When it comes to entering retirement, a failure to plan can have devastating consequences. And a surprising number of people are unprepared. More than half of workers older than 55 have not developed a plan for paying themselves in retirement, according to a recent study, and almost two-thirds have not identified which investments they’ll tap first. Many wait until they have set their retirement date to put together any kind of plan at all.
Planning late is better than never planning, but your chances of a secure retirement will improve if you start making decisions and checking items off your to-do list several years before you call it quits.
Take a look at several big issues you will face as you transition into retirement.
- Understand Your Cash Flow: Start by identifying your Base Cash Flow Needs. These are items like food, water, shelter, and health expenses. They might also include “lumpy” necessities like replacing an old car, or fixing your roof. You will have to pay these no matter what, and you will want to make sure you have the necessary income sources to meet these needs. Next, identify your “lifestyle” cash flow needs. These include entertainment and vacations. These are things that make your life more enjoyable, but could be reduced at some point, if it was necessary for your Wealth Plan’s success. Ideally, guaranteed income—Social Security and things like a pension - will cover the basics. Predictable income from dividends and interest help too. A shortfall can be protected with The HCM Income Safety Net System™.
- Review Your Portfolio: For years, you’ve concentrated on accumulating savings. Now your goal is to build a portfolio that supports the largest and longest sustainable withdrawal period. You’ll still need equities in your portfolio to generate the growth necessary to beat inflation, It’s important to add diversifying assets, like bonds, to help reduce volatility.
- Working through The HCM Investment Policy Builder™ with your advisor can help you prepare for the market’s ups and downs, and ensure that any special circumstances will be supported by your portfolio.
- Set Your Withdrawal Plan: A proper withdrawal plan coordinates your income needs with your income sources, your asset allocation, tax location, and Social Security strategy. Taking money from the right accounts, in the right amounts, at the right time can increase the size of your sustainable withdrawals.
- Understand Medicare: You can't ignore signing up for Medicare. You are eligible at age 65, and you can sign up without penalty anytime from three months before until three months after the month of your 65th birthday. Medicare Part A covers hospitalization and is premium-free. Part B covers outpatient care, including doctors' visits, and Part D provides prescription drug coverage. You will have some responsibility for paying these premiums.
- If you don't sign up for Part B during the seven-month window around turning 65, and you do not have coverage through your current employer, you may have to pay at least a 10% penalty on premiums permanently when you do sign up. If you work for a company with fewer than 20 employees, your group coverage generally becomes secondary to Medicare at age 65, so you should sign up for both Part A and Part B—otherwise, you may not be covered at all.
- Optimize Social Security: You can sign up for benefits as early as age 62 (full retirement age is 66 for people born between 1943 and 1954). But by claiming early, your benefits will be reduced by about 25% to 30% of the amount you would get at full retirement age. For every year you postpone taking benefits after full retirement age until you hit age 70, you get an 8% boost.
- Unless you know you have a less-than-average life expectancy, it usually makes sense to try delay benefits to collect the largest Social Security Benefit possible. Social Security is an inflation-adjusted annuity that you’ve already paid for…in other words, it’s the best income stream you could buy. On top of that, it receives favorable tax-treatment when compared to distributions from your tax-deferred accounts. Although it’s tempting to think about “breaking even”, it’s important to think about the longevity protection Social Security provides. Your Wealth Advisor can use The HCM Social Security Maximizer™ to help you make the right Social Security Decision for your family.
Are you planning to retire in 2017 or within the next 3 – 5 years?
If so, meeting with your HCM Advisor now could be very beneficial to your future financial success in retirement.
Date Posted: 12/28/2016 Advice provided in this article is meant for educational purposes only and financial education is important to us. Before making decisions regarding your personal financial situation, please consult an advisor or conduct your own due diligence. If you would like to discuss your Wealth Accumulation or Retirement Income Plan with an HCM Wealth Advisor, please give us a call at 513-598-5120. Located in Cincinnati, Ohio, we serve clients in 23 states, and we’d love to help.