Much of your retirement planning will depend upon your cash flow once you stop working. If you are going to receive a company pension on top of Social Security, that will materially reduce the amount that you will need to draw from your retirement savings.
You need to look at your debts and expenses as well as your investments in order to figure out how much you will need in order to retire comfortably. This is the time to get a clear estimate of your Social Security benefits (see below) and start researching the cost of healthcare and insurance (see Chapter 4: Crucial Healthcare Decisions). Find a good budgeting tool like www.mint.com or another program that lets you create a detailed transitional budget that will help you see how your cash flow will change on a weekly, monthly and annual basis after you retire.
Frank Q. is 65 years old and will retire in two years. His wife stopped working 10 years ago due to health issues. His current annual salary is $80,000, and he anticipates that he can count on having about $300,000 of retirement savings when he stops working. He will receive about $2,200 per month from Social Security at age 67.
After Frank stops working, he wants to be able to take about $2,000 per month out of his savings for the remainder of his life. He projects that he will live to age 90 and his portfolio should be able to continue to grow at a rate of about 5% per year. However, if he takes that much out of his savings each month, he will run out of money about 40 months before his 90th birthday. If he wants his money to last for the full 23 years, Frank will only be able to draw about $1,830 per month from his savings.
If your cash flow projections are telling you that you’re going to run out of money at age 80, you’ll have to make some adjustments in your retirement plans. (Life expectancy for a 65-year-old rose to 84.3 in 2012, according to the National Center for Health Statistics.)
You basically have three options. You can:
Staying in your job will give you more time to contribute to your retirement plan as well as shave down the number of years during which you’ll be using your savings. And working 20 hours a week for $10 an hour could get you another $650 per month after taxes, which would also substantially reduce the amount of investment income you need to live on.
Modern technology is also making it increasingly possible for people to work from home, doing data entry, customer service and other skilled tasks that pay above minimum wage. Furthermore, working longer can enable you to delay taking Social Security and receive a higher benefit in the future.
In the scenario above, if Frank were to work until age 70, he would be able to draw $1,980 a month from his savings until age 90 and qualify for a higher monthly Social Security benefit. Or he could work a part-time job for perhaps the next 10 years (as just described), earning about $8,000 per year after taxes, and put $6,500 of that amount into a Roth IRA to grow at 5% until his other retirement money runs out. Meantime, Frank will have an extra $1,500, or $125 a month of disposable income. At age 77, Frank’s Roth IRA could be worth over $80,000, which would not only cover the shortfall of income he had with his previous plan, but also leave something for his grandchildren.
The other key aspect of cash flow planning is minimizing your liabilities.
One of the greatest measures of financial security you can achieve is paying off your mortgage. There are several reasons for this, both on your cash flow and your balance sheet. Eliminating your monthly mortgage payment is probably the most obvious benefit. Not having to come up with a thousand dollars (or more) a month for a house payment is comparable to receiving that much money from a Roth account every month – which would require almost $100,000 if you were to rely on that account to make your payment for 10 years.
Furthermore, your home is a tangible asset; you can live in it and use it even if it becomes virtually worthless in the marketplace. For these reasons, you may be wise to simply concentrate on paying off your house if you want financial security but are frustrated with the volatility of the markets.
You also need to have a strategy for paying off your car loans, credit cards and other obligations as soon as possible in order to make your retirement money stretch further. One good way to organize your debts is to create a repayment program using a website such as www.powerpay.org, which can accelerate your repayment plan by rolling the payment from each debt you pay off into the next debt, so that it is paid off that much faster.
Knowing when to start drawing your Social Security benefits is one of the most important financial decisions you will make. It is dictated by several factors, including when you plan to stop working, your projected lifespan and your budget.
If you are able to get by without Social Security for a while after you stop working, you may be wise to delay your payout. (See Tips on Delaying Social Security Benefits.) But if you are struggling with high-interest debt, you could come out ahead by taking Social Security early and using the first few years of your benefits to pay down your obligations.
You may need to run some projections on this comparing your cash flow when you take early, regular and late benefits. A great deal of information is available to you on the Social Security website, but be aware that Social Security employees who interact with the public are not allowed – or trained – to help anyone decide when to begin taking benefits; they can only explain the facts that pertain to the timing of benefits in a general sense. If you want more specific guidance on this topic, consider using the Social Security Timing website, or another one, to get a more complete understanding of the pros and cons of taking your benefits at a given time. A financial advisor can also help you to determine this. For other ways to think through these issues, see How Social Security Works After Retirement , 11 Social Security Calculators Worth Your Time and The 3 Best Social Security Calculators for 2016.
If the only life insurance you have is what you get through your employer, you should consider whether you need – and can afford – to continue coverage after you stop working. If you have substantial debts or other obligations that would need to be resolved were you to die, shop around to see what kind of coverage you can get.
Your best option may be to convert your group coverage into an individual policy. If you have not done so recently, it’s a good idea to get a complete physical now – as if you were being underwritten – so that you have some time to correct any health problems, such as high cholesterol or high blood pressure, before you apply for coverage.Crucial Healthcare Planning