by Joe Hearn | May 10, 2011 | Retirement
Deciding when to retire is not always easy. Many people simply base the decision on their birthday, but there are a whole host of other factors that should weigh into your thinking as well. Here are seven signs it’s time to retire:
1. Your bank account
When you retire, your portfolio takes over the job that the payroll department handled while you were working. If you have to cut yourself a paycheck each month, it makes sense to be sure that your bank account is up to the task. A common rule of thumb puts a sustainable withdrawal rate at about 4 percent. Another way to look at that would be to shoot for retirement savings that are twenty-five times larger than your expected annual withdrawal. If you are not quite there yet, it might make sense to work a little longer (or work part-time), save more, or make cuts to your anticipated spending during retirement.
2. Your bucket list
Before retiring, you should know the answer to three key questions: What do I want to do? Where do I want to do it? Who do I want to do it with? Knowing answers to those questions will help give you purpose and a plan for how to spend your time. If your key reason for retiring is to escape your job, don’t pull the trigger just yet. Wait until you have a plan in place for meaningful pursuits. Doing so will likely help you avoid a bad case of retirement “buyer’s remorse.”
3. Your health
If you are in excellent health and have longevity in your family, working a little longer may not significantly cut into your plans. Not so if you or your spouse are in poor health. In that instance, delaying retirement could mean your chances to do certain things are gone for good. This is especially true if you are planning an active retirement. Take an honest look at your health and life expectancy and weigh that into your decision about when to retire.
4. The markets
Investment returns during the first decade of retirement are extremely important. Retire on the cusp of a bull market and your portfolio will likely build enough padding to withstand future downturns and withdrawals. Retire and begin taking withdrawals at the beginning of a bear market, however, and those early losses will greatly increase your odds of running out of money. Experts refer to this as sequence risk, but it could just as easily be referred to as luck. No one has a crystal ball, but if the economy appears poised for a downturn, you might want to delay retirement (and withdrawals) until things rebound. The same is true if your portfolio has significant losses in the years leading up to retirement. In that case it might make sense to keep working until your investments have a chance to recover.
5. Health care benefits
Recent studies by Fidelity and others estimate that a sixty-five year old couple retiring today will need between $200,000 and $400,000 to cover health care costs during retirement. That is in addition to what Medicare already covers. Having a plan to cover those costs—whether by savings, private insurance, or a Medicare supplement policy—is an important consideration when deciding when to retire.
6. Social Security benefits
Retiring at sixty-two would mean a permanent reduction of almost 30 percent to your Social Security benefits compared to what they would be if you waited until your full retirement age. Just like retiring early reduces benefits, retiring later increases them. Those born after 1943 can expect an 8 percent increase for each year they wait to claim benefits after full retirement age. This increase goes away at age seventy, so working until then will result in maximum benefits.
7. Your spouse
You would be surprised at the number of couples who are blindsided by differences over retirement dreams, plans, and expectations. One wants to keep working while the other is ready to be done. One wants to move to the beach and the other wants stay close to the kids. Are you on the same page with your spouse when it comes to retirement? Make sure you do your planning together so you can work through any differences early and enter retirement as a team.
As you can see, deciding when to retire is a complex decision with many moving parts. By giving it the time and attention it deserves, you can help ensure that your retirement gets off on the right foot.
~ Joe
by Joe Hearn | May 8, 2011 | Housing
After putting down roots during their working years, it’s no surprise that most people choose to stay put when they retire. According to a study by Boston College’s Center for Retirement Research, only about 10 percent of older adults move in any given two-year period. The shaky economy and declining home prices are likely pushing that number even lower. But if you’ve always dreamed of relocating, now could be the perfect time.
Buyer’s market
With home prices falling for the better part of four years, it is definitely a buyer’s market. And while buying into a declining market can be unsettling, buyers are being rewarded with increased leverage when it comes to negotiating things like purchase price, repairs, and closing costs. Add to that the fact that mortgage rates remain near generational lows and making a move could be much less of a financial burden than it was just a few short years ago.
Of course, you likely need to sell your current house, but depending on where you live, selling could be easier than you think. The housing downturn has not affected all areas equally. Prices have fallen much more sharply in places like Florida, Arizona, and California—all traditional retirement locales. If you’re selling your house in the Midwest and moving to Florida, for example, you might actually come out ahead. This is especially true if you take the opportunity to downsize to a smaller place.
Don Jasper of Omaha, Nebraska recently purchased a home for retirement in Cape Coral, Florida. For years, he and his wife have talked about spending at least part of the year in a warmer climate. Recently retired, they took a vacation to Florida and spent part of the trip meeting with a realtor. “We were surprised at how reasonable home prices had become,” said Mr. Jasper. “The home we bought would have been out of our price range a few years ago.”
