3-2-1 Retirement Newsletter (1-2-2020)
Three insights, two findings, one action (January 2, 2020)
Happy Thursday! And Happy New Year!
Welcome to 2020. Let's get things started with a bang.
Below are three insights, two findings, and one action for the week. This week, I focused particularly on sharing ideas that will set you up for a successful year.
3 INSIGHTS FROM ME
I. Stop standing in the way of your retirement.
Your worst enemy cannot harm you as much as your own unguarded thoughts.
I know I am guilty of this. I talk with many people, and usually, after telling them that my work is to help people transition from their 8 to 5 to retirement, the knee-jerk response is: I don’t think I will ever be able to retire! If that sounds familiar, you may be at the greatest risk to your retirement. Before you sentence yourself to lifelong work, replace the fiction with facts that may have you dreaming of your ideal retirement as never before.
I don’t think I can afford to retire.
It probably costs less than you think. A rule of thumb is you’ll need anywhere from 70-100% (more/less for some) of pre-retirement income.
I have not saved enough.
All is not lost. You can make up for lost savings through additional ways to save, better investment returns, increased Social Security benefits, delayed retirement, or part-time retirement work.
How long will my money last?
Planning makes all the difference. It begins with a comprehensive retirement income plan that determines how best to meet goals and manage risks.
What if I run out of money?
You won’t completely run out of money. Any income shortfalls can be mitigated through strategies such as annuity allocation, dynamic withdrawal, home equity, tax planning, Social Security claiming, investment performance, and part-time income.
I’m unsure when I can retire.
On average, men retire at 65 and women at 63. This can go up or down based on your goals and risks. A retirement age readiness as part of a broader retirement income plan can pinpoint your optimal retirement age.
I don’t think Social Security will be enough.
You’re right. For most, it will not be enough on its own. However, payments can be substantially increased by delaying benefits until full retirement or age 70.
I won’t be able to afford healthcare.
Medicare can meet the healthcare needs of most retirees. It’s not overly costly and can meet most healthcare costs when paired with other coverages.
II. What to do if you don't have a pension.
One of the most noticeable changes to retirement over the last few decades has been the disappearance of the traditional defined-benefit pension. Unfortunately, retirees can no longer rely on this as a source of income. If you find yourself short on guaranteed income, annuities are an excellent solution to pensionize a portion of your retirement savings (401(k), IRAs, etc.) by establishing an income stream. Numerous benefits to doing this include 1) creating an additional source of reliable income you cannot outlive, 2) reducing investment risks as the annuity payment amount is not dependent on market returns, and 3) providing dementia insurance for cognitive decline (reduced financial management and decision-making ability), as the annuity payment amount and timing are automated.
III. 4 ways to increase lifetime retirement income.
Research has concluded that retirees' two greatest concerns are outliving one’s money and unpredictable health care expenses. Increases in longevity place more pressure on retirement savings to provide income for a finite but unknown amount of time. Now more than ever, there is an increased need for income sources to meet longer life expectancies. Here are four ways to increase sources of lifetime retirement income.
Converting a 401(k)/IRA account into a life annuity
Figuring ways to maximize Social Security benefits
Using a reverse mortgage to tap home equity
Making better tax decisions to increase after-tax income
2 FINDINGS FROM OTHERS
I. Curious behaviors that can ruin retirement.
Regarding retirement planning, the greatest challenge is not the math but our DNA that determines the outcome. Our brains are not wired to think long-term, and retirement typically last decades. Nor are we good at dealing with risks. And retirement has serious risks. The way we’re wired also gets in the way of using what we’ve got: our savings, our house, and the ability to work to improve our situation. Here’s an interactive program from the Center for Financial Literacy at Boston College that leads you through exercises designed to help you see how your DNA gets in the way. The goal is to learn more about yourself to make sound financial decisions for better retirement outcomes.
Get Your Mind In Gear For Retirement
II. Delaying Social Security increasingly benefits higher earners.
It’s no secret delaying Social Security increases lifetime benefits, especially for those who anticipate a longer life expectancy. But new research indicates the current system unfairly reward high earners due to their longer life expectancies and lower interest rates. This is because the cost of lifetime benefits depends on interest rates and life expectancy. Life expectancy has always varied by earnings. Those with more money tend to live longer.
Moreover, in recent decades, higher earners have enjoyed most of the gains in life expectancy. In addition to living longer, higher earners are more likely to claim later than average. The takeaway is that lower earners claim early and are overcharged for that privilege under the current system, and higher earners claim later and are rewarded more accurately.
1 ACTION FOR YOU
I. One task you must complete to successfully transition into retirement.
Well-established research indicates there are 15 developmental tasks you need to complete while still working to transition into retirement.
We’ll look at one of these tasks for our action item this week and reveal a new one each week.
The completion of these tasks does not suggest a person should retire. However, failing to complete the tasks will put a successful transition into retirement at risk.
This week’s task is related to work: You should explore the possibilities available if you want to keep working full- or part-time in retirement.
Why this is important:
It will assess the post-retirement work opportunity landscape.
It will quantify the amount and duration of anticipated work income.
It will assess one’s inability to supplement retirement income with employment due to tight job markets, poor health, and caregiving responsibilities.
It will help assess the skills needed to be successful in the job market.