Not having to work has two sides to it. It can be both sweet and sour, but it is an era that we all will face if we live long enough. It is wise to be visionary in planning what those days will be like for us before we step in unprepared.
This is because, what you do before and through retirement will ultimately determine what your retirement will look like.
Here are some suggestions and considerations that, if kept in view and properly applied, can create a cushion for the days when you no longer earn a paycheck:
1. Save For Rainy Days - Pay Yourself First
How much do you need to cover your necessary expenses such as a mortgage or rent, taxes, utilities, groceries, healthcare, etc. And how much do you need to cover your discretionary expenses such as travel, gifts and other comforts of life?
You want to enjoy your retirement not just "survive" retirement, so factor in these discretionary expenses.
Next, look at what income you have or will have in retirement. This would be social security, any pensions, annuity income, rental property income, etc. Now compare your expenses to your income and the shortfall is the amount you have to take out of your assets each month.
Project that over a 20 or 30 or 40 year retirement horizon and add inflation into the mix and you can quickly see how long your savings might last.
Yet with all the best planning, emergencies arise and unplanned expenses can come up. At times like this it is important that you have saved for a rainy day. A good rule of thumb is to always keep six to nine months of living expenses on hand that can be accessed at a moment's notice.
If you have to spend that down for any reason, then replenish it again.
2. Diversify Your Investments
We've all heard that it is important to be diversified. But what does that really mean?
Some people think that diversification means being invested in different companies and not just one or two. For example, having investments in Exxon, Shell, BP and Chevron. That may be a diversified portfolio but all these companies are in one sector - energy - and when that industry took a beating in 2015, so would have your portfolio - if that were where you were heavily invested.
Being diversified also means having your assets spread out over different industries such as Healthcare, Utilities, Financial Services, Technology, etc. If one sector takes a hit, you have other industries that hopefully didn't.
3. Social Security Benefits - What are your options?
We all know about social security; we know that we are entitled to some form of payment from social security when we retire, but most of us do not really know how social security works and many end up making bad decisions.
In a recent article about comprehensive retirement strategies, Lisa Barram said, "The majority of Americans who receive social security benefits do not receive anything close to their maximum benefit, often because they elect to file for benefits at the earliest age allowable."
While this may make sense for some it is not a decision that should be made lightly.
Social Security is a lifetime income and should be properly evaluated for each person and family to maximize benefits. Aside from when to file for benefits consumers need to think about ways of reducing social security taxation (benefits can be taxed up to 85%) as well as the fact that Social Security historically has not kept up with inflation.
So when to file is key but there are several aspects that require attention and should be part of any holistic retirement planning.
4. Understand Your Pension Plan
If you are fortunate enough to still have a pension, take the time to understand your choices. Pension plans usually offer several different options when it comes to claiming your benefit.
Pensions often provide a choice between taking a lump sum benefit or taking a lifetime annuity payment. The lifetime annuity payment can usually be structured to provide you with a lifetime income and often you have a choice that can also provide your spouse with a lifetime income.
Take the time to understand your choices before making any final election of your benefits.
5. Find An Alternate Source Of Income
Social security was never intended as the primary form of income for retirement. Social Security was intended to supplement retirement income yet it forms the primary source of income for 61% of retirees in America. This is a sad, but true fact. It is solid advice to plan for alternate streams of income about 5-10 years before you retire.
Rental income, Income Annuities, Real Estate Investment Trusts (REITs) and dividend paying stocks are some of the most used. REITs and rental income have usually been available only to those with a higher net worth; while Income Annuities and dividend-paying stock is available to those who have as little as $25,000 to get started.
The benefit of the above additional sources of income is that it puts less stress on the underlying assets and still generates an income.
6. Learn What Your Health Care Options Are
If you are within 10 years of retirement, then you should take a close look at your anticipated medical costs in retirement. Include your anticipated coverage in this evaluation too. You should also consider your current medical expenditures and whether you need long-term care insurance.
Proper knowledge and planning will help in decision making as to savings and investment in health insurance. Retirement is bad enough for some people without health issues complicating it and siphoning what little wealth has been garnered over the years.
For the information in this article I interviewed Daniel Barram, a Retirement Income Certified Professional® who leads the Case Design Team and is a Co-Founder of Retirement Prosperity Group.