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Monday, March 2, 2015

Planning for Retirement: Six Steps to Follow

Before making the decision to retire, it’s imperative to have a financial plan in place, and to consider any changes in lifestyle and living accommodations that may ensue.

Retirement is a major life decision that needs to be carefully planned. As advisors to older adults, a number of issues should be thoroughly discussed with your clients as they prepare to retire. Consider the following.

• How much annual retirement income do they need? Since retirement income may be needed for thirty plus years, considering the impact of inflation on this income is a must.

• Including Social Security and any pension plans, do they have adequate savings to attain and sustain their retirement income goals?

• How much debt do they have? Does it include high-interest credit cards that can be paid off prior to retirement?

• What are their living accommodation goals as they get older? Does a retirement community appeal to them or is staying in their present home more appealing?

• Based on their health and nest egg, what possible future problems might occur that they will need to consider covering with insurance to make reasonably sure they will not become a burden to their spouses or children?

None of these questions has an exact answer but each of them, if worked through, can serve as a guide to work from. Most folks have some vague idea as to their answers to these questions, but few have actually taken the time to sit down and thoroughly think through their answers and actually put a plan on paper. There is need here for professional guidance to put a proper plan in place. This plan should serve only as a beginning point to a happy retirement and will certainly need continued monitoring as circumstances change. 

One of the key components of a successful, happy retirement is for older adults to understand their finances and create a budget. They must know what their fixed expenses are and how much money they will have for discretionary spending. When the steady paychecks stop and they start drawing down assets to live on, mental adjustments are certainly needed as folks are hit with the reality that this is it. And for many, there is a real fear of running out of money and concerns about becoming a burden on loved ones. 

Step 1. The Budget
Creating a budget should be somewhat enlightening for those who have no idea where they are spending money or how much it actually takes each month to make ends meet. This is where the needs and wants in life become distinguishable. Getting a handle on “where is our money going” can be quite revealing. Figuring out the average of fixed expenses such as utilities, food, gasoline, clothing, and insurance, will help to get a good handle on creating a realistic budget and using it as a tool to control unnecessary spending. 

This process should also include a plan for dealing with debt. Paying off the lowest debt amounts with the highest interest rates first is a good starting point. The last piece of the budget is adding discretionary spending, such as club memberships, recreational items, and travel.

Step 2. Retirement Income Strategy
The rubber meets the road now as retirees begin to see where their replacement income paychecks are coming from. The starting point is to look for dollars from guaranteed income sources, which include pension plans (if they are fortunate enough to have one), and Social Security options need to be explored thoroughly. 
As advisors, putting these two income puzzle pieces together, will require looking at the numerous ways available to draw pension income, and explore the timing of when to take Social Security. Both of these income sources will have spousal benefit options that need to be considered in order to make sure lifetime family benefits are maximized. 

No one wants to leave a surviving spouse holding a bag of groceries with no means to pay for it. Proper Social Security election is one of the most complicated and a poor election here can result in leaving significant money in the system rather than in their pocket for retirement needs. The Social Security Administration gives no advice on how to maximize benefits, so people need to know before they go what the best filing strategy is for their family. 

In an ideal world, these two income sources of Social Security and a company pension would provide a couple with about 60 percent of their budgeted retirement income needs. However, today’s reality for most is not close to ideal. The missing ingredient is the company pension plan. Most businesses over the last twenty-five years have opted to move away from the pension plan and the 401(k) is the company retirement plan of choice. This decision by employers has put the burden for funding retirement benefits squarely on the shoulders of employees. By and large, the baby boomers—who have been spenders rather than savers—have not saved enough in their 401(k) retirement plan to offset the company pension plan that no longer exists. That means their only real option is to continue working until they can make the numbers work. 

Step 3. Social Security Election
For many, the typical income shortfall is due to lack of retirement assets, and getting Social Security right is even more critical. Timing of when to start these benefits is one key to maximizing the income over a person’s lifetime. According to the Social Security Administration, age sixty-two continues to be the most popular claiming age for both men and women with some 45 percent of eligible males and some 50 percent of females electing to take benefits. Generally, most couples today have two benefits each. The first is based on each individual’s earnings record and the other is a spousal benefit based on their spouse’s benefit. Unfortunately, far too many couples and their advisors don’t understand this part of the Social Security system and fail to get this right. Bad decisions as to how and when to take Social Security can literally cost couples hundreds of thousands of dollars over their retirement lifetime. 

