Retirement Planning at Age 55 and Older: The Landing Pattern
If you ask airplane pilots, odds are most will say that takeoff and landing are the busiest parts of a flight. There are lots of variables to take into account to make a safe landing, such as wind speed, altitude, air traffic, visibility and so on.
In many ways, getting ready for retirement from about age 55 and older is like “coming in for a landing.” There are lots of variables to consider. But like landing an aircraft, you really do want to make sure you get it right the first time. No one wants to go through a botched landing, and after all your years of hard work on the job, it’s no fun to have to do another “go-around” and set up for a second attempted landing at retirement.
What are some of the landing pattern variables you need to account for as you get ready for retirement? Here are some of the key items that should be on your safe landing checklist:
· Inflation. An inflation rate of 3-4% annually can cut your standard of living in half over a period of about 20 years. Nowadays living 20 or 30 years in retirement is not uncommon.
· Long-term care. The average stay in a nursing home is two-to-three years and today can cost $100,000 to $200,000. Imagine how much it will be in 10 to 20 years. How will you pay for it?
· Healthcare. Medical costs, such as deductibles, co-pays and prescription drugs, become a bigger part of your budget as you age. On a percentage basis, if healthcare spending will go up, how will your savings keep pace? Or will you cut back on other living expenses?
· Longevity risk. Living longer means we need more resources to support us. How will you avoid outliving your financial resources?
· Market risk. Despite what conventional wisdom may say, you want some riskier investments in your savings, to help support you over a 20- or 30-year retirement. As with many things in life, the key here is diversification, owning a healthy balance of many different types of investments.
· Taxation. As you draw money out of your retirement savings, there’s no need to pay more tax than necessary. Put a good plan in place that accounts for taxable, tax-deferred and tax-free income. And don’t forget that income and estate tax rates can and do change over time. Historically speaking, income tax rates are relatively low now, while the federal deficit is enormous. Do you have a plan in place if income tax rates start rising?
· Timing. The few years right before you retire and right after are incredibly crucial to the sustainability of your retirement nest egg. Through no fault of your own, when you retire can make or break your financial resources. Imagine if you had retired in 2007, back when times were “good.” Plan now what you’ll do in a worst-case scenario, like 2008 and 2009; you never know.
· Work. Many pre-retirees expect to work in retirement, though health and job opportunities may limit them. What can you be doing now to increase the odds you’ll be physically able to handle full- or part-time work in retirement, and that your skills and abilities will be current and in demand?
Planning ahead now can help ensure you have a happy landing in retirement. There are lots of moving parts to coordinate as you zero in on your retirement date. Make sure you know your flight plan well.