Eight Things To Consider For A Secure Retirement

1. Understand your advisor

First and foremost, you need to ensure that your investment advisor’s interests are aligned with yours. You need an advisor who will be a fiduciary to you, at all times.  This means that they will put your interest first, ahead of all interests, including their own.

You also need to research your advisor’s qualifications, as well as any problems in their past.  Anyone can claim to be a financial planner, but there are relatively few advisors who are Certified Financial Planner professionals.  You can start your research for your investment advisor here.

Make sure to ask your advisor how they are paid.   your advisor is a fee-only advisor you will know that the investments they recommend are always in your best interest.  The following are different ways that advisors are paid:

Fee only

No compensation is earned from the investments you make. This ensures unbiased and independent advice regarding your investment and insurance needs. The advisor’s interest is aligned with yours and he or she has the incentive to recommend the investments that make the most sense for you and are in your best interest. Your advisor will be a fiduciary to you at all times.

Fee based

The advisor will receive fees from you, as well as commissions from the investments you make. When the advisor receives their commission from a product you buy, their fiduciary duty is to their employer, not to you.

Commission

The advisor receives their compensation from the investments you make. Because of this the investment may be suitable for you, but another investment that would be better but will not pay your advisor a commission may not even be offered to you.

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Take a look at this good article by Liz Pulliam Weston for a list of things that you need to know about your investment advisor.

To look up information about your advisor you can visit the SEC, CFP Board, Financial Planning Association, and NAPFA.

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2. Social security

It may make sense to delay taking social security, especially if you a married.  Delaying the start of social security will increase the amount of your monthly benefit.  Although you will not receive social security payments earlier in your retirement, the higher payment over your lifetime may help cover your expenses if you live longer.  In addition, the higher social security benefit you receive becomes your spouse’s benefit (if their benefit was lower than yours) when you pass away, and extends the length of time that your higher benefit is paid.  Work with a qualified Certified Financial Planner (CFP®) professional to determine what is best for you.

Click here to learn more about delaying your social security benefit.

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3. Variable annuities

Variable annuities are often trumpeted as a way to invest in the stock market, while at the same time guaranteeing that you won’t lose money. BUYER BEWARE. These investments can be of questionable suitability, especially for an older investor.

Variable annuities are a lucrative product – for the insurance agent who sells them.  They pay a very large commission to the agent – in the range of 5% or more.   In other words, if you were to invest $100,000 in a variable annuity, the insurance agent would receive a commission of at least $5,000.  This may be one reason why so many seniors end up owning variable annuities that are of questionable suitability given their circumstances.

Variable annuities tend to lock you into your investment for a very long time until your money can be withdrawn without penalty.  In addition, variable annuities usually have very high fees, which makes it much harder for you to actually make money when you own one of these products.  These investments are of questionable suitability for an older investor. If you are interested in a way to protect against your investments losing money there are other options to consider.

Do your research, and consult with a fee-only investment advisor before you buy a variable annuity.

You can visit the SEC’s website for further information about variable annuities.

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4. Budgeting

As you build your plan for retirement it is very important that you have an understanding of what your spending needs will be.  If you enter retirement without an idea of how much you will be spending you increase the risk of running out of money.

If you don’t currently track your spending – start now.  You can do it easily by using mint.com which is a free website for tracking your expenses.  An even better way is to record your spending for a month using this worksheet.  This will put you in touch with what you are spending and help you get the information you need to build a solid retirement plan.

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5. Withdrawal rates

You may have read that in retirement  you can spend a certain amount of your savings each year (say 4%) and not worry about running out of money. It is important to use this rule of thumb as only the roughest approximation of reality.

Why?  Because it is highly unlikely that you will spend the same amount each year in retirement. You may take a large trip every two or three years, the roof on your house may need to be replaced, or your furnace may need to be replaced. Unless you have a very large nest egg you most likely won’t be buying a new car each year.  In addition, most people usually spend more money when they are more active in their early retirement years, and then spend less as they advance in age.

The literature suggesting that you can spend a certain percentage of your retirement savings is nothing more than an attempt to place a one size fits all solution on your life.  If you want a plan that actually fits your needs, you need to build a plan that is specifically designed for your circumstances, and takes into account your real world spending needs.

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6. Long Term Care Insurance

Few events can wreak havoc on retirement plans like the need for long term care (LTC). According to the US Department of Health and Human Services, the average cost for a nursing home stay is over $70,000 per year.  Furthermore, about 70 percent of individuals over age 65 will require at least some type of LTC services during their lifetime.  Most people mistakenly think that Medicare will help pay for LTC expenses, but in fact Medicare will only pay for skilled care for a short period of time after you have been in the hospital.  On the other hand, Medicaid will pay for nursing home care, but only after you and your spouse (if you are married) have nearly exhausted your assets.

This means you may be faced with paying for LTC costs yourself, which may drain your retirement savings and leave your healthy spouse with little money to support his or her lifestyle.  Alternatively your spouse or family can provide care for you, and take on all of the associated burdens that come with this responsibility.

A good LTC insurance policy can help protect your retirement nest egg and even offer care in your home as opposed to a nursing home setting. Medicaid will not pay for care delivered in your home.

Premiums for LTC insurance are tax deductible, and the older you are the more you can deduct. The premiums are included with other medical expenses and must exceed 7.5% of your adjusted gross income.  If you are a business owner there are tax advantages of paying the premiums through your company.

Purchasing a quality LTC policy can help protect your hard earned nest egg, relieve the burden of caring for you from your spouse or family, and give you the opportunity to have the care delivered in your home instead of a nursing home.

What are your needs, and what coverage is best for you?  Give you fee-only Certified Financial Planner professional a call to help you determine what type of insurance best fits your needs.  A fee-only advisor we don’t receive commissions from the sale of LTC policies, and can work side by side with you to help you pick the coverage that is right for you.

For more information on Long Term Care visit the US Department of Health and Human Services.

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7. Get your estate in order

Everyone does estate planning.  The only question is will you do it, or have it done for you by the court system?  If you don’t create your estate plan it is likely that your affairs won’t be handled as you intended.  At a minimum you need to create a will, power of attorney, and living will.

Your will directs how you would like to have your estate distributed when you pass away.  If you die without a will, or with an outdated will, your wishes for your estate may not take place.  Additionally, your family members may experience hurt feelings and conflict if they feel they were unfairly treated.

Your power of attorney authorizes others to act on your behalf regarding your financial affairs.  If you are incapacitated your bills will still be paid and other affairs that require your signature can be attended to.  Carefully choose the person to whom you grant this power.

Your health care power of attorney authorizes someone else to make decisions about your medical needs if you are unable to communicate.

In addition, you may want to consider trusts as a way to streamline the administration of your estate when you pass away, as a way to do tax planning, or as a way to remember your favorite charity.

Finally, once you have developed your estate plan, sit down with your loved ones and let them know what you have done, and why.  Explaining your desires now can help prevent family strife after you pass away.

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8. Live your retirement!

So you have retired – now what?  Studies have shown that those who remain active in retirement live longer and healthier lives.  If you have created a robust financial plan you should have already set goals for retirement.  Now is the time to enjoy the things you have been saving for.

If you have built your retirement nest egg don’t hesitate to do the things you have always dreamed of doing.  You will be in your best health as you enter retirement, so take advantage of the opportunities that present themselves.

Make sure to check on the state of your finances periodically to ensure that you don’t need to make adjustments.  But, if you have done your planning well you should have a long list of things you can finally do.  Need some ideas?  Click here.

Enjoy!