RETIREMENT CONSIDERATIONS

This outline provides only a few points to consider in evaluating your retirement options and does not constitute a recommendation or determination as to whether or not you should or can retire. There are many additional variables and strategies you need consider depending on your own individual circumstances.  Health reasons, family reasons, expected inheritances, and many other issues all must be included in your overall retirement planning process.  One element is applicable in all cases, you need to plan for your retirement so those years will be enjoyable.  Thorough planning will better enable you to anticipate your financial status during retirement and better enable you to cope with the many uncertainties, challenges, and unexpected events that are certain to arise during your retirement years.  Unfortunately, after making just the basic calculations identified in this brief outline, some people determine that retirement must be delayed or significant changes to their expected retirement lifestyle must be implemented if the retirement option is still chosen.

1.     Are you emotionally ready to retire?  Would you enjoy being without work?

Many retirees wind up taking another job, either to fight boredom or because of financial reasons.  Consider existing hobbies, new hobbies, travel plans, health, etc.  Retiring because you just do not like your job may be a reaction to a situation, not a long-term emotional commitment to retirement. 

2.     Can you afford to retire?  Consider outgo, inflow, and assets owned.  See items 3, 4 and 5 below.

Retirement does not mean that your monthly expenses will necessarily decline substantially.  You still have to live somewhere, eat, commute, wear clothing, etc.  Studies show retirement expenses are often 70% of pre-retirement expenses, although realistically plan on 100%.  A KEY consideration is medical costs, including the cost of medical insurance and the expenses not covered by insurance.  At 65, Medicare can reduce this cost exposure, but not eliminate your medical costs.  Most retirees need to maintain a permanent residence, a “stake in the ground,” to which they can return after traveling and a place where they can keep “their stuff,” and there are costs incurred maintaining this “stake.”

3.   Have you prepared a net worth statement?  If not, do it now!

List all of your currently owned assets and their current market value, including the cash surrender value of life insurance policies.  Then list all of the amounts you owe, mortgage loans, credit cards, insurance loans, etc.  You deduct the total of the amounts you owe from the total of your asset balances to arrive at your net worth.  This will enable you to determine other sources of funds should you not have sufficient income to cover your retirement expenses.  The net worth figure computed above is typically overstated since income taxes will have to be paid on the sale of appreciated assets such as stocks, mutual funds, rental properties, etc.

4.     Have you prepared a detailed list of your current and projected future living costs?  If not, do it now!    Figure out how much you expect to spend to maintain a comfortable lifestyle.  Make a listing of all of your regular monthly expenditures such as, housing, insurance, vehicle, medical, personal such as barber/beauty parlor, recreation, dining out, travel, clothing, family gifts, loan payments, credit card payments, and any other expenses you now incur.  The more detailed the better.  In a column next to your current expense amounts, enter what you expect to pay for these same items once you are retired.  Now add the additional expenses that you will incur as a retiree.  If you plan to sell your current home and travel in a 5^th wheel, you will add the cost of acquiring, licensing and insuring your new home, space rental, and the cost of the tow vehicle including fuel, maintenance, license, insurance, etc.  Remember to increase the total amounts by about 3% per year for inflation.  If you plan to relocate, you need to build in the expenses of the move as well as the living costs in the new location, which may be different from your current costs.

5.     Have you prepared a detailed list of your sources of retirement income?  If not, do it now!

Include all types of retirement benefits you will be receiving, company benefits, personal retirement plans such as IRAs and 401(k) plans, social security, income from investments, and any other sources of income.  Assume a yield on your financial investments in the 5% to 6% range since you will likely be investing in more conservative investments which typically have lower yield but provide less volatility to the principle.  Remember to reduce the amount of investment income you anticipate from savings and investments if you expect to utilize some of the principle to make asset purchases such as a car or trailer or if some of the funds will be used to pay your monthly expenses.  Total the income items you have listed.  Since income taxes will be owed on many these income amounts, you will need to determine how much net income you will receive.  Your tax adviser can assist you with this computation.  Generally, you will need to deduct 15% to 20% for income taxes on the earnings, although this varies in each case.

6.     Is retirement an option for you at this time?  Is there a shortfall?

From this net after tax income figure calculated in item 5, deduct the total of your monthly expenses from item 4.  If the number is positive, you will likely not have to dip into your savings to retire.  If the number is negative or just slightly positive you may need to consider working part time or using tapping into the equity in your savings and assets to make up the difference so you can afford to retire.  If assets are used, then you will need to evaluate the duration of those assets before they are completely used up.

7.     Consider the tax implications of your retirement funding strategy.

You need to evaluate the tax consequences of your different assets and income to develop the most tax efficient retirement funding.  Some sources may be tax free, others may provide income subject to ordinary income rates, while other sources may be taxed at capital gains rates.  Often, letting your tax deferred account, such as IRAs grow as long as possible is the best approach.  Consider using assets that you are already paying taxes on, such as regular investment account to fund income needs.

8.     Estate planning is an important part of retirement planning.

As you develop your retirement strategy, you should simultaneously evaluate your estate planning strategy.  In the above steps, you have identified the items that make up your estate so you have already achieved the first goal in the estate planning process.  If your estate is under the taxable threshold limit, then the primary focus should be on item 7, tax efficiency.  If your estate will be above the taxable threshold, you should develop your retirement planning decision incorporating your estate planning strategy.  Naming of the proper beneficiary of your retirement accounts, retaining highly appreciated assets to benefit from the step-up in tax basis to avoid capital gains, and other options should be considered to achieve the maximum estate tax benefits.

This very brief outline hopefully provides you with some general retirement considerations in taking the first steps in the retirement decision process.  Each individual has a different set of circumstances and needs and the retirement plan should be developed taking all of these issues into consideration.  Once you have the general information assembled, your financial and/or tax advisor should become involved in the process to identify any areas where tax considerations may impact, often negatively, your financial planning decisions.  We are knowledgeable in this area and available to assist you with your retirement and estate planning.