You’ve worked hard all your life, and retirement is just around the corner. You hope you’ve scrimped and saved enough so you can take trips to see the grandkids and enjoy lazy days full of activities you love to do, not work tasks you have to do.
Did you know that we are living longer than the last generation? Those retirement years can stretch into decades. According to the Social Security Administration, a 65-year-old today can expect to live another 19 to 21.5 years. A third of those older adults will hit age 90, and 1 in 7 will live beyond age 95. (factoid: when Social Security was created in 1935, average life expectancy was actually UNDER 65.)
In all honesty, would you admit to being concerned, maybe even a little worried? You have seen the newscasts and the articles about the high cost of aging in the United States. Are you sure you have enough money saved to live the way you want to live for the rest of your life? Living the way you WANT to live is a critical point in the planning process.
Financial planning—including estate planning—for the later years of life is crucial. You do not have to make these decisions alone. Our friends at Prudential, Edward Jones, and others, offer helpful retirement planning calculators to show you how much money you will need to retire and live the life you are planning. Retirement planning that does not include estate planning is incomplete; especially if you have specific gifting goals for heirs and/or charitable causes.
There are other helpful calculators online to determine specific needs and costs of services like senior housing and long-term care.
When starting to plan for retirement, the first thing to do would be to decide how much money you will need to pay day-to-day expenses. While you may not be receiving a paycheck every two weeks, your bills will not stop coming. Consider these common expenses as you create your financial planning retirement plan:
- Health care
- Auto and life insurance
- Groceries and personal care
- Home improvements and maintenance
- Travel and leisure
- Outstanding loans and debt
Health care is crucial. Make sure you consider not only your current health care bills but also the bills you may see in the future. This is especially important if you have a chronic condition or other preexisting conditions.
In terms of housing expenses, keep in mind you may need to move into a senior living community which can be exponentially more expensive than your current housing expenses. Purchasing long-term care insurance may help with that, but it is doubtful it will cover all of your costs.
While your needs are very personal to you, there are a couple of rules of thumb you could use to calculate how much money you will need at retirement. These rules are based on either how much money you will need to have saved before retirement or how much money you will spend every year during retirement. Choose the calculation that makes the most sense to you.
The 10x Rule states that you need ten times your pre-retirement income if you want to retire by the age of 67. For example, if your income is $100,000, you need to have saved $1,000,000.
The 80 Percent Rule takes into account the money you will not be spending during retirement, such as work-related costs and payroll deductions. It says that you will need 80% of your current income every year after retirement. So, if you earn $100,000 per year, you will need $80,000 each year in retirement. This method does not take into account how long you will live after retirement, so it is a little hard to plan for how much you need to save.
The Four Percent Rule takes into consideration your overall retirement savings. Calculate your combined retirement savings, including 401k, IRA, and other assets, and plan to take four percent of that total annually once you retire. For example, if you have $1,000,000 in combined retirement savings, you can take out $40,000 each year. This will tell you how much money you are guaranteed to have every year and if you need to supplement your retirement income.
Now that you’ve calculated how much money you will need in retirement, it is time to analyze your existing retirement savings. Hopefully, you’ve been contributing to your retirement accounts since you started earning wages. Aside from the venerable pension, the most common retirement accounts offered by employers are 401(k), 403(b), or 457(b). These are especially important because many employers will offer company matches, which is basically free non-taxable money. You can also save via a traditional or Roth IRA. IRAs are tax-deferred, which means you do not pay taxes on any money earned until you start withdrawing from the account.
Retirement savings can be complicated. Investment professionals specializing in retirement savings can help you analyze your retirement needs and invest in the best retirement accounts.
Now, let’s talk about other ways to pay your expenses during retirement.
Sources of Income
The Social Security benefits are “entitlement” programs. You have paid for these benefits through Social Security taxes in every paycheck. The total amount you receive is based on your work history and cumulative earnings. The laws state you can start taking a portion of your benefits at age 62, but you will have to wait until he is 65 or 67 (depending on your birth year) to take the full benefits. You can calculate your forecasted earnings on this calculator.
