Most people become even more focused on planning and saving as they near retirement age. The most common questions we hear people ask is, “Will I have enough money?” followed closely by, “When can I retire?” But what about high earners who know they’ll have enough money for their golden years? Is retirement planning still important? What types of factors do they consider?
Surprisingly, no matter what your net worth, many of the concerns are similar. Therefore, the top advice we give to our most affluent clients can be insightful for anyone nearing retirement and may be useful to you as you plan for this stage in your life. In this post we will discuss the countdown to retirement and seven smart ways to get ready.
1. Plan to Live Longer Than You Think You Will
One of the most vital facts our clients often fail to realize is that they will likely have a long retirement, much longer than their parents did. A 65-year-old today can expect to live another 19 to 21 years, on average, according to the Social Security Administration. And what if you’re not average? One in four 65-year-olds will reach age 90 and one in 10 will live over 95 years.[i]
This means that even if you spend 40 or 45 years working, you could live another 30 years as a retired person. This highlights the importance of saving as much as you can toward retirement throughout your working years, because you’re going to need to support yourself (and perhaps your spouse) for a potentially lengthy retirement.
2. Plan to Save As Much as You Can
It should come as no surprise that having money set aside for retirement is critical, no matter how affluent you are. Even those who earn a lot of money during their lifetime won’t be in great shape during retirement if they spend too much and save too little. There are many stories of high earners who spend it all on houses, cars and vacations and end up with little in the way of savings.
It can be challenging to save for retirement, and you’ll need a nest egg to support the lifestyle you desire when you’re ready to call it quits. Did you know that 45 percent of workers who are 55 or older have less than $100,000 in savings and investments?[ii] This is nowhere near enough, even with Social Security payments, when you consider what you’ll need for even a year’s worth of living expenses, never mind 20 or more years.
Depending on your age, you may not be able to save consistently year in and year out throughout your lifetime. The ability to save is generally related to the life phase you’re in and your related expenses. Here’s why:
- Early adulthood – Young people may not be earning much money yet; however, unless they have significant student loan debt, their expenses aren’t usually that high either. It’s a great idea to put at least some portion of each paycheck into retirement savings, especially because the impact of compounding investment returns over 40-50 years is amazing.
- Middle adulthood – Once you have a mortgage and children, most people go through a spending phase of their life, making it more difficult to allocate money for retirement, given competing priorities like saving for college. Do the best that you can, and follow the age-old wisdom to save for retirement first, because no one is going to lend you money to finance your golden years and your kids have more years to pay down any student loans they have than you do.
- Later adulthood – Eventually the high spending phase winds down, once kids are out of college. A spouse who had devoted most or all of her (or his) time to raising children may become a more significant wage earner, or the mortgage may get paid off. Because these are likely to be your prime wage-earning years, this is an ideal time to rev up retirement savings.
No matter what phase of your working life you’re in now, the most important takeaways are to save as much as you can during each phase, and it’s never too late to save.
3. Plan to Spend More Than You Expect
We find that our clients spend almost as much in retirement as they did during their working life. There are a few reasons for this. Even though the mortgage may be paid off, some people purchase second homes, decide to winter in warmer climates, travel to visit children and grandchildren or take up exploring the world once they have more free time. When you were working you were not spending much money during the day. When you are retired, whatever you choose to do with your time tends to cost money. It’s important to consider that when estimating your monthly retirement expenses.
And at some point, when you become less active due to normal aging or illness, your primary expenses will be things like healthcare and long-term care, such as assisted living. Our high net-worth clients tend to self-fund their long-term care needs because they have the means to do so. But for most people, self-insuring can be risky. Long-term care insurance is one possibility, but it can be expensive and it’s often not easy to qualify for payouts, depending on which company you go with. It’s important to consider how you will cover these costs of aging as part of your overall retirement planning.
4. Plan to Work Longer Than You Want To
If your expenses aren’t going to decrease much and you’re likely to live a long time after you retire, one of the most effective ways to help ensure you have enough money to last your lifetime — and to meet any estate planning goals — is to continue working as long as you can.
Yes, almost everybody wants to stop working at some point. But given that these may be your highest wage-earning years and you just might live to be 100, our advice is to consider working as long as you can. And it turns out that more of us are working longer. According to a recent Gallup poll, non-retired Americans, on average, say they will retire at age 66. This is up significantly since the 90s, when the average American projected retiring at age 60. [iii]
The age at which you choose to retire can also impact your expenses during retirement. If you retire before age 65, you won’t qualify for Medicare; for most people, that means paying 100% of the cost of medical insurance. And many people choose to work longer, in part, so they can defer taking Social Security payments until they reach age 70, which maximizes their benefits. Social Security planning has become easier over the last few years because some of the rules have changed and strategies that used to be popular are no longer possible. The basic advice still stands: You get a significantly higher benefit if you defer taking Social Security until age 70. Given that you’re likely to live for many years in retirement, if you can afford to do so, it makes all the sense in the world to wait.
5. Plan to Continue Investing
There are many factors when it comes to managing an investment portfolio during retirement. For many of our clients, we don’t get overly conservative with investments, which would almost be like putting money under the mattress and hoping it will last.
Assuming you’ve successfully made it to retirement and are able to live within your means throughout retirement, your portfolio can keep growing during retirement.
It’s not uncommon for people to think that you should take less risk with your investments as you approach retirement and while you are retired. What we’re saying here is, that’s not necessarily always true. Given that your expenses are likely to be higher than you expect and you’re probably going to live longer than you think, it may not be appropriate to have all your money in low or no-risk investments, which is what a lot of people tend to think they should do (the old “rule of thumb” is that the percentage of your savings in stocks should equal 100 minus your age; the rest should be in conservative investments, like bonds). You and your financial planner can decide what investments are right for you based on your risk tolerance and other factors. Just don’t be surprised if you’re advised not to tuck most of your money away in a savings account.
6. Plan for Tax Implications
One of the things you may want to consider is optimizing your assets for tax purposes during retirement. For example, does it make sense to convert a traditional IRA to a Roth IRA before retirement and pay the upfront taxes? To answer this question, one of the things you’ll want to look at is whether you expect your tax rate to be higher or lower during retirement.
Another important consideration is your own personal views about paying taxes. Some clients care a lot about paying the least amount of tax possible. These feelings may even compel them to do things like move to Florida or another tax friendly location, simply for the tax implications. Other people are less concerned about taxes, for example, planning to retire in California because they like it there, even though it may mean paying significantly higher taxes.
Tax planning can get increasingly complex depending on the types of assets you own, the value of your estate and other considerations. Accountants and financial planners can be valuable resources to help you sort through the details of your specific situation.
7. Plan to Keep Planning
The planning doesn’t end once the retirement finish line is in sight. In fact, some of the most important strategizing can take place in the time leading up to retirement. It’s also important to continue reviewing your plan throughout your retirement years because your situation and goals are likely to change. Your wealth management team can help you with retirement planning at each stage of your life, taking all these factors — and many more — into consideration. Contact us today to learn how The Fiduciary Group can to help you prepare for the retirement of your dreams.
This article does not represent a specific investment recommendation. No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from The Fiduciary Group which can only be provided through a formal advisory relationship. Clients of the firm who have specific questions should contact their The Fiduciary Group advisor. All other inquiries, including a potential advisory relationship with The Fiduciary Group, can be directed here.