Retirement can last much longer than you anticipate. Life expectancy rates have been rising over the years, owing to improvements in medicine and safety. While this suggests that you will live longer, it also indicates that you will require a larger retirement corpus to sustain yourself in your non-working years. As per the Money Guide, a married woman aged 65 years has a 50% chance of living over the age of 90. This likely means that an average retirement phase could be as long as 25 years.
A longer life expectancy is good news if you are well-prepared for retirement. However, it can be a cause for concern if your retirement planning is not where it should be. For example, if you plan to retire at 65 and you live till the age of 100, your retirement corpus would need to last 35 years. However, if you were to retire at 65 and live until the age of 80, then your retirement savings need to cover you for 15 years. In both these cases, the amount of retirement savings required for sustenance is significantly different.
It is also a cause of concern if your initial plan was to live off a pension or use Social Security benefits to fund your retirement needs. Pensions have become almost negligible in the U.S, and Social Security benefits can barely suffice. In 2020, the average Social Security check was only about $1,500, which can be inadequate to cover your retirement needs. This indicates that you need a fail-proof retirement plan to ensure you live the later years of your life comfortably and stress-free.
A Retirement Planning Checklist with 6 things that you should consider before retiring.
Retirement planning is complex and could require the expertise of a retirement advisor. Retirement advisors do more than just create a retirement nest egg for you. They also give you a distribution strategy for your drawdown years so that you are financially secure. These advisors guide you on making penalty-free withdrawals for your retirement saving accounts, as well as help you plan for health expenses, long-term care, tax management, and even estate planning if needed.
Here are some reasons why you should hire a retirement financial advisor:
They make retirement planning less complex:
Retirement planning can be a complex process that requires professional expertise. Missing out on any of the vital aspects of retirement planning could impact your ability to stay financially secure during retirement. So, even though planning for retirement might sound easy to you, it can be an expensive mistake if it is not fail-proof. Hence, getting help from a qualified retirement investment advisor can be your key to a comfortable retirement. Engaging with a retirement advisor early in life can also help you take advantage of the power of compounding. The sooner you begin strategically saving and investing your funds, the more chances you have to accumulate a larger corpus. Apart from guiding you to create a significant retirement reserve, an efficient retirement financial advisor can also help you fill in the gaps and answer key questions, such as:
- When is the right time to take your Social Security withdrawals?
- How much income will your investment portfolio generate when you retire?
- Which retirement accounts should you withdraw from first?
- Which accounts can you tap if you wish to save more?
- Should you roll over your 401(k) account or consider a Roth conversion?
For instance, you might plan to retire early at 62, the eligible age to take Social Security withdrawals. However, if you begin taking your benefit at this age, you will likely have a smaller check than if you delay your withdrawals until 68 or further. As per research, you can increase your Social Security cheque by more than 50% if you delay withdrawals until the age of 70. Alternatively, your retirement investment advisor can also help you create a diversified investment portfolio aligned with your goals, risk tolerance, and time horizon. In terms of withdrawals, the retirement advisor can help you create an effective plan to take your drawings in a manner that minimizes your taxes and maximizes returns.
They can help create an adequate retirement nest egg for you:
A major concern for retirees today is the fear of outliving their retirement corpus, typically because of an increased life expectancy and, in some cases, due to early retirement. Irrespective of the reason, a longer retirement span means you need to create a larger retirement corpus for your non-working years.As per the Consumer Financial Protection Bureau, approximately 50% of retirees will need to reduce their retirement spending, either forcefully or voluntarily, to ensure they do not outlive their savings. Further, one in five married couples and 45% of the single retirees depend on their Social Security to substitute 90% of their retirement income. But, as reported, the Social Security benefits of an average retiree can substitute not more than 40% of their salary.
Hence, it is important that you know exactly how much you will require to live a financially secure retirement. For this purpose, you can use a retirement calculator to determine how much you need to grow your wealth before you retire. You will need to fill in basic details such as your life expectancy, monthly expenses, expected retirement income (from all income sources along with return on investments), and your current retirement corpus, to know precisely how much you need for a comfortable retired life. The professional will evaluate your current living standards and give you an estimate on how much you would require for a financially secured retirement. Once the target is set, a retirement investment advisor can build a strategy to help you achieve your retirement savings goal. The advisor can recommend different retirement savings vehicles, such as an IRA (Individual Retirement Account), a 401(k), a Roth IRA, etc., and help you understand their pros and cons, withdrawal limits, tax advantages, withdrawal criteria, penalties, and more. They will help you create an investment portfolio that is aligned to your risk tolerance, investment horizon, and financial objectives. They will also create your portfolio with a long-term view and help you keep things in perspective during volatile markets. This can help you mitigate short-term losses effectively, and protect your savings. Over time, as you age and your life situations change, a retirement financial advisor can also support you to adapt your portfolio. For instance, when you have more than 10 years to retirement, your advisor might advise you to place more funds in growth-oriented securities like equities. Whereas, as you near your retirement, a retirement advisor might adjust your portfolio to include more secure assets like bonds, etc., and might aim for capital preservation rather than growth. Further, your retirement advisor can also help you identify ways to fund your child’s education expenses without compromising on your financial or retirement stability.
