There are so many retirement choices these days that even the basic concept of retirement may seem outdated. Many people hit 65 without skipping a beat, continuing to work for five, 10 or even 15 more years. Others transition over several years from full-time to part-time to “no-time” work. Finding encore careers, maybe in public service or aligned with a longtime passion, provides a new calling and renewed engagement in a world that needs all the help it can get. Of course, millions of people still relish kicking up their heels and embracing a life of leisure, travel and visits with the grandkids.
Each is a possible path in retirement, and these choices are yours to make. However, there is one thing I will strongly urge you to do as you approach these years. As you think both about your health and your finances, begin planning no later than age 60 for whatever kind of life you will be seeking as you get older.
Odds are that you will be largely on your own here. Employers traditionally have done little to effectively help their older employees prepare for retirement, although the aging of their workforces is causing more employers to focus on retirement preparedness. Certainly, the track record of current retirees when it comes to saving and planning is hardly reassuring.
We often don’t save enough for retirement, don’t plan ahead and come off like the proverbial “deer in the headlights” when that first Monday without work rolls around.
My tips here are aimed at older employees, but they also should be read by adult children. Their involvement is often needed to help their parents age successfully and enjoy what many older people find to be the most enjoyable and rewarding part of their lives.
In my opinion, just about everything you need is contained in one of three topical buckets: health, money or lifestyle. Your health and money futures will determine many of your lifestyle choices, and I will leave that bucket for you to fill!
I begin with health because the quality of your future health can determine the adequacy of your retirement finances as well as the kind of lifestyle you will lead.
Health guidance for older employees is offered less frequently in the workplace than is advice about retirement savings and investments. Health expenses in your later years often are the biggest unknown factor in your future spending needs, so doing some health planning now may be one of the smartest things you can do to prepare for retirement.
Vanguard, a retirement investment company, has a useful guide to health costs in retirement. Based on research provided by the Mercer employee benefits firm, the guide can help you determine your likely retiree health expenses. Most estimates of these expenses are provided as a lifetime total, usually ranging from about $200,000 to $250,000 for a typical 65-year-old couple. This big number can be very scary and, it turns out, is not a good planning reference point. Looking at annual expenses is more helpful, the study found. Averages, of course, may be misleading, so the study breaks down the components of future health spending. The goal is to let people build a profile that matches their individual situation.
A more accurate projection of future costs includes deciding if you are likely to face low, medium or high expenses due to your health; how expensive health care is where you live; and the kind of Medicare coverage you have.
A hypothetical 65-year-old woman, the study said, would face median 2018 health costs of $3,900. This includes premiums for Medicare Parts A, B and D, plus out-of-pocket expenses. If she were extremely healthy, the report said, that figure could decrease by about 15 percent. It would rise by a whopping 90 percent or more if she were at high risk of adverse health experiences, “with the possibility that expenses in some years would exceed five times the medium-risk baseline.”
Annual health spending using this approach ranges from about $3,000 to more than $26,000! Spending an hour with this guide can help you develop a more accurate idea of where you might fall along this spectrum.
If this information is not enough to get you onto a treadmill right away, consider that these numbers do not include long-term care expenses, which Medicare generally does not cover. No one really knows if they will require such care, how expensive it will be or how long it will last. I treat the equity in my home as a piggy bank for these unpredictable future expenses. You will need your own plan.
I penned a lengthier column last year on health care costs in retirement, which may offer a few additional nuggets of information for you.
Retirement preparedness, at least in terms of money, has largely been a failure in the United States. Collectively, we are not saving nearly enough for our later years. Workplace savings plans have proven successful for high earners but not for the rest of us. Traditional pensions largely have disappeared.
Social Security benefits can help a lot, but many people claim reduced benefits early rather than waiting. This may have big lifetime consequences, as the monthly benefit at age 70 can be 75 percent larger than at age 62.
Private savings and investments are, to put it politely, largely non-existent for more than 80 percent of Americans – including far too many people near traditional retirement age.
Doing studies and reports about the problem has become a vibrant cottage industry, and I will not add to this collection. Here are recent sobering assessments from Aegon, the Center for Retirement Research at Boston College, Fidelity and Prudential.
What’s true for “everyone,” however, is often not true for individuals and certainly does not have to be true for you. Here are four steps you can take to find a path that works for you:
1) Make a realistic study of your annual income during your retirement years. How much money will be produced from your retirement accounts and any pensions? Your savings? Social Security? (Include different claiming ages to see your range of benefits – open an online My Social Security account to get projections.)
2) Create an expense budget for your retirement years. Don’t guess and don’t cheat. This is hard work. For the past 10 years, I have produced detailed monthly spreadsheets of my spending across a dozen or so categories. It’s a hassle, to be honest, but boy does it pay off at tax time and in doing fact-based spending plans.
3) Outline and assess your guaranteed vs. variable income. Ideally, many financial advisers say, your guaranteed retirement income (pensions, annuities and Social Security) will cover your fixed expenses. Variable income from investment returns and liquidation of your savings will cover discretionary expenses like travel and entertainment.
If markets do well and you have money left over, great for your heirs and charitable causes. If not, you can cut down or even eliminate discretionary spending. If your fixed income does not cover your fixed expenses – which is the case for many older Americans – you will need to dip into your savings and likely do without.
4) Evaluate alternative options. Will your income – both guaranteed and variable – cover your spending needs? Most likely, the answer is no. This will trigger a repeated exercise of speculative downsizing, adjusting your income and spending projections until you close the gap.
All this kind of looks and feels like “work” in retirement, doesn’t it? But the sooner you do this work, the more time you will have to make needed corrections in saving and spending habits. Such gradual adjustments are much, much better than finding at age 65 that you have to slam on the brakes or discover that you can’t afford to lead the type of life you want.
Journalist Phil Moeller is an expert on retirement and aging. He writes the “Ask Phil” column for the PBS NewsHour and is the author of “Get What’s Yours for Medicare: Maximize Your Coverage, Minimize Your Costs” as well as the co-author of the updated edition of The New York Times bestseller, “How to Get What’s Yours: The Revised Secrets to Maxing Out Your Social Security.” You can follow him on Twitter (@PhilMoeller) or reach him via e-mail: AskPhilByUHC@gmail.com.
Plans are insured through UnitedHealthcare Insurance Company or one of its affiliated companies. For Medicare Advantage and Prescription Drug Plans: A Medicare Advantage organization with a Medicare contract and a Medicare-approved Part D sponsor. Enrollment in these plans depends on the plan’s contract renewal with Medicare.