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    The Phases of Retirement and How to Prepare for Them

    Everyone has a unique vision for how their retirement will unfold — a story they want to write for themselves once they move to the next phase of life.

    “The story is different for each person,” observes FPA member Monica L. Dwyer, a CERTIFIED FINANCIAL PLANNER™ (CFP®) professional with Harvest Financial Advisors in West Chester, Ohio. “In the beginning, some grapple with not working. One client told me that it took him a full year before he could relax and enjoy the morning paper without feeling he had to be somewhere. Others slide right into retirement and have been waiting for it for so long that they are really ready.”

    However unique a person’s vision for the next phase of life may be, though, there is a common thread to peoples’ stories, a reality that it’s important to be aware of, and to plan for in advance: the likelihood that retirement will unfold in several distinct stages, each with its own set of circumstances, priorities, challenges and rewards.  According to U.S. government figures, a man reaching age 65 today can expect to live, on average, until age 84.3. For a woman turning 65 today, the average life expectancy is 86.6. What’s more, about one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.

    Simple math suggests that for many people, retirement could last two or three decades — or more. By having a clear idea of what each stage of retirement might look like, people can take important planning steps in advance to position themselves to make the most of each stage.

    Phase One of retirement is often about the fun stuff: attacking the bucket list with travel, pursuing hobbies, maybe continuing to work for income and/or as a volunteer, activities with friends and family, and so on. This is frequently called the “go-go” phase of retirement.

    Unique planning considerations:

    • Get a clear picture of current household expenses — the demand side of the cash flow equation, including both hard (food, housing, transportation, utilities, etc.) and discretionary (dining out, travel, hobbies etc.). This action-focused stage may require additional discretionary, lifestyle expenses. In a financial planning context. Your investment and income drawdown strategy should reflect this potentially higher-priced lifestyle. Be sure to account for expenses that may escalate in retirement, such as for healthcare, perhaps more travel and the like, as well as expenses that may drop off, such as work-related expenses. Also be sure the estimate accounts for inflation. 
    • Once a person reaches their 60s, key decisions loom about when to draw, and how to maximize, Social Security benefits. Does a person need to start drawing Social Security income earlier, starting at age 62, or can they wait until 65 or even 70 to turn that spigot on? Waiting allows a person to earn valuable “delayed retirement credits” that increase their monthly benefit when they do start taking payments. Those credits are equal to an annual 8 percent raise in benefits.
    • Absent a workplace health insurance plan, move to fill the health coverage void. Just prior to turning 65, file for Medicare benefits, and determine what additional healthcare coverage you need, if any, to supplement the benefits that Medicare provides.
    • Determine how to tax-efficiently handle the required minimum distributions that must come out of qualified retirement plans [401(k)s, traditional IRAs, etc.] starting at age 70.5.
    • What about work? Do you want to keep working? Do you need to keep working? Among employed Baby Boomers, two-thirds plan to, or already are, working past age 65, or do not plan to retire at all, according to a study by Transamerica. There are substantial benefits to continuing to work, including continued income and access to workplace benefits.
    • Firm up with your spouse/partner your vision for the type of housing and care you want if one or both of you has a long-term health issue, and how you plan to pay for that vision, whether that means setting aside a pool of money to cover retirement healthcare expenses or investing in some type of long-term care insurance. Then discuss your vision with other family members to ensure they are on the same page.

     

    Phase Two of retirement usually brings a slow-down. A person may not be as game for adventure and activity, and could be more limited by health issues. As a result, maybe they’re spending less on discretionary, lifestyle-oriented pursuits, but spending more for health and medical care.

    Unique planning considerations:

    • Keep monitoring income supply and spending habits. Are your assets on track to last as long as you need them to?
    • Reassess how your assets — retirement accounts, investment portfolio, etc. — are allocated and adjust as necessary to ensure they are appropriately diversified and not too conservative or too risky for your age and circumstances.
    • Revisit and update your estate documents as necessary, ensuring that beneficiary and account information for investments, credit cards, retirement accounts, bank accounts, life insurance policies, Social Security and pension statements, real estate property, personal property and debts, along with estate documents like your will, powers of attorney and living will, are all readily accessible.
    • If you (and your spouse) plan to “age in place” — to remain in your home, at least foreseeably — does the home need to be updated to accommodate limited mobility? What will the update cost, and how will you pay for it?

     

    During Phase Three of retirement, people tend to get more sedentary as they deal with the realities that come with advanced age: mobility limitations, health issues and the like.

    Unique planning considerations:

    • Health concerns, mobility issues, concerns about home upkeep and other factors could dictate a move to a new housing situation, such as an assisted living facility that better accommodates the new realities of this phase of retirement.
    • Is it time to stop driving? If so, what transportation options are available to get you where you need to go, and how to cope with this loss of freedom?
    • Coping with the reality of losing your spouse/partner and living alone.
    • Healthcare expenses tend to mount. About 50 percent of a person’s lifetime healthcare costs will occur during the last six months of life, according to a report from TIAA-CREF.
    • If you plan to pass certain assets to loved ones and/or to an organization or cause you support, be sure those intentions are specified in writing in legally sound estate planning documents.

     

    July 2018 — This column is provided by the Financial Planning Association® (FPA®) of Iowa, the principal professional organization for Certified Financial PlannerTM (CFP®) professionals. FPA seeks to elevate a profession that transforms lives through the power of financial planning. Through a collaborative effort to provide more than 23,000 members with tools and resources for professional education, business support, advocacy and community, FPA is the indispensable resource for CFP® professionals. Please credit FPA of Iowa if you use this column in whole or in part.

