5 dos and 5 don'ts of financial planning
If you’re in your 50s, retirement is on the horizon. Here are some important financial planning decisions you need to avoid.
- Don’t dip into retirement. With the average employee having seven careers in a lifetime, there’s a possibility that you’ll experience seven or more temptations to cash out an IRA rather than roll it over. Read here to find out why multiple IRAs may create an unexpected burden. Then there are college tuition fees, children who want to buy homes, grandchildren’s needs and the list of financial pressures can pile up. That cache of money you’ve been slowing (hopefully piling up) can be tempting. Resist the urge. Hitting up retirement accounts at this point in your life comes with hefty fees and can substantially hurt future security.
- Don’t underestimate retirement health costs. Even without ending up in a nursing home, the typical retiree couple pays $276,000 in medical expenses during their combined retirement years. Here’s a quick calculator to help you get a rough idea of potential costs. A recent article covered how something as minor as choosing to retire at 62 can potentially cost you $18,000 extra in the three years between 62 and 65 (when most folks qualify for Medicare).
- Don’t jump into retirement too early. If you’re not financially ready or if you’re not mentally prepared, remember that there are no requirement dates for retirement. Rethink what retirement means to you. Some people love their work and keep working all their lives. Choosing to retire when doing so will seem a loss can be detrimental to your health. Choosing to do before you are financially ready can be a hardship you’ll never recover from. Delaying has another potential upside in that remaining in the workforce can allow your Social Security benefits to continue to grow.
- Don’t go into retirement with debt. Someone on a fixed income will be hard pressed to pay for mortgages or other high debt and if you have to take larger chunks of your retirement savings to pay for it, you’ll pay higher taxes (a double ding). One bad health incident can topple the whole house of cards. Putnam Investments found that retirees who returned to work had on average just 47 percent equity in their homes.
- Don’t rely on factors outside your control. Inflation, growth in the market, company pension plans, appreciating home loans are all things you can’t do a thing about. Make a plan to help you deflect the costs of when these things don’t go your way and review your plan and potential costs on a regular basis.
Just as there are some key areas to avoid, there are also some key financial decisions to do. Here are some important steps to take now.
- Do defer paying income tax on more of your retirement savings. Older workers can tuck away more money into both traditional IRA and Roth IRA accounts than their younger counterparts–$24,000 in 2015.
- Do take the time to consider the pros and cons of a Reverse Mortgage. Despite how many people look at them, reverse mortgages don’t eliminate your housing expenses in retirement. Property taxes, homeowner’s insurance premiums and maintenance costs will continue to accrue. Falling behind on any of those will put you in default with the mortgage company. Read our white paper on reverse mortgages.
- Do set realistic goals. By now you should have a retirement account you’ve been adding steadily to. How much money is enough money to retire? As a nation, we are on track to saving enough to be forced to live on 55 percent of our current income at retirement. Most people don’t find that retirement costs them less money and some actually see their expenses increase according to Fidelity Research. You can calculate your projected income by estimating your Social Security benefits and using a retirement calculator to see if you are saving enough. Then review your projected expenses. A financial dashboard can give you a picture of your current saving and spending rates and help you determine whether you are on track for retirement.
- Do review your estate planning documents. Make sure your legal paperwork is in order. That means Wills, Powers of Attorney, Living Will, and possibly trusts. These things aren’t age-related, meaning you probably needed them clear back when you were 20 and invincible.
- Do decide whether or not it makes financial sense to purchase a Long-Term Care insurance policy. Doing so will depend upon many factors. It’s important to have a good understanding of those factors. You should have a solid understanding of what you can and cannot expect a policy to cover and whether or not you can live with premium increases or without coverage.
Finally, hire an expert. Sometimes you really need the voice of experience to help you set goals and get your plan on track. Retirement is a long term financial opportunity. The challenge is in recognizing that it’s at the tail end of retirement when you’ll know whether or not you’ve done an adequate job of planning. The point of spending time working on it now, when you can make adjustments and corrections is to avoid burdening your children or loved ones later. Financial planning is just one part of the aging process. In addition, retirement planning should include planning around opportunities related to housing, health, legal and family. Make sure you cover all of your bases when planning your retirement.