Tag Archives: Cash Flow Planning

Michele Clark in the News: CNBC about Downsizing Housing in Retirement

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I was happy to be a resource for Sara O’Brien of CNBC for the article “Older Americans planning to downsize should brace for sticker shock” that highlights the surprises that retirees can face when downsizing.  We had a great discussion about the types of expenses people often forget, the types of housing I see clients gravitate toward, and if the cost of the square footage downsized home is dollar downsized as much as people originally had envisioned.

Why retirees might not get as much equity out downsizing as they thought

When thinking of “downsizing” people often assume that if they reduce the size of their home, the purchase price will also be lower.  That isn’t always the case.  Often times people are looking for newer homes that will require less maintenance, and may even be attracted to villa homes that include (for a fee) exterior upkeep such as snow shoveling, yard work etc.  Those types of homes cost more.  You may end up downsizing the square footage but upsize the amenities.

People often forget that they will pay a 6% sales commission to the realtor to sell their home that translates into a smaller check at the closing table than they originally thought.  For a $450,000 house, it is $27,000 less for their retirement than they were thinking. Especially considering they are also using the proceeds to buy another house.

Due to years of watching HGTV reveals people swing open a front door and expect to be wowed. Knowing this a Realtor’s marketing plan will include a list of staging ideas and home repairs designed to maximize the sales price and reduce the number of days on the market. These expenses are often overlooked because they cover more items than they used to, Pre-HGTV.

Moving expenses and the cost of setting up the new home add up as well.

Why it pays to plan in advance when thinking of downsizing

One benefit to downsizing, even if the reduction is not significant, is if you currently have a mortgage, and you move to a less expensive home, you can improve your monthly cash flow by doing away with the monthly principal and interest mortgage payments (you will still pay taxes and insurance each year.)  Or of course, if your current home is paid off, you will walk away from the closing table with equity out of the house, which is what people traditionally think of when they think of downsizing.

Another benefit is in the form of improved monthly cash flows, due to a reduction in housing costs, such as utilities, home owner’s insurance, and potentially real estate taxes.

Overlooked expenses in retirement: Gifts and travel related to gift giving occasions

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Many people who come to me for assistance with retirement income planning are on the cusp of retirement and have never tracked their expenses.  If that is the case, no problem, we have methods to estimate spending to get a baseline estimate of your spending needs in retirement.

For those that are trying to get a clearer picture of retirement spending, I often see them list their regular monthly expenses such as utilities, insurance, food, and gasoline.  But overlook the irregular expenses such as home and car maintenance, personal property taxes, gifts, etc.; expenses that happen on an irregular basis.

Gift giving in Retirement

To help you think through what you might spend on gifts in a year consider these items:

Consider your:
Immediate family
Extended family
Friends
Your children’s friends, teachers, coaches, etc.

Consider occasions:
Christmas
Hanukkah
Birthdays
Weddings
Graduations
Baby showers
Hostess gifts
Funeral flowers
Get well flowers

Consider travel related to gift giving:
Christmas
Destination or out of town weddings
Baby showers
Funerals

What does this average you annually, divided by twelve; this gives you an estimated amount that you spend per month.

Retirement planning is setting your self up to be able to afford the lifestyle and activities that are important to you.  Part of that is determining what is important to you and how much it costs.

Retirement Income: Estimating How Much You Will Need

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Use your current income as a starting point

You have probably read financial press articles that discuss desired annual retirement income as a percentage of your current income. Depending on the article, that percentage could be anywhere from 60 to 90 percent, or even more. The appeal of this approach lies in its simplicity, and the fact that there’s a fairly common-sense analysis underlying it: Your current income sustains your present lifestyle, so taking that income and reducing it by a specific percentage to reflect the fact that there will be certain expenses you’ll no longer be liable for (e.g., costs associated with working such as lunches out, dry cleaning, commuting, etc.) will, theoretically, allow you to sustain your current lifestyle.

The problem with this approach is that it doesn’t account for your specific situation. If you intend to travel extensively in retirement, for example, you might easily need 100 percent (or more) of your current income to get by. It’s fine to use a percentage of your current income as a benchmark, but it’s worth going through all of your current expenses in detail, and really thinking about how those expenses will change over time as you transition into retirement.

Project you retirement expenses

Your annual income during retirement should be enough (or more than enough) to meet your retirement expenses. That’s why estimating those expenses is a big piece of the retirement planning puzzle. But you may have a hard time identifying all of your expenses and projecting how much you’ll be spending in each area, especially if retirement is still far off. To help you get started, here are some common retirement expenses:

  • Food
  • Housing: Rent or mortgage payments, property taxes, homeowners insurance, HOA fees, property upkeep and repairs
  • Utilities: Gas, electric, water, telephone, cell phone, Internet, cable TV, trash
  • Transportation: Car purchases or payments, auto insurance, gas, maintenance and repairs, public transportation
  • Insurance: Medical, Medicare Supplement, dental, life, long-term care
  • Health-care costs not covered by insurance: Deductibles, co-payments, prescription drugs
  • Care for yourself, your parents, or others: Costs for a nursing home, home health aide, or other type of assisted living
  • Taxes: Federal and state income tax, capital gains tax, personal property tax
  • Travel: for fun, to visit family, to go to family events such as weddings and funerals
  • Clothing
  • Debts: Personal loans, business loans, credit card payments
  • Education: Children’s or grandchildren’s college expenses
  • Gifts: Charitable and personal such as Christmas, birthday, wedding
  • Recreation: dining out, hobbies, leisure activities, season tickets to sports or entertainment
  • Miscellaneous: Personal grooming, pets, club memberships, household items

Don’t forget that the cost of living will go up over time. The average annual rate of inflation over the past 20 years has been approximately 2.3 percent. (Source: Consumer price index (CPI-U) data published by the U.S. Department of Labor, January 2015.) And keep in mind that your retirement expenses may change from year to year. For example, you may pay off your home mortgage or your children’s education early in retirement. Other expenses, such as health care and insurance, will increase as you age. To protect against these variables, build a comfortable cushion into your estimates (it’s always best to be conservative). Keep in mind that some expenses have historically gone up at a rate greater than inflation.  For example, in our retirement projections we inflate healthcare expenses at a rate of 6%.