They can frame an effective withdrawal and spending strategy for your needs:
A major component of retirement planning is creating a retirement nest egg. However, it does not end there. A critical part of drafting a fail-proof retirement plan is also to frame your spending and withdrawal strategy for your retired years. When you retire, you essentially switch from an accumulation phase to a distribution stage, which requires new retirement planning strategies. Your focus shifts from growing your wealth or retirement nest to withdrawing from the nest egg to sustain your retirement expenses. In this phase, your advisor helps you understand how to best spend your assets. Your retirement financial advisor understands the unique challenges of retirement and hence, aims to draft a plan that adequately fulfills your needs while also ensuring you have enough for the future. The retirement advisor will help you create a budget for you to minimize discretionary expenses while sufficiently fulfilling your discretionary spending.
Apart from helping you spend wisely; retirement financial planning also involves creating a fail-proof withdrawal strategy. Each retirement saving vehicle like an IRA, a 401(k), Roth IRA, etc., has its withdrawal terms and conditions. For instance, you can take penalty-free drawings from your IRA or 401(k) only after 59.5 years of age. Any money taken before that will attract a 10% penalty along with any applicable taxes. However, these accounts come with an obligation to take RMDs (Required Minimum Distributions). RMDs begin by April 1 of the year you turn 72 years old. Not taking the RMDs or failure to take the full amount can result in penalties (up to 50% of the RMD shortfall). However, you can take a higher sum from your retirement accounts if you want to without any charges. These withdrawal rules can get intimidating and often cause you to make a mistake, resulting in a significant financial charge. However, when you have a retirement advisor, you can have assured guidance on how and when to take withdrawals from these accounts. A retirement financial advisor can help you to use your retirement withdrawals in a manner that you can cover your expenses as well as save for the future. Moreover, if you have any questions regarding your 401(k) rollover into an IRA or a Roth IRA, combine your 401(k) from different employers, etc., a retirement advisor can help provide guidance.
They assist you in planning wisely for healthcare expenses:
Retirement is the golden era of your life. However, with age also comes several health issues that can lead to a rise in medical expenses. Healthcare expenses take the largest bite of your retirement corpus. As per Fidelity, an average 65-year-old couple retiring in 2021 is likely to spend $300,000 for their medical needs in retirement. Long-term care insurance reimburses you for services needed for you to preserve your lifestyle if your age or an injury, illness, or cognitive impairment makes it problematic for you to take care of yourself. This is even more important if you are married because you would need to sponsor healthcare expenses for your spouse too. These statistics indicate that your retirement financial planning has to be solid enough to take care of your medical expenses in the later years. In this space, your retirement advisor can enable you to minimize your health care expenses as well as plan for the long term. Your advisor can also help you make the most of other options like the Health Savings Account (HSA), Medicare, Medicaid, health insurance exchanges, and COBRA (Consolidated Omnibus Budget Reconciliation Act).
They can help minimize taxes in the present and during retirement:
Taxes can significantly affect your retirement savings in the present and after retirement. You will need to pay taxes on your income, earnings from your portfolio, capital gains, as well as on your contributions towards retirement saving accounts like a Roth IRA. This can affect your retirement savings in the long run. Your tax liability during your retired years depends on your retirement income, the state you reside in, and your retirement account withdrawals each year. Moreover, if you are employed in any capacity after retirement or own a house, etc., your taxes may differ by wide margins. For instance, if you only rely on Social Security during retirement, you will not pay any taxes if your earnings are below the taxable income. However, if you have income from other sources such as your IRA, investments, pension, etc., alongside Social Security, you will pay taxes as per your income level. In this case, even your Social Security withdrawals will attract a tax charge. The total liability will depend on your income and your spouse’s total retirement income, and your tax filing status (married filing separately, married filing jointly, single, etc.). Your retirement financial planning can involve structuring your retirement income to reduce your taxes in the present as well as during your retired years. Your retirement financial advisor can help you pay fewer taxes and still have a reliable income source for your non-working years. You can also take help from your retirement investment advisor to create a holistic estate plan. An estate plan is crucial not only to high-net-worth individuals but for anyone who owns any type of asset. Comprehensive estate planning can ensure that you stay secure even in the event of financial incapacitation. Also, estate planning strategies, such as creating a trust, making charitable contributions, etc., can reduce the tax burden for your heirs later.
To sum it up
Retirement financial planning is crucial for a peaceful and stress-free life. Moreover, the assistance of a competent retirement advisor in helping you secure your financial future is highly recommended for a planned and comfortable retirement lifestyle. It is important to be cautious when choosing a planning and investment professional. If you are worried about the cost of a financial advisor, continually assess the value they bring to your retirement planning to ensure you are getting the most suitable financial advice for your needs.