When entering retirement, many retirees question whether they have “enough” to enjoy this phase of their plan. Even those who believe they have enough can’t help but wonder if they are missing something. A review of your retirement plan during this phase creates clarity regarding current and future financial decisions, which will help you enjoy retirement.
Common themes/questions as you Enjoy Retirement
While preparing for retirement, you hopefully reviewed the steps needed to project a high probability of successfully enjoying retiring. Now you enter the enjoying retirement phase. The theme of this phase is balancing today’s enjoyment with the uncertainty of what lies ahead. The impact of inflation (traditional and medical) and the potential increased need for health care and perhaps long-term care are common questions.
Enjoying Retirement plans include discussions about:
- How much can I spend? You will likely have a “floor” of income. The floor is the sum of your guaranteed income sources. The difference between your guaranteed income sources and your expenses will come from your investments. Projecting cash flow needs (including the impact of inflation) will help you understand how much you can spend during retirement.
- How much will Medicare increase? The true answer is we don’t know. But we must project an increase. We currently project an increase in medical costs over twice default inflation.
- Will Social Security and/or other guaranteed income sources increase? Inflation is arguably your biggest enemy when considering your ability to enjoy retirement. It is important to consider how inflation impacts your income sources. Social Security is adjusted for inflation. Most pensions and/or annuity payments are not. Your expenses will increase with inflation.
- How will I pay for Long-Term Care (if needed)? Understanding the various options before you need care will help you and your spouse make informed decisions. Some assisted living facilities provide care provided you lived within their community prior to the need for care. Some care is included at the original cost while other facilities charge extra. If you wait until you need care, you will either accept the risk and pay for services or buy long-term care insurance. A plan review will reveal your risk when considering either option.
- Should I adjust my portfolio? The short answer is yes. You will likely need to adjust your portfolio as you enjoy retirement. But you might not follow the often-cited path of simply being more conservative as you get older. Reviewing your plan on a regular basis will compare the trade-offs between risk and return. When you remove one form of risk (example market risk), you are likely adding an additional form of risk (often inflation risk).
- From which account (and investment) will I pay next year’s bills? When you were in the accumulation phase, you were adding to your portfolio. Now that you’ve entered the distribution phase, it is important to understand how much you plan to withdraw from your portfolio each year. That amount should be invested in a low volatility option. You don’t want to need money the day after the market corrected by 20% (or worse). A well-crafted plan will address current and future cash needs.
- What happens to my income if me spouse dies? If one spouse passes, the survivor’s guaranteed income is often adjusted. Testing a scenario where one passes earlier than expected provides the knowledge needed to make long-term, informed decisions. The decisions will include how to collect guaranteed income sources, need for life insurance and the potential impact of a change in tax status (filing single rather than joint).
- Can I gift today? You may want to help loved ones or charities today but recognize if you gift the money today, it is gone. Including a gifting strategy while enjoying retirement can be tax advantageous if you already have a charitable intent.
- What should I do with existing insurance policies? While in the earlier phases, life and disability insurance typically protected the risk of losing income. As you enjoy retirement, you will likely not have earned income, but as mentioned earlier, the death of one spouse will likely adjust your income. Reviewing the impact will allow you make informed decisions about insurance.
- What should I do with existing annuity products? You may have heard ads where advisors claim “I hate annuities and so should you…” While we don’t like the fees associated with variable annuities, we recommend considering all options before transferring or liquidating an existing annuity. Because our fees are based on hours rather than a percentage of assets, we are not tempted to liquidate an annuity simply to create a new fee for you. You might be best served by maintaining your current annuities and use the income portion of the product. It would be a shame to pay the fees and not use the benefit you paid for.
Why you should review your plan during the Enjoying Retirement phase
The decisions over which you have control over have likely been made. You are collecting Social Security benefits or know when you plan to start receiving. Your investments are aligned with your cash flow needs. As you move through retirement, the factor over which you have the most influence is how much to spend annually.
Your plan should balance your needs with your desires. You might desire a greater amount of travel in the earlier years of retirement. You might consider moving into assisted living as you get older. You will likely enter this phase with limited or no earned income. Your expenses will be paid from guaranteed income sources (Social Security, pensions and other) with the remainder coming from investments (growth and income). A clear plan will allow you to enjoy retirement.
If you question whether this is a good investment for you, we recommend interviewing us and other financial planners. Like most financial planners, we do not charge a fee for this meeting. Take time to understand the differences and decide what is best for you.