Beginning each New Year, you will find countless articles on financial tips that are very helpful.
As I was giving thought to my own list for 2017, I found myself reflecting on the past. For 23 years, I have provided retirement planning to countless individuals and their families. During that time I have seen not only the positive effects of doing proactive financial planning, but also the disastrous outcomes from not implementing adequate protection strategies.
That is why for 2017, I have chosen to highlight those steps I believe to be most critical.
Crucial Planning Tip #1: A Retirement Plan
Have a written retirement plan done by a financial professional
This is your guide to help you determine if you are going down the right path as you plan for retirement. You can do this yourself, but unless this is your profession, there are things that you are going to overlook.
Your retirement plan should include your sources of income: CSRS or FERS annuity, FERS retirement supplement, Social Security and any other income sources (military pension, rental income, etc.)
Don’t take this lightly. Make sure you are doing everything possible to maximize these income streams. As a federal employee, you have important decisions to make about your federal benefits, and working with a financial advisor that has a good solid understanding of how your benefits work is crucial. I have seen some very good financial advisors give poor advice to federal employees that caused them to make bad decisions that CAN’T be fixed.
It is important to not only look at your individual sources of income but also give thought as to how each of your sources of income work together.
Example: most retirement planners will recommend that you delay taking Social Security benefits until your full retirement age (FRA) to get a larger benefit. Currently FRA is 66 for people born in 1943-1954, and it gradually rises to 67 for those born in 1960 or later. Early retirement benefits are available for qualified individuals at age 62 and 1 month, but at a permanently reduced amount (75% of full benefit). If you are one of the many federal employees eligible to retire years before your FRA, you need to determine if you are better off delaying Social Security benefits and taking larger withdrawals from your TSP and other savings. Often this is a wise decision, but not always. If the withdrawals you need to take from your savings will cause you to spend down your assets too fast, it may be better to draw Social Security earlier to avoid spending down your savings. Therefore, it is so important to look at all components of your plan.
Give serious thought to what your ideal net monthly income need is. Make sure to identify your necessary expenses such as insurance, taxes, utilities, car payments, etc.
Next give thought to what you want to do in this phase of your life: travel, dining out, lessons in music, cooking, gardening, golf, boating, and so forth. Be honest and try to put a number on what these expenses will be.
Your retirement plan will show if you are on track to meet these needs. It will also help to determine your savings goal and if you need to contribute more to TSP or other savings plan to meet that goal.
The retirement plan needs to include COLA so that you keep up with your buying power in future years. If you are married, then consideration of what your spouse’s survivor needs will be is paramount. Should one of you pass away, the surviving spouse could lose not only a portion of the Social Security benefits being collected, but also at least half of the deceased spouse’s pension or federal retirement annuity if applicable.
There are several components to a good retirement plan, and once all are in place you will know if there are any gaps, and if you should be doing things differently. I typically recommend revisiting your retirement plan annually to track your progress and make changes based on your needs.
Do not procrastinate about doing this. Many people feel that they don’t have enough money to work with a financial advisor, or think it is too early to start retirement planning.
First off, many financial advisors provide an initial complimentary consultation to learn about your financial situation and your needs. Then they will be able to quote you a fee for retirement planning. Many people meet with several financial advisors before determining who they want to work with.
It is never too early to plan for your future. The earlier you start, the better. Everyone has different needs, and making sure that you are on the right path is essential.
Crucial Planning Tip #2: Plan for a long-term healthcare need
Have a plan in place to protect you and your family should you need long-term care
You may have done a superb job of planning for your retirement and have a solid retirement income plan in place, however, is that enough? Given today’s improved healthcare and the increased longevity among older Americans, it is equally important to create a long-term health care plan to help prepare for a more satisfactory quality of life in your senior years.
Long-term care (LTC) is assistance is needed when someone is unable to care for themselves due to chronic illness, physical injury, cognitive impairment, or frailty. The majority of care given is custodial care, as opposed to acute or rehabilitative care. According to the Department of Health and Human Services, 70% of people turning age 65 will need some form of LTC during their lives. The cost of care varies based on the type and duration of care you need, the provider you use, and where you live.
Options for paying for a long-term care need
The first is a traditional LTC policy. This is the option that’s available to you through the Federal Government’s partnership relationship with John Hancock. You choose a daily benefit amount, benefit period, and inflation protection. This is probably the lowest way to purchase a plan for LTC, however, the two biggest complaints have been (1) The premium is not guaranteed, and rates have gone up more than once. The last increase in 2016 was an average of 83% although many recipient’s premiums doubled, and (2) If you never have a need for LTC the insurer does not refund any of the premiums.
Another option that seems to be gaining a lot of popularity is Hybrid Life/LTC policies. Generally, they are Universal Life insurance policies that include a chronic care rider. Most of them pay 2% of the death benefit if you need long-term care. (Example) if you had a plan with a death benefit of $400,000 and you qualified for LTC, the plan would pay you a monthly benefit of $8,000 for your care. If you never need LTC the plan will pay out $400,000 to your beneficiaries when you pass.
Self-insuring is the default option for those that have not done adequate planning. Only the very wealthy can afford to self-insure without causing financial hardship. See this article from Forbes: Can You Self-Insure For Long-Term Care?
Some people choose to buy into a Continuing Care Retirement Community (CCRCs). They offer a variety of services within the community, and provide increased levels of care as needs change. CCRC’s require a hefty entrance fee as well as monthly charges. Entrance fees can range from $100,000 to $1 million, along with monthly fees ranging from $3,000 to $5,000 and may increase as needs change.
The last option is to qualify for Medicaid. Eligibility requires limited income and resources which means you must spend down most of your assets. Medicaid may help cover some of the costs of long‐term care, but may not provide your desired quality of life.
Long-Term Care Consequences Affect the Family
Long-term care planning not only affects the financial resources of a family, but the demand for care can become all-consuming to caregivers, resulting in emotional and physical stress when family members have to provide care. If there are children, it sometimes compels at least one to place his/her life aside. It impacts not only the caregiver, but the relationship with a spouse and children. Because care is not always shared, it can lead to constant disagreements and for many, complete estrangement. LTC rarely brings families together – it tears them apart.
Crucial Planning Tip #3: Spending Money Too Fast Too Soon in Retirement
Don’t fall into the trap of spending money too soon in retirement
Making a budget in retirement helps you avoid one of the biggest mistakes people make – spending too much too soon.
Over spending is dangerous in retirement. Start by listing all of your monthly, quarterly or annual expenses. Break the list into two parts: Needs – Things like food, housing, transportation, healthcare. Make sure to account for increasing health-care cost. Wants – Things like travel, hobbies, sports, social memberships.
If you have large monthly obligations like house and car payments, you may want to consider a lifestyle change. Your goal should be to embrace retirement, and you may find ways to lower your fixed expenses to have funds available for what you enjoy.
Resist the desire to help adult children and grandchildren too much. I have seen this happen too many times over the years.
I’m often reminded of one of my clients that had taken a pension buyout from a private sector employer. She had a large IRA and felt she could provide more for her children. She spent too much on her daughter’s wedding, and was consistently helping her son get on his feet. Before long she came to realize she had gotten into the trap of spending too much too soon. It is in many of us by nature to do whatever we can for our children, but just make sure that you are putting your own needs first. You can’t go back and redo retirement.