Decide when you will retire

To determine your total retirement needs, you can’t just estimate how much annual income you need. You also have to estimate how long you’ll be retired. Why? The longer your retirement, the more years of income you’ll need to fund it. The length of your retirement will depend partly on when you plan to retire. This important decision typically revolves around your personal goals and financial situation. For example, you may see yourself retiring at 50 to get the most out of your retirement. Maybe a booming stock market or a generous early retirement package will make that possible. Although it’s great to have the flexibility to choose when you’ll retire, it’s important to remember that retiring at 50 will end up costing you a lot more than retiring at 65.

Estimate your life expectancy

The age at which you retire isn’t the only factor that determines how long you’ll be retired. The other important factor is your lifespan. We all hope to live to an old age, but a longer life means that you’ll have even more years of retirement to fund. You may even run the risk of outliving your savings and other income sources. To guard against that risk, you’ll need to estimate your life expectancy. You can use government statistics, life insurance tables, or a life expectancy calculator to get a reasonable estimate of how long you’ll live. Experts base these estimates on your age, gender, race, health, lifestyle, occupation, and family history. But remember, these are just estimates. There’s no way to predict how long you’ll actually live, but with life expectancies on the rise, it’s probably best to assume you’ll live longer than you expect.

Identify your sources of retirement income

Once you have an idea of your retirement income needs, your next step is to assess how prepared you are to meet those needs. In other words, what sources of retirement income will be available to you? Your employer may offer a traditional pension that will pay you monthly benefits. In addition, you can likely count on Social Security to provide a portion of your retirement income. To get an estimate of your Social Security benefits, visit the Social Security Administration website (www.ssa.gov). Additional sources of retirement income may include a 401(k) or other retirement plan, IRAs, annuities, and other investments. The amount of income you receive from those sources will depend on the amount you invest, the rate of investment return, and other factors. Finally, if you plan to work during retirement, your job earnings will be another source of income.

Make up any income shortfall

If you’re lucky, your expected income sources will be more than enough to fund even a lengthy retirement. But what if it looks like you’ll come up short? Don’t panic–there are probably steps that you can take to bridge the gap. We can help you figure out the best ways to do that, but here are a few suggestions:

  • Try to cut current expenses now so you’ll have more money to save for retirement
  • Consider delaying your retirement for a few years (or longer)
  • Lower your expectations for retirement so you won’t need as much money (no beach house on the Riviera, for example)
  • Work part-time during retirement for extra income

The best way to determine if you are on track for the retirement you envision, is to get started now on a financial plan. You don’t have to go it alone; you can enlist the help of a professional.  Contact us today.

Based on an article Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016

 

Michele Clark Quoted in the News: St Louis Post Dispatch article about financial compatibility

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The St Louis Post Dispatch quoted me in their article “Is Your Honey Good With Money? Better Find Out Before Tying The Knot.” in the Sunday paper.

I shared my thoughts on couples and financial compatibility.  As a financial advisor for twenty some years, I have worked with many different couples of various age ranges, so I was able to share some ideas for checking to see if you think about money in the same way.

Even if you don’t, one of the most important things to do is to talk about it before you marry.  Money squabbles are one of the leading causes of divorce.  Valentine’s Day has just passed and love is in the air, take a look at this article to make sure it stays that way!

Emergency Fund: The Foundation for Financial Success

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Unexpected financial expenses seem to crop up at the least opportune time. The car needs a new transmission, you lose your job, or a parent or child becomes ill and you need to reduce your hours at work in order to care for them, taking an unexpected reduction in income. All of these expenses, and others, can drain savings quickly.

Why have an emergency fund?

You can resort to using credit cards to pay for emergency expenses however, worrying about paying down your growing credit card balance can lead to further stress during an already difficult period. You will experience “one step forward and two steps back” where it’s hard to see any progress.

How to create an emergency fund.

The better choice is to establish an emergency fund now. Determine how much money you want to set aside in the emergency fund and set up an automatic deposit into that account once a month for a small amount, so that you establish the habit of adding to the emergency fund. If you have finished paying off a monthly loan of some kind, consider immediately setting that money aside for the emergency fund so you don’t use it for daily expenses. Set up an account with your bank that is not easily accessible so there is less temptation to use the money.

Remember a large screen TV or a vacation is not an emergency. If large items such as these, are on your wish list, start saving for them separately and only use your emergency fund for true emergencies.

How much should you have in an emergency fund?

The rule of thumb is to keep six to twelve months of living expenses in savings for emergency funds.

Whereas a dual income family could get away with six months of income in savings, if you are a single income household, you would want twelve months of income saved.

If you and your spouse work for the same company, there is a greater risk of you both losing your jobs at the same time, therefore it would make sense to keep twelve months.

Having an emergency fund will reduce your stress during periods of difficulty because you can tackle the situation and not worry about the financial aspect.