Supplemental Security Income (SSI)
SSI is a needs-based program for seniors with limited income. It also helps people of any age who are blind or disabled. SSI benefits are monthly cash payments for eligible people in financial need. Some states will increase the amount of the SSI benefit if seniors live in an assisted living community. The state rules vary. Contact your state’s SSI program for more details. SSI is not the same as Social Security. In most cases, you cannot collect both SSI and Social Security.
Medicaid will not pay rent or utilities, but it may pay for your medical care. It is a joint federal and state program that pays for medical services to eligible low-income and vulnerable families and individuals. The Medicaid program rules vary from state to state. Colorado’s Medicaid program is called Health First Colorado.
The most common medical services covered by Medicaid include community care in nursing facilities, home health care to those eligible, physician services, lab and x-rays, and both outpatient and inpatient hospital services. Medicaid pays for about 60% of skilled nursing and 10% of assisted living care.
Medicare Part A kicks in when you turn 65 or become disabled before turning 65. There is no income requirement. Part A mostly covers inpatient hospital care, such as operations, lab work, X-rays, intensive care, and a semi-private room. It also covers home health care and hospice care.
Part A can help pay for a home health agency, medical equipment, and medical supplies. Part A will also cover some short-term skilled nursing care.
Part B is called Supplementary Medical Insurance. Almost every older person is eligible. Part B covers doctor visits, diagnostic tests, ambulance services, lab work, and some therapy.
Part C is also called Medicare Advantage (MA). MA covers the same services in Part A and Part B but in a skilled nursing community for the long term. The plan pays a fixed amount for care every month to insurance companies that offer MA plans. The definitions of out-of-pocket costs vary year to year.
Long-Term Care Insurance
Long-term care insurance will pay for many of the medical and living expenses that Medicaid and Medicare will not. This includes room and board at a senior care community and personal care such as bathing and dressing. There are no standards or mandates like the government-run Medicare and Medicaid programs, so every policy is different. Becoming covered by long-term care insurance will get more difficult and more expensive, the older you become. So, we recommend that you purchase a long-term care insurance policy before you retire.
If you or your partner served our country in the armed forces, you may be owed financial support in your golden years. One program is called Aid and Attendance. This program will pay a monthly pension that can be used to pay assisted living or skilled nursing costs. This benefit is given in addition to your pension. As with most government programs, there are plenty of rules to meet for eligibility. For in-home help, Veterans’ Directed Care would be an option. This plan pays for personal care at home.
You may have purchased life insurance to help your family after you are gone. If you need more income, you have the option of selling your policy outright or cashing out some of the value. You could also sell your policy to a third-party investor for more than the surrender value. This is called a life settlement.
Your Family Home
Reverse mortgages and home equity lines of credit (HELOC) can help fund your retirement. However, not everyone is eligible, and care must be taken.
To qualify for a reverse mortgage loan, the youngest borrower on the house title must be at least 62 years old, the home must be the primary residence, and you must have sufficient home equity. You will also need to meet HUD financial eligibility criteria. The entire loan will become due when you die or move out.
A HELOC is a short-term loan based on the value of your home. You have 5 to 10 years to draw funds from a HELOC and then 10 to 20 years to pay it back. You must have at least 20% equity in your home to be eligible for a HELOC.
Now that you have an idea of your income and savings as well as the expenses you are expecting during retirement, you can create a forecasted budget for your retirement. This budget can also help you decide exactly when it would make sense for you to retire. If you have a lot of investments, you may want to ask your financial planner for some advice. They can estimate the amortized returns on your investments, make sure your portfolio is balanced, and help you find the best way to withdraw your savings so that you are minimizing your taxes.
Even before you retire, it’s a smart idea to revisit your retirement plan annually to ensure your savings plan is still on target and make adjustments as needed.
You’ve worked hard to get to this point. Proper financial planning is key to making sure you get to enjoy your post-retirement life.