Financial Literacy Month: Planning for Your 50s and Beyond

April 22, 2013

If you’re like most of us, at a certain point in your 50s you’ll look in the mirror and realize that the person staring back at you needs to start thinking about retirement planning. Phasing out of the workplace (where you’ve likely spent more years than any other stage of your life) morphs from an abstract exercise to a genuine OMG-I-need-a-plan project.

To quote British author, Douglas Adams, my first piece of advice is “Don’t panic!” Yes, there’s a lot to consider, but there are also an abundance of resources available to us.

Hopefully, you’ll have a number of years from your first realization of the challenge ahead until you actually submit your retirement notice to HR. I’ve found that a good approach is to make a list of the different financial aspects of retirement.

Do a quick run-through to note the obvious items under each category. This provides a basic foundation to start building a comprehensive plan. After that, spend a designated amount of time focusing on each area. For me, two to six weeks is in the right range.

You’ll need to decide the best way to organize your thoughts and questions as you learn more about each topic -- notes in a computer document or a paper file, whatever works for you. Here is my preliminary list:

Income
List all your potential sources of income in retirement. Traditional sources include:

  • Pension  (current job and any previous jobs)
  • Social Security
  • Voluntary retirement accounts (401(k), 457, 403(b), IRAs)
  • Other investments (mutual fund accounts, stocks, and bonds)
  • Real estate  (rental income or proceeds from sale)
  • Part-time work

Total your assets and project the growth in their value from future contributions and/or appreciation prior to retirement. You can use a web calculator to assist with this.

Does consolidating accounts prior to retirement make sense? Get an idea of how much annual income you can comfortably withdraw from expected investment assets.

Expenses 
Think about where and how you want to spend retirement. What part of your life (and expenses) will be similar to today and what will change?

  • Will you move to a smaller home or splurge on a golf course property?
  • Do you plan to stay in the same city or move somewhere with a lower cost of living?
  • What kind of travel are you looking forward to – on the cheap or upscale locales?
  • Health care is a wild card you don’t want to overlook. Several studies in recent years have estimated that a retired couple can expect to spend in the neighborhood of $250,000 in out-of-pocket costs on health care. If you’re still several years from retirement the Affordable Care Act is expected to bring changes, so you’ll need to revisit this issue.
  • College expenses and retirement are strange bedfellows. If you anticipate education costs to continue after your retirement, be sure to factor that into your decision-making.
  • Don’t forget to plan for taxes. Most retirement income (with the exception of Roth IRAs) will be taxable to some extent at the federal level. Some states (including Colorado) offer tax breaks on retirement income up to certain limits.
  • Finally, how long will your plan need to cover these expenses? Given your family history and current health, what’s a reasonable life expectancy for you to work with? Use a calculator to help with this estimate.

Debt 
Before taking on new debt, analyze the impact it will have on your ability to save more prior to retirement:

  • If debt payments will extend past your retirement date, be sure to adjust your projected expenses to account for this.
  • If you’re carrying credit card balances (not paying the balance in full each month), develop a plan to start paying down those accounts.
  • Consider the advantages (lower expenses in retirement) and disadvantages (loss of a tax break) of paying off your mortgage before retirement.

Insurance
There are three types of insurance to consider as you prepare for retirement:

  • Health insurance without an employer-sponsored plan is a challenging and expensive proposition. If both you and your spouse/partner are eligible for Medicare, then this is less of an issue, but if either of you is under age 65 at retirement, be sure to investigate the cost of coverage before you decide to retire. The Affordable Care Act will likely change the landscape of health insurance in the U.S., so you’ll need to monitor the evolving trends when you revisit your plan.
  • Long-term care insurance is another major decision to explore. Purchasing insurance is not without risk as many companies have left the market or increased premiums significantly. But not having insurance or some kind of plan for long-term care can result in a significant hit to your assets. New hybrid products, which combine long-term care with life insurance, may be an option to investigate.
  • Life insurance needs change over time, so retirement planning is a good opportunity to evaluate coverage requirements once you’ve stopped working. Review your retirement income sources to identify income that would continue via ongoing payments following your death. If that number comes up short, life insurance is one option to help fill the gap.

Estate Planning
No, I’m not talking about leaving millions to your heirs. This section is about making things as easy as possible on those who are responsible for taking care of you (if you become incapacitated) and distributing your worldly possessions (following your death). If you haven’t already created the core documents below, you’ll need to tackle them as you approach retirement. Be sure to communicate their existence and location to the appropriate people.

  • Will
  • Power of attorney for finances
  • Power of attorney for health care
  • Living will

Your initial round of research may reveal additional topics applicable to your situation. Add them to your documentation for future reference. As you approach retirement, it’s a good idea to revisit the list annually to see if your situation or the environment (e.g. Medicare) has changed.  If you find the amount of information and decisions overwhelming once you begin doing your research, consider consulting with a professional financial planner to help with your plan.

Now that you have a road map to begin the process, just getting started can help you feel more confident about taking care of that guy or gal in the mirror. They’ll be taking a big step in the not-too-distant future, and it’s your job to ensure they’re prepared for it.

Note: If you’re a member of Colorado PERA’s defined benefit (pension) plan, I suggest reviewing Preparing for Colorado PERA Retirement. This overview document will help you understand how your PERA benefit fits into your overall retirement plan.

Sources for infographic:
More Americans Delaying Retirement Until Their 80s on CNN Money
Surprising New Retirement Statistics on Restart Retirement