Other factors
Getting a good deal isn’t the only factor that should influence your decision on whether to move. Tax rates vary greatly from state-to-state, so you should consider how things like state sales taxes, personal income taxes, retirement income taxes, and property taxes will impact your retirement budget. Inheritance and estate taxes might also affect your decision. In addition to taxes, you should consider things like climate, cost of living, healthcare facilities, proximity to family, and leisure and cultural activities. Talk with your spouse about what’s important to each of you and use your vacation time to visit the places you are considering.
Making the transition
Once you’ve made the decision to move and have settled on the best community for you, it’s time to begin the transition. Find a realtor you trust and begin looking at available properties. If possible, buy your new home a year or so before you retire. This will not only give you a place to stay when you visit, but will allow you time to begin setting up the new house. Each time you visit, bring things from your old house with you. This will help the new place feel like home and will help to de-clutter your old house, allowing it to show better when (or if) you decide to sell.
Some who choose to relocate initially regret their decision because they miss family and friends and because their new surroundings feel unfamiliar. To make the transition more natural, go out of your way to meet new people and get involved in the community. Finding a church to attend or joining a country club are great places to start. Also scout out things like where you will buy your groceries, get your car fixed, go to the dentist, and get your hair cut. Knowing your way around like a local will make you feel like you’re a part of the community as opposed to just an outsider on an extended vacation.
Finally, if you’re moving to a different state, meet with your attorney to make sure that your will, trust, and powers of attorney will be valid in your new state of residence. Make any revisions necessary.
Deciding where to live when you retire is one of the most important decisions you will make. It will impact your finances, friendships, leisure activities and even how frequently you see your family. Moving isn’t for everyone, but when done properly it can be the beginning of a rewarding new adventure. “We’re really excited,” says Mr. Jasper, “but we definitely did our homework.”
Joe originally published this article at www.fpanet.org.
by Joe Hearn | May 4, 2011 | Pursuits, Retirement, Travel
At the risk of sounding obvious, you have a much greater chance of accomplishing a goal if you know exactly what it is you want to do. Someone committed to going to Harvard has a much greater chance of ending up there than does someone who just wants to go to college. Someone committed to climbing Mount Everest is much more likely to reach the summit than someone who just wants to climb mountains.
How about you? When it comes to retirement, how specific are your plans? do you want to “save” or do you have a specific dollar amount in mind? Do you want to “retire as soon as possible” or do you have a specific date in mind. Do you want to “travel” or do you have a goal to visit five countries a year? A decided person is a productive person. Being specific allows you to aim at a target. Not surprisingly, aiming at the target improves your chances of hitting it.
by Joe Hearn | May 3, 2011 | Misc., Risk
Have you ever wondered what you would do if you suddenly became the victim of a natural disaster, terrorist attack, fire or other unexpected event? Would you know what to grab if you had only seconds to escape your house? The plans you’ve made in advance and the items you decide to take will determine how quickly you are able to rebound from disaster. Here are seven ways to prepare for the unexpected.
Prepare a Grab-and-Go Case. Organize your important legal, financial and insurance paperwork into a file that you can snatch if you need to flee your house or your city. Consider including birth certificates, estate planning documents, financial statements, insurance policies (homeowner’s, auto, life, health), Social Security cards, a list of your prescriptions, a copy of your driver’s license and some emergency cash.
Make a Contact List. If a disaster occurs, you’ll want to contact friends or relatives to let them know you are safe or to ask for help. List their names, addresses and phone numbers. Include your trusted advisers, such as your physician, attorney, financial adviser, accountant, insurance agent and banker—they’re all trained to help you pick up the pieces of your life.
Prepare a Household Inventory. After a major disaster, most homeowners are simply not able to remember all their belongings for an insurance claim. A household inventory—a written list, photographs or a video walk-through of your home—will help avoid this problem. Remember to store the inventory somewhere other than your home, with a copy in your grab-and-go case.
Meet With Your Advisers. When you have six feet of water in your living room is not the time to discover you don’t have flood insurance. The emergency room is not the place to learn you need a medical power of attorney. Take the time to schedule meetings with each of your advisers and let them know you are trying to fill in the gaps and disaster-proof your affairs.
Update Your Plans. Change is the one constant in life. Make sure to review and update your affairs at least annually. Some questions to ask include (1) Has your marital status changed? (2) Has the value of your assets changed significantly? (3) Have you altered your insurance policies? (4) Have you changed jobs? (5) Has your health recently changed? If you answer yes to any of those questions, you need to update your plans.
Have a Backup. Let’s face it. You may not be able to escape with your important paperwork. Many fires, for example, happen while the homeowners are away. To protect yourself, store backup copies of important documents in a safe-deposit box or with a trusted friend, relative or adviser. As a general rule, don’t keep anything in a safe-deposit box that may be needed in an emergency, such as powers of attorney—a safe-deposit box may not be accessible 24 hours a day and may be sealed temporarily after the box owner dies.
Evaluate Storage Solutions Carefully. Your primary focus should be on keeping your information secure. If your computer is your main storage vault, make sure it has up-to-date firewall and anti-virus protection. Use of a reputable online storage service may be a good option for those comfortable with the technology.
