Last month's article, "How do I retire with the resources I have?" brought me a number of emails and calls with questions about the alternatives we all have as we approach and enter into retirement. When you really stop and think about it, combining going to school with getting married, having a career, raising kids, going through empty nest syndrome ( go ahead- admit it) when we finally reach the time to retire, how much quality time with good health and the ones you love do you have?
Retirement will be different for everybody: age, geographic location, health at retirement, family health history and pre-retirement lifestyle are but a few items to be taken into account when doing your retirement calculations. I am often asked as to when retirement planning should start- my stock answer is around the age of 21. Money is the focus of most when thinking about retirement- having enough to sustain your pre-retirement lifestyle for the remainder of your life. The one thing impossible to nail down when doing your calculations? How long will you live, a huge factor in the calculation. In the past, I’ve written about "Monte Carlo Simulations," a computer program that through complicated algorithms runs thousands of scenarios to see if the money saved vs. the projected expenses will sustain you through the latter years of your life. The results though, are only as good as the input, and the question is, are you missing these in your retirement calculations?
Taxes. When calculating monthly expenses and diligently adding up your annual expenses item by item, did you take taxes into account? The second biggest mistake I see when folks come to see me with their spreadsheets of expenses is the lack of taking taxes into account. During our working years, most are used to having taxes withdrawn from their paycheck automatically: in retirement it your obligation to pay quarterly taxes on your own. Depending on your tax bracket and state of residence, you may need to factor in an estimated 10-25% more principal to be saved. Most hazardous is the fact that most just simply (and tragically) forget about taxes completely, and then find themselves woefully short once into retirement, with no alternative but taking a part time job to close the fiscal gap.
Inflation. Newsflash: just because you retire does not mean the price of a loaf of bread or a car will no longer go up. In and along with your income calculations, you also have to include the fact that $1.00 today, based on a hypothetical 3% inflation rate, will only buy $.97 of goods and services one year from today. Now, add up the percentage of withdrawal of your investments that you plan to withdraw for income, add in inflation, not including the above mentioned taxes, and you can get an idea of what type of return you would need to sustain you throughout your lifetime without eroding principal. Since we don't know how long we will live, you can use the mortality tables available on the internet, factor in your health, family history, and then have a good guess. Unfortunately, our final date is for the most part unknown unless you know something or someone I have yet to acquaint myself with.
Healthcare. The big factor either forgotten or grossly miscalculated. If you are under the assumption that Medicare will take care of you from age 65 cost free, you are mistaken. There are deductibles, things that are not covered needing a personally owned "Medigap" policy to cover these holes in coverage, and then the expenses of certain health issues not covered at all. I could, and probably will in the future, dedicate a full article to Medicare and its different parts, but in a nutshell you are not covered for everything, not by a longshot. This, above all other items, is the most often forgotten issue in retirement planning and causes the most angst for retires as it is unexpected and can break the bank. In addition, long term care expenses can be quite exorbitant and create a family calamity when one spouse is in a facility at a high cost and the remaining spouse at home is trying to keep things together as the high cost of long term care erodes the carefully saved dollars of decades. If you plan to look into a long term care policy, be sure to work with a reliable agent who can explain to you the positives and negatives, and what is and is not covered. Waiting until you retire may be too late, as you get older, the annual costs go up. Consult your Certified Financial Planner® or insurance agent for an in depth explanation of coverage’s.
With proper planning, retirement should be a time of joy and happiness. Don't wait for the last minute or last couple of years before retiring- it take far more time than that... and make sure you don't leave anything out to your best ability when doing your number crunching.