Retirement can be a wonderful thing to do, but it’s a very big decision to make. Ric Edelman of Edelman Financial Services wishes all retirees the very best… but emphasizes that a lot of thought needs to go into retirement before you take the plunge.
The reality is that it’s not just about where to live or whether your retirement savings will be sufficient, though those are both valid and important considerations. No, Edelman says: there’s another big question looming—what will you do?
Many people work hard their whole lives, climb the corporate ladder, have a fine career, but when retirement comes around, they don’t know exactly what to do with themselves. Edelman divides retirement into two phases, starting with the “retirement is new” phase, which can last up to one year, and then phase two, which is essentially… the rest of your life.
The first year, or phase one, is filled with excitement and pleasure. Suddenly you don’t have to get up with that pesky alarm clock every day! You don’t have to report to anyone (except perhaps your spouse!). There’s no wretched commute. All the projects that have been piling up—you finally have time to get to them. And golf! Coffee with your friends! It’s all pretty wonderful.
Phase two starts when all the projects around the house are finished, you’re bored with golf, and when you wake up in the morning you feel like you no longer have a sense of purpose. The big question looms: what now?
Edelman points out that you’re still the same person you were before you retired, even though things may feel different. You had a plan for your career or business, didn’t you? So take that same energy and sense of purpose and create a plan for your retirement, one that understands that you have several decades to account for. Decide whether you’d like a part-time job, at least initially. Plan your travel for the next five and then ten years. What about going back to school? This is an excellent time for it, since homework won’t be competing with your day job.
Whatever you plan, make sure that you accompany it with a financial plan. How will you reach your goals? How much will you need every month to make this happen? Think of all the things that you’ll need to spend money on: food, your mortgage or rent, your utilities, your car, your insurance, and so on.
Your plan probably included establishing some new activities or hobbies. How much will they cost? Plan also for the same things you planned for before retirement: vacations, family holidays and events, emergencies, taxes.
The big change that you’ll need to make is around healthcare. Medicare doesn’t cover everything; not even close. In the U.S., Medicare is equal to about 2/3rd of your healthcare costs, and as you get older, you’ll have more of them, including prescription drugs. And look ahead: at some point you and/or your spouse will require long-term care, so buy some insurance now to cover it. Edelman says that
AARP estimates a whopping 70% of people aged 65 or older will need long-term care, and Medicare doesn’t pay for private rooms in nursing homes. A long-term care insurance policy, says Edelman, is a better idea.
Mortgages and retirement
Unless you have a steady income in retirement, or serious assets, you’re not going to be able to get a new mortgage: lenders just won’t do it. If you’re somehow able to refinance or get a new loan, you’ll find that you have to pay higher interest rates. So if you’re going to buy a home, or refinance the one that you have, by all means do that before you retire, when mortgage lenders will still look favorably on your application.
Your home is your biggest asset and many people believe that they need to have it paid off before they retire. Edelman says that isn’t necessarily the case. What if you own your house, no mortgage, but you suddenly have a major medical emergency or require long-term care, both of which are possibilities as you get older. You need cash to help your current situation, but you don’t have it: it’s tied up in your home. If you want to use that money, you have to sell your house. Keeping your mortgage going and taking the extra money and putting it
somewhere safe is a far better option for retirees.
So as part of the planning talked about earlier, you’ve now determined how much money you need every month for your life to go on as you want it to and for you to reach your goals. The major challenge now is to determine where that money will come from: what are your income streams?
When you look at your income stream, you need to figure out how it stacks up against your expenses… and not just how it addresses today’s expenses, but what your expenses will be five, 10, 20, even 30 years from now. Retirement is glorious and it’s longer now than ever, but the world changes and you don’t want inflation to get the better of you.
Think about all the things that can happen, and plan for them now. You need a will. You need a living will. You need a durable power of attorney. None of these things are pleasant to think about, but not having them will make the future extremely unpleasant, either for you, for your spouse, or for both of you.
Plan now for the retirement you’ve always dreamed about!