Plan Now To Cover Your Basics in Retirement
By David E. Geschke
Director of Retail - HilltopSecurities
CEO & President - HilltopSecurities Independent Network
In pre-retirement, it’s pretty amazing the things we take for granted. All of our bases are covered by our salaries — food, housing, transportation, health care, insurance, etc. But, when you stop and think about it, those basics are a substantial monthly outlay of cash. What happens when the paychecks stop coming? Don’t have a panic attack. That issue is simple to resolve. Sit down with your financial advisor now and make sure your basics are covered.
To get started, you may want to ask yourself a few questions to get an accurate picture of what you will need:
What Are Your Basics?
People think that when they retire their expenses will go down, but this mindset is not logical. It is important to consider what percentage of your current income will be needed — 70 percent is the traditional expectation, but that is usually significantly lower than the reality. Not only must you cover your existing monthly bills, but you will also need to allow for the property taxes on your house — which has most likely appreciated in value over the years.
Sadly, it is not uncommon for us to see clients who have to sell their family homes, where they may have lived for more than 30 years, because they cannot keep up with rising property taxes. We hate to see this happen and that is one reason why we categorize taxes and monthly expenses as hidden costs. That is why it is so important to ensure that you are including those expenses in your preparation for retirement. If you are on a fixed income this can be particularly draining. So, when you are devising your retirement plan it is important to account for all of the following:
- Housing (including rising property taxes)
- Health Care
- Personal Insurance
What Are Your Resources?
- What is your current take-home pay?
- Do you have any additional sources of income? Will they cease or continue in retirement?
- What expenses that are currently deducted from your paycheck will be out-of-pocket in retirement?
- Will there be areas where you will be able to save money in retirement? (We’re not talking about gas or commuting costs — you need to think outside the box and capture extraneous expenses.)
What Are Some Potential Expenses?
- How will you pay for health care?
- Do you have a cushion to cover long-term care? Long-term care insurance?
- Do you anticipate any increased expenses in retirement (e.g., for travel)?
- Is it your goal to be Captain Saturday for your family? If so, that comes with additional financial considerations, because all that money you are saving in other areas could just transfer to filling gaps in this area:
- Will you be visiting grandkids?
- Will you be helping kids with grandkids during the week?
- Will you just be transferring your commuting savings to taking care of your grandkids?
- Are there any new areas (e.g., hobbies, interests) where you will incur costs?
- Entertainment? A little bit of golf, perhaps?
- Civic Organizations?
- Charity Donations?
What Are Your Options?
These extra expenses add up, and when you include property taxes, those numbers become real. There is the ever-increasing cost of health care in general, but you also have to bear in mind long-term care, assisted living, in-home health care, and other types of elder care. There is a trend to invest in Continuing Care Retirement Communities (CCRCs), which are restricted to residents over 55 and cover care from age 55 to end-of-life situations. CCRCs supply assisted living accommodations that range from fully functioning individuals to caring for residents who require round-the-clock hospital-type care.
When residents move into a CCRC, they can purchase a condo or freestanding home. The residents live in these independent facilities but, when additional care is needed, they move into an assisted living condo or apartment with a higher degree of care. This progression continues until hospital-type care is required. But, this type of care does not come cheap. On average, the entry fee is $282,000 with a $3,000 monthly maintenance fee. This is one option but it may not be feasible for your finances or those of your family. So, once again, you need to carefully address some questions when planning for long-term care:
- What are your potential expenses?
- What kind of care are you looking for?
- Deciding which of the multiple levels of care suit your needs and capabilities is an important family conversation. Are you having it?
- Some facilities are expensive — after your needs are sorted, how do you afford your wants? It’s integral to make sure you have the assets to fulfill your wants. If not, with research you can find options in your price range that can meet your needs and some of the nice-to-haves.
Leave a Buffer Zone for Unforeseen Expenses
This cannot be stressed enough, you need a cushion to fall back on should something unexpected arise. This is the money you set aside for wants, not needs. Some potential expenses may include: home improvement — should you want to downsize and sell your home, you are going to need to make improvements so that you can get the most out of your home. You will need the money you get from the sale of your house to fund your retirement. Or, consider the possibility that someone in your immediate family needs to use a wheelchair or a walker; that is going to require retrofitting your house so that the injured person can navigate stairs and doorways easily. All of these things cost money and tend to be unforeseen expenses — hence the importance of the buffer zone.
Don’t Underestimate the Money You Will Need to Fund a Comfortable Retirement
One of the biggest mistakes advisors see is that clients underestimate their needs in retirement and don’t save enough, leaving them in a tough position should an emergency or unforeseen expense arise — like an injury or the need to renovate your house for sale. When answering the above questions, don’t forget to think about the unexpected: health care not covered by insurance or long-term care, home improvements, familial obligations such as helping with college costs for a loved one, taking in a friend or family member in need, because if nothing else, life definitely likes to throw curveballs.
But it’s not all doom and gloom! If you work with your advisor on a comprehensive financial plan, you can plan for your basics and all the other things that can catch you off guard. This may seem easier said than done, but it’s not. The numbers are out there. You don’t have to guess at the costs of housing or health care, you and your advisor can work together to get accurate estimates of what you will need. Answer the questions above and survey your expenses over the past 10 years. Using that as a baseline, adjust your monthly expenses based on the lifestyle changes you will make during retirement. You and your advisor can then choose the best investment vehicles to provide the income you will need to cover your basics, for example, treasurys, annuities, CDs and municipal bonds, among others.
HilltopSecurities, Covering Your Basics and the Certainty Circle of Life
At HilltopSecurities, we use an approach called the Certainty Circle of Life to ensure our clients have multifaceted protection. The Certainty Circle of Life takes a multi-dimensional view of your individual needs and builds a plan to meet those needs, while acknowledging that life is a journey and unexpected events will happen. By building a flexible plan, we help you meet those events head on and still have the freedom to live your dreams.
Proper planning in the years leading up to retirement and emphasizing the importance of putting these plans into place in the years leading up to retirement is so important. Planning needs to begin years out from your retirement. Six months out isn’t going to cut it. By setting up a long-term strategy, you are removing luck from the equation. Work with your advisor long-term to put plans in place for your retirement.
Our straightforward advice and guidance is what keeps our relationships strong and our clients protected. For more information, give us a call at 800.678.3792.
Hilltop Securities Inc. (HTS) is a registered broker-dealer and registered investment adviser that does not provide tax or legal advice. Additionally, Group and Individual Health Insurance products are not offered through HTS. Material presented herein is for informational use only and reflects the views of only the author. This information may not be duplicated or redistributed without prior consent of HTS, and distribution or publication of this material does not represent a solicitation to complete a financial transaction with the firm. Though information was prepared from sources believed reliable, HTS does not guarantee its accuracy or completeness. Securities offered by HTS (1) are not insured by the FDIC (Federal Deposit Insurance Corporation) or by any other federal government agency; (2) are not bank deposits; (3) are not guaranteed by any bank or bank affiliate; and (4) may lose value. HTS is a wholly owned subsidiary of Hilltop Holdings, Inc. (NYSE: HTH) located at 1201 Elm Street, Suite 3500, Dallas, Texas 75270, 214.859.1800. Past performance is no guarantee of future results.