By FPA member Frank C. Boucher, CEBS, CFP®
Last Updated: December 6, 2010
I like to do things myself. A few years ago, I decided to tackle a small plumbing project while my wife went out shopping. A half hour later, I was looking at a broken pipe with spraying water and making an emergency call to the plumber. I got wet, spent a lot of money and had to deal with the embarrassment of facing the plumber, who I must admit, was more diplomatic and sensitive than I would have been had our roles been reversed.
Then there was my wife who laughed and said, “The next time, call the plumber first.”
I learned my lesson and I don’t know if it is a coincidence that I haven’t been able to find my plumbing tools since then but, the fact is, when it comes to plumbing, I better seek the help of a professional.
It has been said that most people spend more time planning their vacation than they do planning their retirement. I don’t know if that’s true, but I do know that a lack of planning or poor planning at retirement can lead to expensive, irreversible mistakes that can seriously affect how you will enjoy, or not enjoy, your retirement years. Sadly, I’ve seen it happen too many times.
Retiring isn’t easy. You have a lot of decisions to make. There are plenty of people offering you advice and not all of them have your well being in mind. This can also be an emotional time for many and we tend to make bad decisions when we’re emotional. Let’s take a look at some of the things you need to think about and then you can decide whether or not this is a “do it yourself” project.
Why are you retiring? This may seem like a stupid question but some people retire because they hate their boss. Think about this for a while. Why are you retiring? Do you have a passion that you want to pursue? Do you want to see the world? Do you want to spend more time with your family? This is job one. If you don’t know why you want to retire, keep on working.
How much money do you need? There are plenty of online calculators out there but most of them are superficial and should be used with caution. It’s easy to go through your checkbook and tally up your monthly expenses, but it is not so easy to project when your vehicle will need major repairs or your roof will start leaking or your refrigerator will die. These things don’t care if you are retired and you have to fund for them. You also need to consider setting aside money for those vacations you want to take and, other obligations. And, don’t forget health care costs. If you are like most retirees, you will spend more for health care.
Of note, a recent Employee Benefits Research Institute report found the following about health care costs in retirement: A 65-year-old man retiring in 2010 with median drug expenditures would need $65,000 in savings and a woman of the same age would need $93,000 if they want an average (50 percent) chance of having enough money to cover health care expenses in retirement. For a higher (90 percent) chance of having enough, a man would need $124,000 and a woman $152,000. A couple both with median drug expenses would need $158,000 for a 50 percent chance of having enough money, and $271,000 for a 90 percent chance. At the highest (90th percentile) level of drug spending, a man would need $187,000 and a woman $213,000 to have a 90 percent chance of having enough money to cover health care expenses in retirement. Learn more about the report findings.
Employee benefit plans: Does your employer have a defined benefit pension plan? How much will you get? When will you get it? Will you take a benefit for the rest of your life or will you want your spouse to get something if you die first? What makes the most sense for you? How do you decide? How about your 401(k) plan? Do you want to leave it with your employer? Do you want to roll it into an Individual Retirement Account (IRA)? Where? How will you invest it? Will you buy an annuity with some or all of it? How much? What kind of annuity?
Health insurance: Are you eligible for Medicare? Have you applied? Do you know what it covers? Do you need supplemental insurance? How much? How much does it cost? If you are not 65, you aren’t eligible for Medicare in most instances. Where will you get your insurance? How much will it cost? What is the best policy to buy?
Social Security: When are you eligible for Social Security benefits? How much will you get? How much will your spouse get? When will you get it? Should you get it when you are 62 or wait? What do you need to consider when deciding?
Life and long-term care insurance: Do you have life insurance? Do you still need it? Many pre-retirees don’t. Is there a cash value that you can spend or invest? Would you be better off with long-term care insurance? Is long-term care insurance right for you? How much will it cost? What will it cover?
Where will you live? Are you going to stay where you are? Are you going to move? Is there a difference in living costs? Will you be happy being away from your family? Is that charming seaside village you visit every summer just as charming when the weather changes and the tourists go home?
Incapacity: What is going to happen if you can’t take care of yourself? Who will take care of you? Where will you live? How will you pay for it? What belongings do you want to have with you? Does your family know what you want?
Investments: Do you have investments outside of your retirement plans? How are they invested? Should they be changed? When will you spend them?
Estate planning: Do you have a will? Is it current? Do you have valid powers of attorney and health care directives? Where are they? Does your family know where to find your documents? Have you discussed your estate plans with your family? Does everyone understand their roles and responsibilities? Are your beneficiary designations on your retirement plans and insurance policies up to date? Should you be gifting? Do you need a trust?
I think you get the picture. Retirement is more than getting away from your nasty boss. This is a major life decision and it deserves all of the thought and preparation that you put into the life decisions that got you here in the first place. Do you have all of the answers? Great! Go for it! But, maybe you don’t. Maybe this isn’t a do-it-yourself project. That’s okay. Remember my plumber? If you are reading this, you are on the Financial Planning Association’s website and you are just a couple of mouse clicks away from finding a professional who can help you.
FPA member Frank C. Boucher, CEBS, CFP®, is owner of Boucher Financial Planning Services.