Planning for Financial Independence in Later Life
TAKING STOCK
As retirement approaches, it is important for every household to
assess its financial identity (assess its finances). Waiting too long
might mean missing one or more opportunities to preserve maximum
financial independence in the future. To help get you started, can you
say "Yes" to the following statements?
- We talk regularly and frankly about finances
and agree on our goals and the lifestyle we will
prefer as we get older.
- We know our sources of income after retirement
how much to expect from each, and when.
- We save according to plan and are shifting from
growth-producing to safe income-producing
investments.
- We know where our health insurance will come
from after retirement and what it will cover.
- We have reviewed our life insurance and
considered options such as converting to cash
or investments.
- We each have our own credit history.
- We each have a current will or living trust.
- We know where we plan to live in retirement.
- We have anticipated the tax consequences of
our retirement plans and of passing assets on
to our heirs.
- Our children or other responsible relations know
where our important documents are and whom to
contact if there are questions.
- We have executed legal documents, such as a
living will or power of attorney, specifying our
instructions in case of death or incapacitating
illness.
THE KEY IS PLANNING
"If only I'd known then what I know now ...."
Looking to the future is key to financial planning at any age, but
especially in the decade or so before retirement. For many households,
retirement is a time to fulfill dreams and delayed ambitions. It also
can be a time of anxiety if you postpone thinking realistically about
the ways your financial identity will change—income, savings,
investments, credit, insurance, job benefits, and perhaps living
arrangements. Meeting the challenge of financial management will help
remove uncertainty and increase your available options. Both partners
need to be involved in retirement planning and may wish to discuss their
plans with adult children.
Many people neglect planning. Some prefer to leave financial
decisions to the other partner, while others simply find it too
difficult to talk about money. Whatever the reason, if you have not yet
begun planning, you may want to seek pre-retirement planning advice from
a professional or a community service organization.
LOOKING AHEAD
The decade before retirement is a good time to take inventory of
assets and obligations and make financial choices aimed at maximizing
future resources. These years are typically a peak earning period and
they offer the chance to reduce major debts, such as a home mortgage,
and increase savings and income-producing investments. Households faring
the combined expenses of educating children and caring for aging parents
may find saving difficult during pre-retirement years. In these cases,
making a realistic financial appraisal is more useful. These are
questions you might ask yourselves:
- What are our sources of retirement income and how much will each
provide-monthly or in a lump sum?
- Social Security
- Pensions, IRAs, Keoghs
- Savings and investments
- Sale of assets
- Home equity
Find out all the options for receiving your pension benefits and
whether they are insured. Find out if pension benefits will be reduced
if you receive Social Security. Read carefully and consider the
consequences of signing any documents relating to a reduction in spousal
pension benefits. One of you may need this income if the other dies.
When estimating how much income can be expected from these and
other sources, remember to take inflation, taxes, and market
fluctuations into account. Depending on your anticipated income
potential, you may decide to postpone retirement a few years, or plan to
work part-time.
Is our health insurance adequate for retirement?
The cost of serious or long-term illness is a major burden for many
older Americans because Medicare does not cover all health care costs.
If you consider buying "medigap" insurance to supplement Medicare, shop
carefully for a policy that supplements rather than duplicates Medicare
coverage. Long-term health insurance for nursing home or home health
care is new. Examine all the terms of any such policy before you buy.
MANAGING WHAT YOU OWN AND WHAT YOU OWE
Professionals say that retirement income should be 60-80 percent of
current income to maintain the same Standard of Living. If your
financial picture does not correspond to this guideline, you might
prepare a budget and a cash flow statement based on income and expenses
during the preceding 6 to 12 months in order to identify gaps in income
and find ways to cut spending.
On the expense side:
- List current expenses such as housing, food, health care,
transportation costs, and other financial obligations.
- Include a contribution to savings. Experts recommend a reserve fund
to cover 6 months of basic expenses.
- Itemize personal expenses for such things as clothing, travel,
entertainment, and hobbies.
- Develop habits such as price shopping, menu planning, coupon
dipping, and monitoring your use of credit to guard against
overspending.
On the income side:
- Think through contingency plans in case expenses begin to outpace
income or one partner becomes seriously ill.
- Remember that credit histories in your individual names can be
invaluable in retirement, or in the event of widowhood or divorce.
Credit can be essential to meet unexpected or emergency expenses.
Federal regulations prohibit age and gender discrimination in the
granting of credit. Lenders must treat all income alike, whether from
employment, retirement benefits, or other reliable sources. Still, it
may be easier to get a national credit or charge card in your own name
while you are employed. If you have never been employed, you can still
build a credit history by becoming an "authorized user" on your spouse's
account.
