5 Macro Questions As You Consider Retirement

928088256I recently read an interesting article called 27 Ugly Truths About Retirement. The title is clearly a bummer and while it is really meaty stuff, a list of 27 of anything is FAR too much to absorb. So what’s really important to know?

My financial mentor/accountant, the late Jack Dunn, taught me a lesson years ago. He said to focus on materiality, things that matter most. Sounds like advice for life as well.

Retirement is something that deserves a serious plan and thought way in advance of the event. That means more than socking some dollars into a 401k/IRA, which BTW you REALLY need to do.

So while you can feel free to do the deep dive on those 27 Ugly Truths, here are the 5 material questions you should address when you are considering retirement.

1. Where will you live?

This is a really important question. Current residence? A downsized residence? Near (or far) from children, if you have children? Do you have a mortgage remaining? (Best to reduce/eliminate as much as you can). Lots of financial issues are tied up into the answer to this question

2. What will you do?

Golf every day? (hardly). I don’t like golf so that’s not even close for me, but realistically one does not golf daily, even in warmer climates. Will you really retire, or work part time elsewhere? Honestly, how will you occupy your time?

3. How is your health?

Good, I hope. But regardless, you need to plan for spending here far more than you think. Obviously signing up for Medicare is a start. But Medicare is not free, and you would be wise to sign up for Supplemental programs that provide greater coverage. But there are many things not covered—hearing aids, vision, long term care.

4. Do you have a financial plan?

What is your balance sheet as of today and a reasonable projection of where you’ll be by 65.  For some retirement will come earlier, of your own decision or not. For others, working into later life is your plan (that’s OK but still do a plan for age 65). And then do a cash flow analysis through age 95+. Why so long? Because you might live that long! Don’t assume your early demise. The average 65 year old still has 20 years of life ahead, for many far longer. So take a long view.

You need to segment your assets by current assets, cash, investments etc. and retirement assets—401k, IRA, pension (not relevant to most). This is important because withdrawals from (non-Roth) retirement accounts are taxed as ordinary income. And you MUST begin withdrawals by age 70-1/2 according to a formula (you can easily find the formula online)

Sounds too complicated to handle yourself? That’s OK—pay someone to help you. And BTW, be sure to allocate $ to taxes. RMDs will be taxed, and likely social security too.

5. Do you understand Social Security?

As part of #4 you need to understand social security and have a strategy to maximize your benefits. The first thing to know is that you should not plan to live solely on social security because it will not provide enough funds. The average recipient gets $1400/month, but higher earners max out at $2788/month—or $33.4k annually–at full retirement age (now 66, but rising to 67)., more $ if you wait until age 70. Social security is complex.  Your details are critical to understand. Don’t be worried that you heard social security is “going bankrupt” next decade. It’s not. But long term, adjustments will need to be made to remain solvent.

Take each item slowly and think it through. Do your homework far in advance and you will be wealthier and wiser as a result.

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