Spokane Journal of Business

Living in retirement requires strategy

Defining goals will help tailor savings, resources to fit individual situations

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Arriving at your retirement date with no real idea as to how you’ll be able to live without that regular paycheck is not a good strategy. Consider using the following guidelines to help create your retirement roadmap.

Don’t rely on some questionnaire or “quiz” to help you decide how best to manage your retirement assets. Those are not designed for specific people. You need to decide how you want to live, where you want that to be, and what type of activities you want to pursue. Take the time to create your comprehensive retirement strategy. This is like any good GPS. It helps you stay on track and to get you to your destination—even when your life, the markets, and the economy change.


Plan for a long(er) life

According to the Social Security Administration, at least one member of a 65-year-old couple now has a 90% chance of living to 80 or beyond, a nearly 50-50 chance of reaching 90 and a 1-in-4 chance of turning 95 or older. Living longer also affects your key retirement decisions, such as how to make the most of your time, how to invest, when to claim Social Security, and whether you might need long-term care.

If you’re in good health at 65 and have a family history of longevity, your retirement plan should account for 30—or more—years of living expenses. And keep in mind that with new medical advances, family history isn’t destiny, so you may live even longer than you think. That means your investments need to continue growing long after you’ve stopped working in order to help keep pace with inflation and reduce the risk of outliving your money.

Social Security benefits are calculated based on your 35 best earning years. You’re eligible for 100% of your benefit at your full retirement age. Individuals born in 1960 and later have a full retirement age of 67. Claiming at 62 will permanently reduce your benefit from the full-retirement-age amount by as much as 30%. Waiting to claim after full retirement age gives you an 8% increase each year in your benefit amount until age 70 for a maximum of 124% or more.

So, how long until waiting pays off? Should you take smaller amounts sooner? Or wait for larger amounts later and rely on your portfolio in the meantime?

If your goal is to maximize your cumulative benefit, the answer depends on how long you live, and your income needs.

You would receive more in total at age 77 by claiming at full retirement age at 66 and 10 months, rather than 62, and at age 81 when choosing between full retirement age and 70. The odds of receiving more by waiting are in your favor because of the relatively high probability of living to 77 and 81, particularly if you’re married. Delaying Social Security often pays off in the long run—especially if you’re the primary wage earner of a couple and your portfolio gives you that flexibility.


Expect rising medical expenses

Medical expenses tend to rise sharply throughout retirement as you grow older and require more care longer—and at higher prices. According to HealthView Services, these out-of-pocket costs for an average 65-year-old retiree on traditional Medicare are projected to almost triple from around $480 per month to over $1,500 in today’s dollars by age 95.

These costs are averages per person and don’t include long-term care coverages, which aren’t included in Medicare. Costs may be much higher too, if you have expensive prescriptions, and you’ll pay more in Medicare premiums if your income is higher.

Plan to include health care costs as a separate expense in your retirement strategy, using a 6% annual growth rate to be conservative. You may want to assess your long-term care alternatives when you’re healthy, or as early as age 50, when the most options are available to you.


Reduce tax liability

Optimize savings by opening tax-advantaged accounts—401(k)s, individual retirement accounts, and health savings accounts—while working, and consider diversifying across pre-tax, or deductible, and Roth options if available to you. As a rule, saving in a Roth when income is relatively low and shifting as your income rises may result in lower taxes overall.

Consider deferring income when you’re in your peak earnings years until you may be in a lower tax bracket in retirement. However, if you’re already concentrated in tax-deferred accounts, contributing to a Roth may help you diversify your retirement tax picture.

Work with your accountant and financial adviser to actively manage your tax picture throughout retirement. Higher incomes can also affect your Medicare premiums and the taxability of Social Security benefits. Consider proactive Roth conversions in years when your tax rate is lower.

Maximize your after-tax return by holding your highest-taxed investments—those generating ordinary income or short-term gains—in tax-advantaged accounts. Look to offset gains with losses when rebalancing your taxable portfolio or taking withdrawals from taxable accounts.


Use time to your advantage

Save and invest based on your time horizon. All goals aren’t created equal, so investing for them as if they are may not be the best plan. Instead, decide how much of your savings to put toward other goals based on your priorities.

Next, create an investment strategy that allows you to take advantage of the longer investment horizon for goals with longer time frames. To keep your strategy on track, be sure to have short-term savings or money market funds that can cover emergency expenses without having to sell your investments during down markets. Use six months of expenses as a minimum goal. While markets can always have a bad day, week, month or even year, history suggests investors are less likely to suffer market losses over longer periods.

Plan to stay invested. During periods of market declines, a natural emotional reaction can be to “take control” by selling out of the market and seeking safety in cash. This is due to “loss aversion;” in other words, losses hurt more than gains feel good. Acting on that sentiment not only locks in losses but often results in you missing some of the best days that are key to a portfolio’s recovery.

  • Michael Maehl

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