- Consider selling assets or converting life insurance into cash as
another possible way to meet expenses.
- Investigate Home Equity Conversion (HEC) as an option if you own or
nearly own your home and need money. There are several kinds of
home equity conversion loan plans, including Deferred Payment Loans
and Reverse Mortgages, where you borrow against home equity and
receive monthly or periodic cash payments.
Unlike home equity loans or lines of credit, reverse mortgages
involve no monthly repayments as long as you live in your home or until
a predetermined date. These plans do involve costs for application fees,
closing costs, and interest, and they may affect eligibility for public
benefits programs such as Medicaid. Generally, you can decide how to
spend the money. Reverse mortgage plans are not all the same, so it is
important to read the loan documents carefully. Check with a trained HEC
counselor, other financial advisor, or an attorney before deciding
whether home equity conversion is appropriate.
LEGAL MATTERS
You can use several legal tools to maintain control over your
affairs in later years. These will enable you to decide, while healthy
and alert, what you want done in the event of death or disability. Be
sure to discuss any arrangements with your survivors to save them from
facing difficult decisions and to give them peace of mind, knowing they
are complying with your wishes.
- Wills—If you do not have a current will, the state, not you, will
decide how your assets are divided. Such legal documents as Living
or Revocable Trusts offer ways to avoid probate.
- Trusts—This device lets you decide who would be responsible for
your financial affairs if you became unable to manage them
yourself.
- Powers of Attorney and Living Wills—Powers of attorney typically
assign responsibility for financial matters to another person. Some
apply to health care decisions as well. You can use a Power of
Attorney or a Living Will to state in advance your wishes in case
of an incapacitating or life-threatening illness. Doing so is
essential if you want your family to know the circumstances in
which you wish to decline life-support measures.
RELOCATING OR STAYING PUT
Where to live after retirement is a major decision. Perhaps you
plan to relocate to a more favorable climate or to be near family.
Research the consequences of such a move in terms of the basic cost of
living, access to health care, and state and federal tax obligations.
If you are considering the advantages and disadvantages of selling
your home, whether or not you plan to relocate, these are some questions
to ask:
- Can we afford monthly payments for mortgage, taxes, utilities, and
maintenance?
- Will one or both of us be able and willing to take care of the
house?
- Is the house a suitable place to live as we grow older and less
agile?
- Will we need to draw on our home equity as a source of income or
credit, or would we have more options if we sold the home and
invested the proceeds?
In addition to owning a home or renting an apartment, a number of
other housing options may be available in your community, many of which
offer savings on housing expenses. These are some alternatives to
consider:
- House-sharing for help with chores or added retirement income;
- Group living in a private home or one sponsored by a social
services agency;
- Accessory apartments, or mobile or manufactured homes, including
ECHO (Elder Cottage Housing Opportunity) housing which, if zoning
laws permit, can be installed on the property of an adult child or
other relative;
- Condominiums or cooperatives which have the advantages of home
ownership without the burden of maintenance;
- Retirement communities which may offer companionship, recreation,
and sometimes medical and housekeeping services.
SPECIAL CONSIDERATIONS
An important part of financial planning is anticipating how to
handle bad times. Prudent planning includes learning about public and
private benefits programs. In most communities, governmental and private
agencies offer services to help care for older persons, such as low-cost
medical clinics, home health care, housing options, adult day care, and
chore services.
The local Social Security Administration office has information
about entitlement programs such as Medicaid, disability insurance, food
stamps, and Supplemental Security Income. Ask about your state's
Medicaid "divestment" rules which permit transfers of some assets to
other people if done a specified length of time before applying for
Medicaid (usually at least three years). Divestment is a precaution some
take to avoid "spousal impoverishment" when all the family's assets are
spent before a sick family member can be eligible for Medicaid
assistance.
When arranging family matters, it will ease your survivors'
emotional burden if you let them know your preference for funeral or
memorial arrangements. You can handle these matters yourself by planning
through a non-profit cooperative memorial society or by prepaying at the
funeral home of your choice. If you decide to pre-pay, be sure you or
your survivors can cancel the contract should you move or change your
mind. Planning ahead and using comparative shopping skills can save
thousands of dollars in funeral expenses.
PLANNING TO STAY INDEPENDENT
It's never too early to start retirement planning, and never too
late to make adjustments in your financial situation. Whether wealthy or
not—and it is probably more important for those who are
not—investigating your options and making practical choices now can
allow you to stay in charge and meet future financial goals.
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