How much thought have you given to your retirement plan? For many of us, probably not quite enough. Retiring in today’s financial environment requires more planning than it did for generations past. We live in a more complex world, not only financially, but technologically as well. Extended life spans, increased costs of living, and reduced employer benefits, are just a few factors making it more difficult for Americans to secure their futures. A man reaching 65 today can expect to live, on average, until 84.3. A woman turning 65 today can expect to live, on average, until 86.6. Additionally, about one out of every four 65-year-olds will live past 90, and one out of ten 65-year-olds will live past 95.
The good news here is that people are living longer due to healthier life styles, improved diets, and advances in medical technology. The bad news? Longer life expectancies require a reliable income stream to draw from for potentially 30 years or more. Whatever your retirement dream, the last thing you want to worry about is outliving your money. The fact that people are living longer should call for a fundamental shift in the way they plan for their retirement.
Arguably one of the most difficult things to do in both retirement and life, is to project future expenses – especially into your final years of life. Many Americans have a blind spot when it comes to planning for long-term care costs. Long-term care is a range of services and supports you may need to meet your personal care needs. Most long-term care is not medical care, but rather assistance with the basic personal tasks of everyday life, sometimes called Activities of Daily Living (ADLs)2. Forbes reports that the average American underestimates the cost of in-home long-term care by almost 50 percent. Meanwhile, a semi-private room in a nursing home can be as expensive as $82,125 – that means an average American is underestimating long-term care costs by around $40,000! Even if you’ve got a healthy nest egg stashed away for yourself, when illness strikes, many need someone they trust to enact the plan they’ve laid out for themselves.
In addition to planning for long-term care costs in retirement, prospective retirees need to be sure they’re taking measures to maximize their Social Security benefit. Most people’s Social Security benefit acts as the foundation of their retirement plan and is usually capable of supporting the rest of their financial plan. The best way to do this is by understanding how it works and what different options may be available to you. In the past, collecting Social Security was mostly a matter of triggering your benefit. Today, however, this is really only one piece of the puzzle: in order to get the most out of your Social Security benefit you need to file in the right way and at the right time.
Before you choose to begin receiving payments or selecting the type of benefit you should file for, you should first know how your Social Security benefit will be calculated. The primary insurance amount (PIA), is decided by your earnings history and how many years you worked. It only becomes available to you at your full retirement age (FRA), which is set according to your birth year. It is not necessary to wait until you reach your full retirement age before you begin taking benefits.
You can elect to file for Social Security as early as age 62 or as late as age 70. Delaying when you file for Social Security may have a profound impact not only on your benefit amount but also on the future of your retirement. Many people don’t realize their monthly benefit could have been much higher if they had delayed filing for Social Security, even by a few years. It is extremely important to consult with a financial professional to decide when the right time is for you to claim your Social Security benefit.
Another large piece of the retirement puzzle is your risk tolerance. Your ability to bear risk could potentially impact the income plan you design for your retirement. Consequently, determining your risk tolerance is a critical component of the planning process. Determining the amount of risk that is right for you depends on your specific situation, which means every person’s risk tolerance is unique. Every investor can fall in one of a number of categories, from extremely conservative to extremely risky, although their position will most likely fluctuate throughout their life as their financial needs and goals evolve.
It is important to note that there are many factors to take into consideration when determining if your retirement plan is good enough to meet your needs and goals in retirement. Planning for retirement is not something that you do a few years before you stop working. Rather, it’s a process that may encompass the better part of your life. Throughout our working years, most of us experience major life events such as engagement, marriage, birth of children, purchasing a home, changing jobs and finally retirement. As you trek through this journey, your finances will undoubtedly continue to evolve, but it’s important to keep your retirement vision at the forefront of your mind and never let it out of your sight.