As the income plan comes together, actual retirement date and when they turn on Social Security benefits may be different. An example would be for a couple to retire at age sixty-six and start drawing down on assets while waiting until age seventy to start Social Security. This strategy takes advantage of the 8 percent per year deferred income credit on Social Security and can add up to an additional 32 percent in Social Security retirement benefits. The key here is to be able to fill in the Social Security gap created by deferring that income. Usually this can be accomplished by a combination of part time work, use of the Spousal Benefit from Social Security, and the use of personal retirement savings. Retirement itself is increasingly being deferred as more people work longer and their income continues, allowing for increased Social Security benefits. 

Liquidating retirement savings in the early years of retirement can be a bit unnerving to folks as it represents more than just retirement income, but is also a security blanket. One must be careful not to dip into this nest egg too deeply or too early, but sometimes a little dipping goes a long way toward satisfying longterm goals. A good calculator and comparing several » Average Spending for Retirees Food and Beverage 15% Housing and Related 36% Apparel 3% Transportation 17% Healthcare 12% Entertainment 6% Contributions 5% Misc. 6% As retirement age exceeds age seventy-five, these percentages remain rather constant with the exception of transportation, which generally goes down, and health care, which usually goes up. Source: U.S. Bureau of Labor Statistics ways to accomplish filling in this four-year income gap can help make the right decisions. 

Step 4. Debt
As everyone knows, debt is easier to get than to get rid of. Obviously, the hope and desire would be to be debt free when it’s time to retire. With that said, many are not and won’t be free of debt. Debt should be attacked with a plan and end goal in mind. General wisdom tells us to stop digging the hole first and then work toward filling it in. High interest credit card debt should be dealt with first, and the home mortgage should be the last to go. This debt reduction process is much better addressed prior to retirement when there is still income coming in, and will usually require some lifestyle adjustments. Depending on mortgage interest rates and maturity dates, it’s sometimes better to just say the mortgage will most likely be with us throughout most of our retirement years and just live with it. 

Step 5. Long-Term Living Accommodations
As part of the process of working on retirement plan, long-term living accommodations need to be thought through. Many people want to stay in their in their homes, and over time with proper guidance, they can make their homes safer and more livable should mobility become an issue. It is always better to work toward solving these problems before they become “have to do” issues. Bathrooms and kitchens are the two areas that usually need a makeover for safety as well as ease of use. Selling real estate when you have to is never a good thing. 

For many, the thought of a retirement community is very appealing. No property maintenance, no yard to keep up, and no meals to cook. But these communities can be very costly. As people evaluate their options, it is always better to discuss the what-ifs and the triggers that need to start the process of moving or remodeling. 

Step 6. Insurance, Wills, and Directives 
Wills, advance directives, insurance documents, and beneficiary designations should be reviewed and updated regularly, but especially during the retirement planning process. It’s a good time for professional advisors to help clients reevaluate their needs. There can be a number of changes that can save money, and save their family from grief and heartache. On the cost-cutting side, there could be some insurance coverages they no longer need, some deductibles they can raise, and do some self insuring. Long-term care insurance should be an option to look into, if they haven’t already done so.

For some, it is to ignore the potential problem and hope it never arises, others have taken the necessary steps to see that their plan matches their goal. That plan is either self-insured, fully insured, or somewhere in between. 

Medicare costs, as well as all the different supplemental plans available, are a real uncertainty. For the most part, older adults need competent advice and recommendations from professional advisors in order to make it through this maze with some degree of certainty that they have chosen the coverages that they need. 

Beneficiary designations in many instances may include incorrect primary beneficiaries, or have no contingency beneficiaries at all. This can create issues and missed planning opportunities at death. Wills need to be updated to make sure they reflect current desires along with properly drawn health care directives and powers of attorney. Anyone contemplating retirement should first consult an expert, a professional financial advisor. 

Finally, retirement years should be the best years of life. They certainly can be enhanced toward that goal with proper forethought and planning before reaching the first tee box and having to yell fore or use a mulligan. By the way, mulligans are rather costly during retirement, and many times almost impossible to recover from. • CSA

James A. (Al) Hurt, Jr., CLU, ChFC, CSA, is a retirement specialist with Security Ballew in Jackson, Mississippi. For the past forty years, he has assisted individuals and businesses with wealth management. Today, he focuses primarily on optimizing Social Security benefits for his clients. He may be contacted at, 601-368-3500. Visit

Planning for Retirement: Six Steps to Follow was recently published in the Fall 2014 edition of the CSA Journal.

Blog posting provided by Society of Certified Senior Advisors