    The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION.  The marks may not be used without written permission from the Financial Planning Association.

     

     

    Four Strategies to Reckon with the Stock Market Roller Coaster

    After a quiet, steady and sometimes spectacular bull market in 2017, stock market volatility returned with a stomach-churning vengeance early in 2018, conjuring unpleasant memories of the major recession of a decade ago, and reminding investors just how important it is to take steps to protect their assets from the wild, unpredictable market swings that are all too common these days.

    2017 went down as one of the least volatile years on record in the stock market. But the relative quiet ended abruptly in February 2018, when the S&P 500, a popular index that tracks stock market performance, recorded three drops of greater than two percent in the span of five days. Within a month, however, stocks had mostly recovered what they lost. After a blip, the bull market was back.

    Short-lived as that blip was, it served notice to investors that staying true to certain investing fundamentals is the best defense against the vagaries of the stock market. “There’s a tendency to pay much closer attention when the stock market drops,” observes FPA member Molly Balunek, CFP® who heads Laurel Tree Advisors, a comprehensive financial planning firm in Cleveland, OH. “People say, ‘The market has been so volatile, what trades do we need to make?’”

    The answer in many cases may be none. But volatility can tempt people to behave irrationally and take actions in the moment that may not be in their best financial interests. To resist that temptation, financial professionals suggest following the four investing fundamentals explained below:

    1. Ensure assets are appropriately diversified.  Diversification means strategically allocating assets across and within the various classes: stocks, bonds/fixed investments, cash and perhaps other categories, such as real estate or commodities. Diversification applies to a person’s entire asset base, including retirement accounts, such as a 401(k) and IRA, a stock portfolio and more. The goal, Balunek explains, is to build a mix of assets whose behavior doesn’t always correlate; that is, that those investments don’t always move in lock-step. That helps to level out the peaks and valleys in the overall performance of a person’s full portfolio of assets, while still producing a certain level of long-term growth. “One of the best things to do to manage risk through asset allocation is to put assets in a low-cost, high-quality, diversified stock portfolio,” she says.

    Diversification occurs across asset classes as well as within asset classes. So within the stock/equity category, a person might invest in small-cap as well as large-cap stocks, domestic as well as international, growth-oriented as well as value-oriented. The exact mix depends on the individual, their circumstances, phase of life and tolerance for risk. A person who is decades away from retirement generally may stand to tolerate more investment risk, because they have more time to recover from dips in the value of their investments. So their asset portfolio may be positioned more aggressively for growth than that of person who’s close to retiring or already there.

    1. As part of asset diversification, another important fundamental that affords investors protection from volatility is to keep a cash reserve — and be prepared to use it when the situation warrants. This is particularly important for people who are approaching retirement or already retired. Having a substantial cash reserve gives them flexibility in how and when they draw income for retirement. Say, for example, the value of an investment portfolio on which a person is relying for retirement income drops substantially. Rather than selling off stock or some other asset to generate income when the value of that asset is down, the person instead can draw income from their cash reserve while they wait for those investments to recover their value.

    A cash reserve can also provide the flexibility to pounce on ripe investment opportunities, Balunek notes. If the value of a certain company’s stock drops substantially, that may be a good time to use money in the reserve to purchase shares of that stock, while its value is down.

    1. Maintain focus on long-term investment goals and the big picture. This is about keeping the right perspective and mindset. Stock market volatility can drive people to make panic-driven, knee-jerk decisions that aren’t in their best interests. Instead of following the “Buy low, sell high” investing credo, some might panic and do the opposite, selling investments when their value has plummeted instead of waiting out the downturn and letting those investments recover in value.

    Reminding yourself of your long-term retirement strategy and goals will help keep market behavior, positive or negative, in perspective, and hopefully help you resist the urge to make unwise snap decisions about your assets.

    To reinforce those reminders, consider putting them in writing, in a formal financial plan. Having a written retirement plan in place, one to refer to when markets turn volatile, can help a person keep their financial bearings, stick to their longer-term goals and resist making ill-advised investment decisions. As tempting as it can be to look at the day-to-day, week-to-week and month-to-month movements in the value of investments, a formal financial plan can help a person stay focused on the big picture.

    As part of that plan, offers Balunek, “develop and document an investment policy that defines how the money will be used, invested and rebalanced. Before making any unplanned changes, review the policy and consider if the changes are situational or fundamental. If they are situational, evaluate other ways to meet the need before changing the investments. If they are fundamental, then revise the investment policy accordingly and implement the investment changes with the new discipline.”

    1. Build out the fixed income part of the portfolio. Generally speaking, it’s appropriate for investors to allocate some portion of their assets to fixed-return vehicles, such as bonds, regardless of their age or standing in life. Even when the stock market is down, the value of these fixed vehicles will not fluctuate.

    Here’s another fundamental that is especially important for pre-retirees and retirees. If the value of their stock investments drops, they can rely more heavily on income from fixed investments (bond funds, ladders of individual bonds, where maturity dates are staggered to continue supplying a steady stream of income), giving their stock investments time to hopefully recover. Balunek generally recommends that people start fortifying their fixed allocation five to 10 years in advance of retirement.

    June 2018 — This column is provided by the Financial Planning Association® (FPA®) of Iowa, the principal professional organization for Certified Financial PlannerTM (CFP®) professionals. FPA seeks to elevate a profession that transforms lives through the power of financial planning. Through a collaborative effort to provide more than 23,000 members with tools and resources for professional education, business support, advocacy and community, FPA is the indispensable resource for CFP® professionals. Please credit FPA of Iowa if you use this column in whole or in part.

    The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION.  The marks may not be used without written permission from the Financial Planning Association.