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Retirement provides a chance to enjoy the fruits of one’s labor but pleasurable retirement requires proactive and thorough planning. Everyone should ask themselves six questions as they approach the end of their working lives. Answering them can help you guide your plans.
Key Takeaways
- Calculate the amount of money you’ll need to achieve your goals.
- Consider moving to a less expensive place if you live in a major urban area.
- Your house may be your most valuable asset so selling it and downsizing your living arrangements could make sense.
- Make an estate plan so you have peace of mind knowing that you and your heirs will be properly looked after.
1. Retirement: What’s the Grand Plan?
Some people dream of buying a boat when they retire. Others are content to spend their days on the golf course and still others want to travel the world. You need a goal before you get too far ahead of yourself in thinking about how you’ll save for retirement. It’s crucial to first decide what you want to do in retirement. You can begin to make it happen when you know what your dream is.
It makes sense to determine what it entails to join a club if your dream is to wake up in the morning and play golf all day. Some require substantial up-front fees. Determine whether the area you live or want to live in has adequate courses.
You’re going to want to live reasonably near an airport if your dream is to travel the world, or seaport if you prefer to cruise. You’ll also want to make sure that there aren’t any other obstacles that will affect your plans. You can shape the rest of your plans to make it work by deciding what your dream life after retirement will look like.
You can’t plan for your retirement without knowing what you want to do in it.
2. Do You Have the Cash?
It’s great to have goals, dreams, and ambitions but they don’t mean a thing if you lack the financial means to fulfill them. It’s best to do some soul-searching to determine what your future expenses will be rather than living on hope. Will you have enough money to live comfortably and enjoy your retirement years?
Financial planners have been arguing for decades over how much money the average person or couple needs upon retirement. Some say that you’ll need 70% to 90% of your pre-retirement income annually to maintain your lifestyle but many estimates are just that: estimates.
Do some research if your goal is to travel the world upon retirement. Figure out how much it will cost and then make sure that you’ll have enough money to live your dreams and pay your bills. You may need to change your dreams or cut back on your expenses in other areas to make it work.
3. Should You Move?
People tend to live in more urban areas when they’re young and employed but it’s often prohibitively expensive for retirees to live in or on the outskirts of major cities. Those who are expecting to retire within the next few years should consider making a move to a more affordable location. There are many choices out there but how do you evaluate all of the possibilities?
Several factors should be considered when picking a new place to live:
- Proximity to family members
- The cost of housing and owning versus renting
- Access to healthcare facilities
- Access to entertainment such as shows and sporting events
- Proximity to a major airport
- Year-round weather conditions
- Income, property, and estate taxes
It’s almost impossible to find a location that fits every need so the best strategy may be to settle on an area that meets the bulk of your needs, particularly those related to long-term health and well-being. Cold weather might not bother you now but it could have a debilitating effect on your body or your ability to keep active for some part of the year when you’re 85.
You might want to consider moving to a warmer climate if you think this will be the case, even if it doesn’t address some other factors.
4. Should You Sell Your Home?
Most retirement planners focus on an individual’s investment portfolio. The portfolio is important but it’s often not the average person’s most valuable asset or their largest potential source of liquidity. The bulk of their wealth is tied up in many people’s homes. They might consider selling their residences as they approach retirement age, particularly if the mortgage has been satisfied and the property has increased significantly in value.
You’ll generally need less space and a smaller home is easier to maintain but the primary reason to sell is to gain liquidity and make sure that you have enough cash to live on and establish an emergency fund. What good does sitting on a $1 million home do if you don’t have the money to buy adequate health insurance or do the things you enjoy?
People approaching retirement should try to “game” the real estate market. They should attempt to figure out if it makes sense to sell the family home now and rent a home for a couple of years until retiring or if it makes better sense to hold onto the home until the day comes when they bid the workplace adieu.
So what’s the best way to go about gaming the market? Pay close attention to trends in your region. Read the local newspapers to find neighborhoods offering open houses and inquire with a local real estate agent as to whether home prices are rising or declining.
Suppose that you’re 10 years from retirement and the real estate market is currently running hot.
- You secure an extra $100,000 from the sale of your home thanks to favorable market timing.
- You then invest that money in a vehicle that yields an 8% return per year.
- It will grow to more than $215,000 in 10 years.
Remember that you’ll also need to subtract the cost of renting an apartment for those 10 years.
Let’s say that your new rent is $1,000 per month. That will add up to $120,000 over 10 years. Now do the math: $215,000 – $120,000 = $95,000. That’s a considerable net gain from selling into a hot market.
5. Have You Made an Estate Plan?
It makes sense to do some estate planning to ensure that your assets are properly transferred to your heirs and to minimize estate taxes. It’s important to sit down with your attorney and accountant to determine the most cost-effective way for your estate to be delivered to beneficiaries upon your death.
You’ll need a will but that might be just the beginning. The best approach might also involve setting up a trust and/or custodial accounts for your children or grandchildren.
It’s important to consider estate planning because there’s a three-year “look-back” period for assets removed from your estate. The amount of the insurance could be included in your estate for estate tax purposes if you have a trust buy a life insurance policy on your life then die within three years after the contract was signed. Advance planning is key to estate planning and your overall happiness in retirement.
6. Do You Have a Personal Plan and Needed Documents?
Take some time to plan for your own care and that of your spouse if you’re married. Set up healthcare proxies, powers of attorney, and other documents well before you need them when you can thoughtfully consider your needs and preferences.
Don’t leave these crucial decisions until there’s an emergency when your energy and abilities may be compromised. Others could end up making choices for you that would not have been your preferences. Get there first and arrange your own life.
What Is the Three-Year Rule for Estate Taxes?
The rule states that you can’t gratuitously relinquish ownership of assets within three years of your date of death. Some people attempt to do so in an effort to avoid these assets being included in the value of their estate for estate tax purposes.
The value of these assets is pulled back into your estate in this case but there are no repercussions if you live for three years and one day or longer after the transfer. You can’t give assets away to an individual or entity, including transferring them into the ownership of a living trust.
Do I Need a Will If I Have a Trust?
You’ll need a will even if you’ve created a living trust if you want to be sure that all your assets will pass to the beneficiaries of your choice. You can create a “pour over” will to transfer into your trust any assets that you’ve neglected to place there during your lifetime or any that you may have acquired since you created your trust. You can also create a will to send all your assets into a trust that will be created at the time of your death.
What Is a Custodial Account?
You can set up a custodial account on behalf of a minor that you or someone else you’ve named can manage on their behalf until they reach adulthood. It can be an investment account or a savings account, but the gift is irrevocable. You can’t take it back. You’re legally obligated to transfer the account to the child when they reach a certain age that’s legally mandated by their state, usually between 18 and 25.
The Bottom Line
Don’t hold back now if you’re in the home stretch. Retirement planning can be overwhelming at first but you’ll be well on your way to generating a solid retirement plan if you can answer these six questions and you’ll be happy that you did.