When I say retirement, what comes to mind? The image of a greyed hair couple walking hand in hand on a picturesque beach. Sitting on an outdoor, wooden park bench holding hands and getting fresh air. There’s nothing wrong with that except for someone like me, a Certified Financial Planner (CFP®) with over thirty years of experience helping hundreds of people make important life decisions aka retirement decisions, the crystal ball is anything but sandy beaches and afternoon strolls.
Truth be told, there was a time when discussions about retirement were a lot simpler and easier to project—create an Excel file, build simple arithmetic formulas, and plug in the numbers. If by chance my clients decided to sell the ranch, I could easily change the values and do the calculations by hand if need be. Today, not only is the retirement discussion different but the savings/investment vehicles themselves are a clear departure from what they once were.
To illustrate, I would like to call your attention to recent data from the Center for Retirement Research at Boston College. Their survey compared workers with pension coverage by type of plan for years 1983, 1998, and 2016. In 1983, 62 percent of private-sector workers were covered by a pension plan at their place of employment. In 2016, that number plummeted to 17 percent representing a 45-point difference. A similar phenomenon can be seen from the 401(k) perspective. In 1983, only 12 percent of private-sector workers were covered by defined contribution plan at work. In 2016, the number grew to 73 percent, a percentage increase of 508 percent.
What does this mean to you? The diligent, hard-working, retirement-minded investor? If you’re anything like our clients, it means you need to be extremely proactive about your retirement savings and planning. In addition, the dramatic shift from corporate funding to self-funding of retirement assets means taking advantage of recent tax reform and investment vehicles such a Traditional IRA or Roth IRA—special types of retirement accounts that can boost your retirement savings, providing you have earned income and meet other conditions. As with all retirement investment vehicles, there are contribution limits and certain restrictions associated (speak to a Certified Financial Planner/CFP® if you are unsure)—however, a Traditional IRA or Roth IRA can be started with as little as $100.
As you begin to map out your retirement and evaluate different scenarios on paper, ideally working alongside a Certified Financial Planner (CFP®) and an investment professional that offers a fee vs commission-based advice, many life questions and foreseeable factors will crop up. In thinking about the answers to such questions, it is important to talk to your spouse and family in advance of meeting with your financial advisor. And how you respond to each of these criteria will ultimately shape the answer to the proverbial question, “When Should I Retire?”
- Where you live. Certain states like Florida, Nevada, and New Hampshire have no state income tax, estate tax, or inheritance tax. Furthermore, these states exempt Social Security benefits from state taxes. In contrast, states like New Jersey, New York, Connecticut, and Massachusetts carry a higher cost of living due in part to high property taxes, state income taxes, home and energy prices. All things being equal, deciding to relocate to a retirement-friendly state may have a substantial impact on how long your retirement savings will last and how you live i.e. lifestyle.
- How much you’ll pay in taxes. As mentioned above, the ultimate decision about where to live in retirement is directly correlated to how much you’ll need for taxes. But wait, there is a lot more to it. The cost of a new residence, ownership of your previous residence, and how you’ll pay for your new home will affect your tax bill. While you and your spouse may qualify to exclude up to $500,000 if you file married filing jointly, anything over that threshold will be taxed at ordinary income rates. Another important tax consideration is required minimum distributions (RMDs) on a Traditional IRA, 401(k), or 403(b), which kick in at age 70 ½. These mandatory withdrawals are usually taxed as ordinary income and will increase the total amount of taxes due.
- When you take Social Security. The age-old decision of when to claim Social Security benefits is universal. You can begin receiving Social Security benefits as early as 62 years of age, with a few caveats. If you wait until your full retirement age (FRA) – age 67 if you are born after 1960 – you will receive your full benefit. However, benefits increase by 8% per year, up to age 70 if you wait until that age to collect. The health, life expectancy, cash needs, and employment of you and your spouse or domestic partner, must also be considered. Employment income, for example, may reduce your Social Security benefit if you claim before full retirement age.
- How and how much you’ve saved. As illustrated in the Center for Retirement Research survey, the shift away from pension coverage at work in the last 35 years has been seismic—the percentage of American workers with a pension has dropped to 17% (2016) from its height of 62% (1983). Many smart, hard-working Americans, with decades of corporate experience, are shocked to discover a shortfall in retirement savings. What we also witness is that a majority of self-managed portfolios do not reflect an asset allocation strategy built with the goal of providing a regular, steady cash flow to meet retirement expenses; rather, investment selection has been concentrated in just equities for example. In advanced retirement planning, we not only evaluate how much you’ve saved but where and how you’ve saved it.
- The amount you’ll need for medical expenses. At Beacon, we tell our clients to set aside at least $250,000 for medical expenses during their retirement—even those who pay a premium for Medicare Part B, C, or D. The reason being is that health care costs escalate as we age, and many expenses, such as expenses associated with long-term care, may be totally out of pocket. According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2018 may need approximately $280,000 (in after tax dollars) to cover health care expenses in retirement. We also recommend contributing to Health Savings Account (HSA) to put aside money for medical costs, especially for a certain subset of clients with a high-deductible health insurance plan at work.
There are other foreseeable factors that could indeed affect your retirement roadmap outside the scope of this article. It is important to realize that every situation is unique. And every client in unique. All factors must be carefully considered when running retirement projections and scenario planning should be performed by credentialed retirement planning professionals like a Certified Financial Planner (CFP®) and Chartered Retirement Planning Counselor (CRPC), both here on staff. We do this type of advanced planning for our clients every day. Contact us at (201) 447-9500 or by email if you would like to schedule a 30-minute complimentary consultation to learn more.
Financial Planning 02/09/2018
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