the plan periodically. Is your spending remaining within the guidelines you previously envisioned? Have you or your spouse developed a chronic illness? Have you moved to a different state? 

Creating a retirement plan takes time and coordination with other financial plans, and guidance from a trusted advisor is key to moving the process forward. If you would like to discuss your retirement plan, contact an Adams Brown wealth consultant.