Keep in mind that in an emergency, portability becomes an additional concern. It would be difficult to grab your computer, with all it’s plugs and cables, and quickly escape your home. Instead, if you want an electronic copy of your documents, consider scanning them and burning them to a CD or storing them on an external hard drive or USB flash drive, portable devices that hold a lot of data. For photos, consider one of the many online storage sites.
Fireproof safes may provide added protection for documents. However, you should know that many consumer safes are rated to withstand heat and flames for only about an hour. After that, even if the safe is intact, the internal temperature could rise above 350 degrees and any paper inside would incinerate. This is what happened to the safe-deposit boxes in the World Trade Center. While some of the boxes survived, many of the contents did not.
None of us can prevent the unexpected, but putting your life back together again is much easier if you have all the pieces.
This article was originally published in the AARP Bulletin.
by Joe Hearn | May 3, 2011 | Pursuits, Retirement
For many, the phrase “retirement planning” has become limited to the planning done in the years leading up to retirement. When you consider that your retirement could last for 20 to 30 years, however, it’s easy to see that your planning won’t end once you transition out of the workforce.
Chances are good that the things you want to do, are able to do, and can afford to do will change over the years. As a result you will likely have several transitions to plan for.
As a chess fan, I was struck by how similar the phases of retirement are to the three phases of a chess game. In chess, you have the opening, the middle game, and the end game. Let’s take a quick look at each and see what parallels we can draw with retirement.
Phase 1: The Opening
The opening of a chess game is all about maneuvering your pieces into position in anticipation of your overarching strategy. How well you develop your pieces in the opening often determines whether you spend the game on the attack or on your heels.
Similarly, Phase 1 of retirement is all about outlining your strategy and getting your pieces into play. That means deciding what you want to do and determining how much it will cost. For example, do you want to travel or stay close to home? Do you plan on moving? Is there a particular hobby or activity you want to focus on? Spend time thinking and talking to your spouse about what your typical day in retirement will look like.
Once you have your plan it’s time to create your retirement budget. List out your sources of income, such as Social Security, pension, personal savings or income from your job if you plan on working part time. Next begin putting numbers to the planning you did earlier. How much will things like your housing, food, travel, insurance, hobbies, and entertainment cost?
Is your estimated retirement income enough to cover your expenses? If not, now is the time to make up for any shortfall. You’re likely in your peak earning years and retirement plans like IRAs allow people over 50 to make excess “catch-up” contributions. Save as much as possible and work to eliminate debt so you can enter retirement with your finances in order.
As you can see Phase 1 has many moving parts. It is not unusual for someone to spend several years planning for and executing this transition. Once you have the where, when, and what questions answered and are confident that your nest egg is up to the task, you are ready to move from the opening to the middle game.
Phase 2: The Middle Game
In chess, the middle game is where most of the action is. The pieces are in play and each player can get creative. In fact, a good imagination and the ability to execute are two of the most important elements of the middle game.
If Phase 1 of retirement was heavy on strategy, Phase 2 is heavy on tactics. It’s time to transition out of your job and turn on your income streams by claiming Social Security and starting withdrawals from your personal accounts. It’s usually best to take money from your taxable accounts first (save tax-deferred accounts until later) and to keep your withdrawals to around 4 percent of your account value per year.
Once your income is set you can begin doing all the things you planned for this phase. This can sometimes be complicated by the fact that your circumstances will constantly be changing. Your health may change. Your finances may change. A great opportunity might present itself that you hadn’t considered before. All of these things will require you to modify your tactics.
World chess champion Gary Kasparov once described chess as trying to find your way to a destination using a map that is constantly changing. The same is true in retirement. Your strategy will likely remain the same, but the maneuvers you make to support your strategy will be fluid. The challenge is to wake up each day engaged and ready to act. As is usually the case with chess, you have limited time to make your moves.
Phase 3: The End Game
When the end game arrives during a chess game, you likely will be down to a few pieces. Earlier in the game, you either sacrificed them as part of your strategy or had them taken from you unwillingly. Depending on how things played out in the middle game, a change in strategy or tactics may be in order. The available choices and the time you have to make them are limited.
Obviously, the parallels in this phase are a little more unpleasant to consider, but since there is no Phase 4, there are some key issues you will want to take care of. For example, you will want to review your will and powers of attorney to make sure they are up to date and reflect your current wishes. Likewise with beneficiary designations on things like your life insurance policies and retirement accounts.
Also, as your health changes, the desire to live next to the beach may give way to the desire to live closer to family or a good medical facility. Moving is always a major undertaking, so talk with family and do as much planning as possible while you’re healthy.
As you can see, retirement is more than just a date on the calendar. By planning for each major phase, you can have peace of mind and focus on living a rich, rewarding life no matter how many pieces you have left on the board.
Portions of this article were excerpted from the book The Bell Lap. In addition, Joe originally published this article at www.fpanet.org.
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