Retirement. It tends to be a catch-all word that generally refers to the light at the end of the tunnel after years of hard work. It’s a time to enjoy the things in life that matter the most, like family, travel, and leisure activities. After all, you’ve put in your time and earned it!
But “retirement” is much more than just a time for seniors to kick back and relax; it is a period of life for which many people have been planning and saving literally for decades.
When helping people diligently save and prepare for retirement, financial planners sometimes find it helpful to break retirement planning down into phases, with each one having distinct characteristics and action items. There are choices about your retirement lifestyle and housing that should be considered and decided during each of the following five phases.
What is it?: This first phase of retirement planning may well be the longest for many people. The Accumulation phase starts when you begin your time in the workforce and commence saving for retirement. It’s sometimes tough to save a lot during the early years of this phase because you are just starting out in your career and are generally at the lower end of the pay scale. Additionally, many people are paying down student loans, buying a first home, and/or starting a family. However, every little bit that can be saved is important because people in this phase have something no one else has: time. Small contributions early on can grow to substantial levels over time due to the power of compound interest. The Accumulation phase is typically thought to end at retirement, however, retirement today is often a moving target, so there may not be a hard and fast end date for this phase.
What are my to-dos?: For those who have a 401(k) or other retirement savings account offered by their employer, sign up and start contributing whatever you are able. Make this a priority and start with a goal of contributing at least up to the amount that is matched by the employer, if applicable. After all, a company match is free money! Set a goal of trying to reach the point where you can put away close to 10 percent of your income. As a rule of thumb, if you can do this and invest the money appropriately, you should be well on your way to a secure retirement.
For those who are self-employed or work for companies that lack a 401(k) option, talk with qualified financial planner about opening a Roth and/or traditional individual retirement account (IRA) for your retirement savings. If you are self-employed, you may consider other options such as SEP or SIMPLE IRAs, or even a solo 401(k). When you’re just getting started, there are a growing number of useful online resources and tools for basic financial education and investing. Remember, it is really never too early to begin envisioning what you want for your retirement years and saving to achieve those goals.
What is it?: This phase typically begins around 50 years old or about 15 years from retirement (whichever comes first). This is still part of the Accumulation phase, so you want to be sure your savings rate is sufficient, and there are also other aspects of retirement planning to begin considering at this stage.
What are my to-dos?: This is a critical time for talking with an experienced and qualified financial planner who can prepare retirement projections for you. These projections can help you determine if you are on track or lagging with your retirement savings. No one has a crystal ball, but having some idea of where you stand at this point is better than not having any idea at all.
This is also the time to begin educating yourself on how Social Security and Medicare benefits work, as well as long-term care insurance (LTCi). Long-term care covers the type of assistance you may need in the future, but which is not covered by Medicare. This type of coverage could become prohibitively expensive if you wait until the next retirement phase. Although the LTCi industry has had its challenges over the past few years, new forms of coverage are already emerging that will hopefully be more sustainable and affordable for consumers in the long run. Finally, if you haven’t already started discussing where you would like to live during retirement, begin having those conversations with your spouse or partner and loved ones now. Think about what will be most important to you during retirement. If you’ve saved appropriately, retirement may be the first time in a long time that you will have the opportunity to live wherever you want, without other obligations dictating this decision for you.
What is it?: The time from your last day in the workforce until you reach your early 70s may be considered Early Retirement. Of course, a growing number of retirees are now embarking on encore careers during retirement, which is an exception to this rule. An encore career keeps retirees active and engaged and perhaps means starting that business that you’ve dreamed about for years.
What are my to-dos?: There will likely be adjustments to your budget during this phase, based on your decisions about where to live or whether to embark on an encore career, etc. It’s also the first time you’ll probably begin drawing income from your retirement accounts to help pay the bills. This is a big adjustment. For many people, the thought of actually reversing the process from putting money into savings to taking money back out can be downright frightening. You’ll probably need some guidance from a qualified financial adviser to help make sure your distributions are well within a reasonable level without jeopardizing your long-term financial security and that you are taxing distributions in the most tax-efficient way as possible. This often means knowing which assets to draw from first.
Early in this phase you’ll also have to begin making decisions about health insurance, such as Medicare and Med Sup, or determining whether your insurance from your previous employer will carry over into retirement.
What is it?: Mid-Retirement starts at 70 years old and extends whatever length of time you are still able to safely live independently. This period of time can vary greatly from one person to another based largely on health, genes, and lifestyle. At this stage, tax and estate planning become increasingly important. If you have built up substantial savings in tax-deferred retirement accounts, such as IRAs and 401(k)s, then you’ll need to be sure you are properly withdrawing required minimum distributions (RMDs), which must begin at age 70 ½. Since you’ll have to begin taking these distributions and paying ordinary income taxes, then this might dictate changes to other parts of your income and investment management plans. An experienced and reputable financial advisor, in conjunction with a CPA, can help make sure you are doing this efficiently.
This is also the most important time to begin thinking about where you would like to live as you get older—In your current home? In a different home? In a retirement community? You should research all of your options in order to make the most informed decision. This is also a good time to begin having honest conversations with your family members about what is most important to you, particularly in the event that your health should decline, either gradually or more suddenly.
What are my to-dos?: This is a time when many people choose to downsize, move closer to family, or begin considering the low-maintenance lifestyle offered by a retirement community. If you plan to stay in your home, begin to earnestly explore and specify the choices you want your loved ones to make if and when your health declines. Since it is not possible to know exactly what healthcare needs or challenges will arise in the future, it is important to consider and plan for a range of scenarios.
If you are considering a retirement community, make sure you know what distinguishes one type from another. It’s also important to know what types of supportive services and healthcare are available to you if needed in the future. For instance, a Life Plan Community usually provides residents an onsite “continuum of care,” the increasing levels of healthcare services that a person may need as they age, from independent living to skilled nursing care. Having access to this type of progressive care means a senior and their family don’t have to worry about all of the “what if” scenarios of the aging process. However, choosing a community can be complex so it’s important to do the appropriate research and comparisons.
What is it?: If a senior’s health declines to the point that they need extensive help to care for themselves on a daily basis, and it is unlikely that their health status will improve, they have entered the Late Retirement phase.
What are my to-dos?: In theory, if a senior has followed the planning steps above, including having discussions with family and making wise housing choices, then the challenges of this phase will be far more manageable than without planning—focused on implementing previously determined choices for the senior’s care.
Are you on track?
Longer lifespans, which can result in extended long-term care needs, means that people must be more proactive when it comes to planning for the later phases of retirement. Unfortunately, this is often a part of retirement planning that is overlooked by families and financial advisors, the result being a reactive approach to addressing seniors’ lifestyle and healthcare needs when a crisis arises.
If you are nearing or in the “Mid-Retirement” phase—still active and able-bodied—it is a great time to plan for your Late Retirement years. Putting off such important decisions about your future needs may mean you and your loved ones will have to deal with difficult, stressful, and frequently costly situations down the road.
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