Financial Planning as you Approach Retirement

Posted by Paul F. Lynch on September 17, 2013

If you're nearing retirement, you may be feeling a mix of emotions: excitement about your plans for the next phase of your life, and apprehension about how you'll make ends meet. You're at a critical point in your retirement planning, and need to take steps to ensure that you're on track toward the retirement lifestyle you want. The following are some tips and guidelines to keep in mind as you lay the financial groundwork for your retirement.

How Much It Will Cost You To Retire

You may be pleasantly surprised to discover that it won't cost you as much to retire as you think. Don't put too much credence in the rule of thumb that says you'll need a retirement income that's close to (or even in excess of) your preretirement income to live comfortably. Many retirees have found that they can live quite well on 65 percent or less of their preretirement income.

The table below lists expenses that will probably decline after you retire. Although you'll still have to save a bit of your income in your early years of retirement, your need for savings beyond that will basically disappear. Work-related expenses will also be eliminated and, after decades of paying into social security, you'll be on the receiving end. Your income taxes will decline as well, typically consuming about 10 percent less of your income. Finally, depending on your situation, you may no longer be saddled with the expenses of college and other child-related costs, or your mortgage.

Of course, some expenses, notably medical costs, are likely to rise after you retire. But when you put pencil to paper, you'll probably find you can enjoy a good retirement on less money than you thought.

Expense Reductions When You Retire

Expense Item Spending Level Decrease
Savings 5 to 20%
Work expenses 3 to 5%
Social security taxes 6 to 8%
Expense reductions at retirement 14 to 33%
Reduced income taxes 10%
Expense and income tax reductions at retirement: 24 to 43%

When To Retire

The age at which you retire has a significant impact on how much retirement income you'll need. Take the following example:

Anne has suffered some losses in her retirement investments, but she estimates that she will have $300,000 in retirement savings at age 62. If she retires later, she will add $15,000 per year to her retirement savings through her retirement savings plan at work. If Anne retires at age 62, she'll have a total yearly income of $31,000, including social security and withdrawals from her retirement stash.

But Anne likes her job and sees no reason to leave the workforce at 62. If she retires at age 68, rather than age 62, her first-year retirement income will rise from $31,000 to $57,000—an 84 percent increase. Also, she'll be able to increase her withdrawals to account for inflation each year for the rest of her life.

You can see what a difference a few years make.

Gradual, or phased, retirement is another alternative: Instead of retiring cold turkey, you can taper gradually, moving from full-time to part-time work status. You might be able to do this within your profession, or you might need to find a different form of part-time employment to make it work.

The following table shows what happens financially if you delay collecting social security and withdrawing money from your nest egg simply by earning enough money to support yourself, without adding even another nickel to your savings.

The Benefits of Gradual Retirement

Delay retirement by...
1 Year 3 Years 5 Years
Social security increase 6-8% 19-26% 36-44%
Withdrawals from retirement nest egg 10% 25% 40%

While retiring late or gradually over time is an attractive option, you still need to be prepared for the possibility of an earlier retirement. Over 40 percent of those who retire early do so involuntarily due to illness, the need to care for a family member, or job loss.

Where To Retire

Studies have indicated that many baby boomers intend to move after they retire, relocating either within same general locale (from city to suburbs or vice versa, for example), to a different part of the country, or even to a foreign country. You may be able to lower your retirement living expenses considerably if you decide to move. For example, moving to the Sunbelt from an urban location in the northeast or California can reduce your living expenses by as much as 40 percent.

What To Do With Your Home

Downsizing to a smaller or less expensive home either before or after retirement can help close the gap between the resources you have and the resources you need for retirement. Eliminating or reducing a mortgage can work wonders for your retirement living standard. And remember that moving into a less expensive home generally lowers all related housing expenses, including property taxes and utilities. If downsizing allows you to free up capital to invest, you'll enjoy more income throughout your retirement.

You might also want to consider selling your home and renting property instead. You can use the equity in your home to help with retirement living expense, and won't have to worry about the hassles of being a homeowner—a big plus as you get further into your retirement years.

Investing Wisely

Common wisdom suggests that the closer you get to retirement, the more conservatively you should invest. But a more relevant consideration is how long you're going to need the money to last. Whether you're a year or a decade from retirement, you'll need your retirement money to last for decades, during which time your cost of living will double, if not triple.

It's highly unlikely that retirement money invested solely in interest-earning securities, such as CDs and bonds, will help you keep up with inflation throughout your retirement years unless you need to withdraw only a very low percentage from your retirement nest egg—no more than 2 to 3 percent. Most retirees need to withdraw more, and that's why they need the long-term growth potential of stocks for at least a portion of their retirement portfolio. Focus on high-quality stocks with good dividend-paying records or mutual funds or exchange-traded funds that hold such stocks.

Reducing Debt

In a time of investment uncertainty, there are some "investments" that pay guaranteed returns. Paying down credit card, home equity, and mortgage loans reduces future interest charges, and over the years this can save you thousands, if not tens of thousands, of dollars in interest. For example, paying an extra $500 on a 19% credit card balance will have a 19% return, since you avoid paying interest on that amount in the future. If you can get your debt under control to the extent that you have paid it down or even eliminated it by the time you retire, your retirement prospects will be much improved.

When it comes to mortgages, a little bit extra can go a long way toward paying it off sooner. Here's an example of how adding to a mortgage payment can reduce the time it takes to pay it off:

David wants to retire in 10 years, and he has 15 years left on his $200,000 mortgage. He's surprised to discover that paying an extra $375 per month toward his mortgage will pay it off in 10 years, rather than 15. While that's a big bite out of his budget, if he can manage to make the extra payments, the amount of income he'll need during his first few years of retirement will be considerably lower if the mortgage is paid off.

Whole life insurance and annuities may also be valuable tools in your retirement planning. To learn more, call SBLI at 1-800-438-7254.

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