By Jimmy Magahern
Figuring what you’ll need for retirement is like planning for a road trip. Experts offer five tips on how to “pack” for that unknown and exciting journey ahead.
In her book Control Your Retirement Destiny, Dana Anspach likens planning for retirement to embarking on a road trip without knowing the distance to your destination.
“You don’t know how long the trip will be, nor can you predict the conditions you will encounter,” she writes. “The only
thing you know is there won’t be any gas stations along the way.”
As founder and CEO of Sensible Money, a Scottsdale-based financial advisory firm, Anspach specializes in retirement planning for folks who are already close to heading off on that trip. In her analogy, the gas is the amount of savings and resources you have as you begin your retirement, and the road ahead is your lifespan, which for many of us has been extending, thanks to medical advances and an embrace of healthier lifestyles.
“Longevity risk is the technical term for the challenge of charting a path into a trip of unknown duration,” Anspach writes. “It is a fancy way of saying that you have a finite set of resources that must last for an unknown amount of time.”
Rough patches lie ahead, too: Unanticipated health care expenses and economic downturns may provide some major bumps between smooth stretches of strong savings rates and high returns on investments. And the vehicle you travel in – the lifestyle you choose to maintain in retirement – will ultimately affect how quickly you spend down those savings.
To help you get the most out of this journey, we asked Sensible Money’s retirement income specialist Chuck Robinson and Adam Pearce, owner of The Retirement Professionals (with offices in Tucson and Phoenix), to weigh in with some expert advice. Together they provided five top tips for heading off on the road to retirement.
- Get the insurance.
It’s everyone’s least favorite part of renting a car for a long trip, but opting for comprehensive insurance coverage is an essential part of riding into retirement.
“Many people talk about taking early retirement,” Robinson says. “But they forget that, prior to age 65, unless you’re among the very small amount of people whose employer carries their health care benefits into retirement, you’re going to have to go into the private marketplace for health insurance. Once you’re 65, if you don’t mind working with Medicare Advantage, which is like an HMO, there is no premium. But if you plan on spending a lot of time outside Arizona, you’re only covered for emergency care. Medicare supplemental programs can carry an annual fee of $2,000 to $3,000 per person.”
Robinson also advises retirees to consider how they’ll pay for long-term care should they or their spouse require it further down the road and their assets disqualify them for Medicaid. “Health care expenses are probably the biggest factor that can torpedo even any reasonably well-thought-out retirement plan.”
- Pack smart.
“Don’t put all your money into pre-tax 401(k), 403(b) or 457(b) deferred compensation plans,” Robinson says. “Divide it up into after-tax Roth IRAs or Roth 401(k)s. The reason is, a couple may be in a low tax bracket early in retirement, but at some point, usually when they reach their 80s or 90s, there’s going to be a single survivor. And that surviving spouse is now going to be taxed as a single individual, which is when Uncle Sam will start requiring them to take more and more money out of their 401(k) and 403(b) and IRAs whether they need it or not. So we encourage people to diversify their assets.”
Be careful about drawing savings from investments, too. “Generally speaking, I believe one should remain flexible through retirement,” Pearce says. “If you’re willing to cut back on drawing from investments in years they are not doing well and during market declines, you can have more flexibility and potentially do better over the long run. For example, in the years the market is down, maybe you don’t take that big vacation and put it off until the market recovers.”
- Watch your speed.
“People in retirement go through three stages,” Robinson says. “They progress through what we call the ‘go-go years,’ the ‘slow-go years’ and the ‘no-go years.’ And they spend differently in each of those stages. Research shows that, on average, people spend less on consumable goods as they age but more on medical expenses. And the long-term inflation rate on health care expenses is higher. So it’s critical that people begin to track their expenses.”
A good retirement planner can help people cut back on their “go-go” expenses as they move into their “no-go” stage. “Maybe there’s a travel club they signed up for that they’re no longer using,” Robinson says. “Simply by going through their expenses from time to time, people can cut 10 to 20 percent of their spending without affecting their lifestyle.”
- Check your timing.
Many retirees are eager to take their Social Security benefits as soon as they’re eligible, but advisors stress that’s seldom the best idea.
“Social Security benefits are based on your earnings history, and there are many strategies (for) seeking to maximize your benefits,” Pearce says. “You can begin taking Social Security as early as age 62, but that comes with a 25 percent reduction of what would be your full benefit at full retirement age – 65 to 67, depending on when you were born. By delaying benefits past your full retirement age and up until age 70, you can get an increased benefit.”
Health again becomes a factor: Will you be healthy enough in later years to enjoy the money as much as you can in your 60s? “If you’re looking at a long-term lifespan, into your 80s and beyond, you may be better off to wait until at least full retirement age if not age 70 for the increases,” Pearce says.
- Follow the rules of the road.
When it comes to withdrawing funds from various forms of savings, it helps to know the rules to minimize taxes and avoid penalties.
“There are many rules and some can be easily avoided,” Pearce says. “For example, a Required Minimum Distribution starting in the year you turn 70½ has a hefty penalty of 50 percent of the amount required to distribute if you fail to do so. Generally speaking, many retirement plans come with an age 59½ requirement for withdrawals to avoid penalties. But there are also many exceptions to that rule.”
Keep these tips in mind as you enter retirement and you just may have enough funds to go wherever the journey takes you.