If You've Fallen Off Track
Perhaps you always intended to save more but just didn't have a solid plan in place or the extra money to follow through. Intentions are commendable, but if life has gotten in the way of saving enough, there's no time like the present to get back on track. It is not too late, but you need to act quickly.
Five Key Concerns for Retirement
To have a well-rounded retirement where you can maintain and protect the lifestyle you and your family have become used to, there are five key areas to address:
- Income management
- Protection
- Healthcare
- Long-term care
- Leaving a legacy
The income you'll need during retirement is dependent on the lifestyle you plan to have. Will you be relocating or staying where you are? What hobbies or activities do you intend to pursue? Do you plan to work part-time or not at all? All of these variables should be examined as you create your overall budget.
Typically, retirees need to replace all or most of their pre-retirement income. Consider this: you may not need as much in the first few years of retirement, but as inflation bites into the dollar's buying power year after year, it will eventually cost more to buy the same things. Make sure your budget takes inflation into account.
Social Security will meet part of your income requirement, but not enough to rely on exclusively. To create an adequate cash flow, take advantage of tax-advantaged retirement savings accounts such as 401(k) plans or Individual Retirement Accounts (IRAs). If your employer or union sponsors a pension plan, find out if you're eligible and what the plan entails. Keep in mind that if you are over 50 years of age, you may be eligible to make additional contributions to retirement accounts through a catch-up provision. For 2007, the regular contribution limit to 401(k) plans, as set by the IRS, is $15,500, and the catch-up limit is an additional $5,000.
Additional personal investments and/or annuities may also help generate retirement income; therefore, you should speak with a qualified financial professional to determine which products may work best with your risk tolerance and investment horizon.
Protection
If you have a spouse or dependents, ask yourself what would become of them if anything were to happen to you. You need to protect their future.
Often when one spouse dies, the survivor's cost of living remains nearly the same. Think about it. The mortgage and taxes still need to be paid, food needs to be bought, electricity needs to stay on, and things you used to do must now be hired out to someone else. Yet the surviving spouse typically loses a large portion of his or her retirement income when his or her partner dies.
To help a surviving spouse or other beneficiaries maintain an income when you're gone, carefully review your pension and IRA documents. There may be options that guarantee continued benefits for the surviving spouse either in a lump sum or at a reduced rate. Also, there are joint and survivor annuities that create an income stream for the rest of the second spouse's life.
Life insurance is an option that can provide tax-free income to your beneficiary. There are various contract options, including term, permanent, universal, and variable, that should be explained to you in detail by a professional. Life insurance often offers families protection so that their financial lives can remain intact even after the loss of a loved one.
Healthcare
Although everyone hopes for the best, the truth is your health during retirement is unpredictable. At age 65, you will qualify for the country's largest health insurance plan: Medicare. If you are among the lucky minority, your former employer may offer continued health coverage for its retirees. However, if you're like the majority of Americans, this type of coverage will be unavailable. Therefore, if you plan to retire before you become eligible for Medicare, you will be responsible for purchasing personal coverage to fill the gap.
The Medicare program does a good job of ensuring the health of America's seniors. But it doesn't cover everything. There are out-of-pocket costs to pay for premiums as well as services outside the plan's scope, such as vision, hearing, dental, and podiatric care. Considering most seniors need these types of care, the costs can add up. According to a non-partisan report published in December 2006, the average senior can expect to pay 27% of his or her income toward healthcare. Therefore, it is of great importance to figure in anticipated medical expenditures when working through your retirement budget.
Long-Term Care
As we age, there is an increased probability that we may eventually need assistance with the activities of daily living, such as bathing, dressing, and eating. This type of care—regardless of whether it's in-home or at a facility—does not come cheap. Medicare does not cover long-term care, and most of us can't afford to pay for it out of pocket without depleting our retirement nest eggs.
Many pre-retirees are opting to buy long-term care insurance policies. Depending on the contract and issuing company, these policies usually begin paying for the costs associated with long-term care once you become unable to independently perform several of the activities of daily living.
Although most people recognize the value of long-term care insurance, often the expense of buying a stand-alone policy deters them from seeking coverage. Some insurers now offer an alternative in the form of a long-term care or "living care" rider that can be attached to a permanent life insurance policy. If the owner ever requires care, the rider makes it possible to accelerate the death benefit of the insurance contract to pay for qualified costs. For more specific information about long-term care coverage options, contact your financial professional.
Leaving a Legacy
Even if you've fallen off track with respect to saving for your own future, it is never too early to speak to an advisor about creating an estate plan to transfer your assets to heirs upon your death. With the help of estate planning and tax professionals, you can create a strategy to structure your bequests in the most advantageous way—both for you and your beneficiaries. Whether you intend to pass your assets on to relatives, friends, or a charity near and dear to your heart, there are a variety of tools at your disposal, including living trusts, charitable remainder trusts, and charitable gift annuities.
When it comes to saving for retirement, time is of the essence. The longer your investment horizon, the more time your money has to work for you. Therefore, you mustn't delay any longer. Contact your financial professional today to arrange a meeting to assess your situation. From there, commit to a strategy and stick with it. Before you know it, those daydreams of retirement will no longer dissolve into anxiety and worry because you'll feel confident that you are back on track just in time.
Please be advised that this document is not intended as legal or tax advice. Accordingly, any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or the marketing of the transaction(s) or matter(s) addressed, and you should seek advice based on your particular circumstances from an independent tax advisor.
About the Author:
Tom Queri is the executive vice president and manager of AXA Advisors' Rochester branch, offers securities through AXA Advisors, LLC (member NASD, SIPC), 175 Corporate Woods, Rochester, NY, 14623, and offers annuity and insurance products through an insurance brokerage affiliate, AXA Network, LLC, and its subsidiaries. He can be reached at 585-292-1569.
