Jonathan I. Shenkman, Contributor
Aug. 4, 2020
There tends to be a lot of excitement in the air as one approaches retirement. Contemplating how to spend one’s golden years represents the culmination of decades of hard work and the ability to enjoy the fruits of one’s labor. While the enthusiasm is warranted, it’s also crucial to make some important financial planning decisions before the fun begins. Many of these decisions are uncomfortable as they involve changing aspects of one’s life that may have been constant for decades or facing the morbid eventuality of one’s deterioration in health or demise.
It’s imperative to face the unpleasantness, as neglecting these essential areas may lead to hardship in the future. Below is a list of several planning steps to take with your loved ones and professional advisors in order to lay the groundwork for a less stressful and much richer retirement.
1. Downsize your home: A home, unlike a stock or mutual fund, is a very emotional asset. People become attached to a home as it is the setting for, and associated with, some of life’s fondest memories. The thought of selling your house can feel devastating, but it almost always makes sense. Remaining in a larger home than necessary presents a variety of challenges as one gets older.
One such challenge is the financial burden. Most retirees are on a fixed budget, with no earnings growth and limited ability to increase cash flow. Owning a larger home requires numerous financial expenditures, including higher property taxes, insurance coverage, upkeep costs, and more. There is also the mental stress associated with the upkeep of your home. Do you really want to spend your retirement worrying about a leaky roof, broken toilet, or damaged sewer line? The mental exhaustion that comes from fixing and maintaining your home should be evaluated to determine if the stress is worth the benefits. Finally, the ability to move around your home may also prove to be a concern at some point. For example, if you bought your home decades earlier, you probably didn’t think twice about having your bedroom upstairs. As folks age and health issues become more prevalent, the ability to effortlessly navigate your home should be a priority. A large spacious home, with different levels, is generally not practical for seniors.
Relocation is another important consideration related to downsizing. This lifestyle choice is not only financial. While one may have a tightknit group of friends in their current community, many retirees decide to move closer to family to ensure that they have a reliable support network as they age. It’s far better to be proactive, rather than reactive, about relocating. It is not pleasant, or sensible, to watch your contemporaries move away while you’re left in a much different community than where you spent the last few decades.
Practical solutions to housing for retirees should focus on a new set of priorities. These include financial cost, safety, mental health, physical limitations, and being around people on whom you can rely. An apartment complex or retirement community that is near family may be good options for many. The sooner you make the decision to downsize, the more trouble you can save yourself down the road.
2. Streamline your investments: Determining a proper asset allocation, an appropriate withdrawal strategy, and coordinating various income streams are all important steps to have a comfortable retirement. However, before any of these steps can be taken, investors need to organize their assets.
Over the course of one’s career, it’s quite common for people to open accounts at various financial institutions. This generally starts with just a checking and brokerage account, and then a 401(k) through their employer. Over time, folks begin to accumulate more accounts, including an assortment of old 401(k)s, trading, savings, and trust accounts. Managing and tracking all these accounts can become cumbersome. One elderly couple that was referred to me many years ago had 22 accounts at 17 different institutions plus individual stock certificates. Their attorney asked me to help them consolidate their assets in order to properly draft their estate plan.
There is rarely a valid reason to have one’s assets scattered around at so many different institutions. Before retirement, it behooves everyone to consolidate accounts, where appropriate. This process will simplify your life, keep your finances more organized, and make it more seamless for your loved ones to assist you when the time comes.
3. Keep your estate plan updated: It’s always important to have an updated estate plan. This is even more essential as you get older, accumulate more wealth, and need to plan for the transition of that money to the next generation. The main documents for a proper estate plan include a will, power of attorney for finances, power of attorney for health, and a health care directive. This type of planning is something that can’t be done without proper training and experience. Spending the time and money for a competent estate planning attorney, instead of a generalist or online platform, should pay off in the future.
It’s also important to review beneficiaries on your retirement accounts and insurance policies to ensure that they are correct. The last thing anyone wants is to work their entire career and have most of their wealth be inherited by an ex-spouse or dead relative. Reviewing one’s beneficiary designations on the aforementioned items is a simple way to prevent such missteps.
Another important component of estate planning is facilitating communication between one’s estate attorney, accountant, and financial advisor. This ensures all advisors are on the same page to properly implement any trusts or other estate planning documents and execute the completed estate plans. It would be worthless to invest time and resources to put together an estate plan if it were not ultimately properly executed.
4. Plan for long-term care: According to LongTermCare.gov, someone turning 65 today has a 70% chance of needing some type of long-term care services in their lifetime. The need for long-term care is defined as not being able to perform tasks of daily living due to disability or chronic illness. The tasks of daily living are eating, bathing, getting dressed, toileting, transferring, and continence. As people continue to live longer, the need for this care will be a reality for many. Failure to plan for that possibility can be financially and emotionally devastating for one’s entire family.
The first, and most important, item to understand about long-term care planning is that it is different than traditional estate planning. The fact that you have your will or Power of Attorney will not necessarily be helpful for a chronic illness needing long-term care. You may want to hire an attorney that specializes in this area to plan properly.
Long-term care planning generally falls into three approaches: Self fund, buy insurance, or Medicaid planning. These strategies are not mutually exclusive. Depending on your specific situation, one or all of these items may play into how to structure your plan. It’s important to recognize that the costs of care can be astronomical. According to LongTermCare.gov, the national average for a private room at a nursing home is $7,698 per month. The number can vary depending on where you live. For example, according to data by Genworth, the cost would be approximately $13,000 in the metro New York City region and approximately $6,000 in Jackson, Mississippi. Therefore, self-funding or having insurance may not suffice. There is no shortage of horror stories about folks who pushed off planning until it was too late and became impoverished or saddled their loved ones with an onerous responsibility.
5. Determine how to spend your time: While financial planning is essential, there is another equally important aspect to retirement planning. As I tell my clients, it’s important to retire to something and not from something. It’s astonishing how few people have a realistic strategy for how they will spend their time in retirement. You may not like your boss or daily commute, but retiring to eliminate those annoyances is not a recipe for happiness. The sad truth is that most hobbies, such as golf and traveling, generally aren’t sufficient to occupy all of one’s time and will leave retirees bored and unfulfilled.
A more realistic view of retirement may be to work part-time, volunteer, and to have regularly scheduled visits with family and friends. A combination of these activities can help provide daily structure, social interaction, and intellectual stimulation, all essential factors for staving off rapid physical and mental decline. It’s essential for those nearing the end of their career to have a well-defined and practical plan for how they will spend their days in retirement.
Procrastination is the major obstacle when it comes to these important retirement planning steps. After all, it’s much easier to leave these decisions on the backburner than make them today. However, postponing will only lead to more challenges over time. As the saying goes, “failure to plan is planning to fail.” For the benefit of your loved ones, failure should not be an option.
Disclaimer: This article authored by Jonathan Shenkman a financial advisor at Oppenheimer & Co. Inc. The information set forth herein has been derived from sources believed to be reliable and does not purport to be a complete analysis of market segments discussed. Opinions expressed herein are subject to change without notice. Oppenheimer & Co. Inc. does not provide legal or tax advice. Opinions expressed are not intended to be a forecast of future events, a guarantee of future results, and investment advice. Adtrax #: 3184728.1
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