Retirement Plan: 10 Expenses to Consider

Posted on June 24, 2012October 1, 2018

Part of the process of determining if you can afford to retire, is to run the numbers to see if the amount of money you have saved plus any expected income you may receive from pensions and Social Security will cover all of your expected expenses throughout retirement.

After working with people for so many years, the one thing I have noticed is that many people have faithfully kept spreadsheets of their day-to-day living expenses and have used those figures to help create their retirement plan. People often come to me to check their thinking, when they are a few years away from retirement, to make sure they are on track to retire.

However, I often discover that people overlook the irregular expenses when planning for retirement on their own. And it is the irregular expenses that can derail a retirement plan, and cause stress and sleepless nights. The tricky thing of course is trying to see into the future and figure out what possible expenses can occur.

Here is list of some of the potential items that you might consider adding to your retirement plan. They won’t all pertain to you, but I hope they will get you thinking about what your retirement could look like, and help you plan for your future.

Replacing cars

I often hear people say that they will just use the same car throughout retirement. And if you do not work with retired people on a regular basis like I do, I can see where you might think that. When you are pre-retirement age, retirement seems like a phase of life that is a mysterious unknown. So I ask them how often they replace their car, and I usually hear answers like every 6 years or every 10 years, and everything in between. A married couple that retires at 65 and drives until 85, replacing cars every 6 years, will buy 6 cars in retirement. I wrote a blog about the impact of inflation on car prices in retirement, many people are very surprised when I show them the expected price of the last car they will buy in retirement.

Travel for fun

When I ask people what they want to do when they retire, travel is one of the first things people say. If you see travel in your future, think about how often, and what type of travel, do some internet searching to get a ball park estimate of the cost that would be involved.

Travel to see the grandkids

Don’t forget about travel to see the grandkids, I mean your adult children. Who am I kidding? You are taking a trip to see those adorable grandkids! If your family is like so many these days, you might have to hop on a plane to feel those little arms wrapped around you. With Skype, you don’t have to be there to see them anymore. But no technology can replace an in-person visit. Trust me; you will want to plan for this expense.

50^th Wedding Anniversary Celebration

In this day and age, fifty years of marriage is an especially wonderful milestone. Some families have a dinner reception, inviting extended family and close friends, which can be the size of a small wedding reception. I have also seen couples treat families to Disney vacations or to cruises. If you have dreams of recognizing a milestone with a special celebration, don’t forget to plan for it so that when the time comes, you can relax and enjoy it.

Medicare

What? It isn’t free? No, I am sorry to have to tell you, it isn’t. And I find that I am often the first to break this news to people. Because if they have never had to help a family member through the process of signing up for Medicare and they are more than a few years away from retirement, then researching “How does Medicare work?” usually hasn’t crossed their mind. Luckily there are some good resources such as www.medicare.gov and for Missouri residents https://missouriclaim.org/.

Long Term Care/Nursing Care

In 2012 the average annual cost of care in a nursing home in Missouri is approximately $55,000. The cost of nursing care has been increasing considerably faster than inflation. One way to offset the risk to your portfolio is to consider Long Term Care insurance that would cover a portion or all of the cost of care, depending on your risk tolerance and the affordability of the premium. I am a fee-only advisor so I do not offer insurance products, but I have recommended that some clients get Long Term Care insurance. Other clients have been able to self-insure, each situation is different. But you do need to consider the impact a stay would have on your portfolio. To learn more read my blog post Long Term Care Insurance: Protect your nest egg.

Big delayed purchases

Have you been dreaming of a cross country trip in a motor home? Or does the water call your name so a boat is more to your liking? Don’t forget to set aside some money for upkeep and repairs.

Home Improvements and Major Maintenance

If you are in your forever home, factoring in the large inevitable maintenance projects such as replacing a roof or HVAC system will help prevent money stress later on down the road. Also, after a few decades, kitchens and baths tend to need updates. Remodels with an eye toward aging gracefully in place are also becoming quite popular. Consider the age of your home and prior remodels when planning future income needs.

College and Wedding/Rehearsal Dinner

Depending on the age of your children, you may have college and wedding/rehearsal dinner expenses in retirement.

Care for a Family Member

Will a loved one be financially dependent upon you, such as a parent or a special needs child? If so, you might consider meeting with an elder care attorney or estate planning attorney that specializes in special needs trusts.

These are a few areas to consider in addition to everyday living expenses when you are creating your retirement plan.

Retiring Early: One way to avoid the 10% early withdrawal penalty tax

Posted on June 8, 2012August 24, 2018

You might have heard that you need to keep your money in your retirement accounts until you are 59½ in order to avoid the 10% early withdrawal penalty tax, but did you know that if your money is in a work retirement plan, like a 401(k), that the you can take it out earlier and still avoid the penalty?

Exception to the rule

To quote directly from the IRS website explaining this exception to the 10% early withdrawal penalty tax:

“Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55, or distributions made from a qualified governmental defined benefit plan if you were a qualified public safety employee (State or local government) who separated from service on or after you reached age 50”

55 and separation from service

If you wait until the year you turn 55, then leave your employer, you can take money out of your 401(k) or 403(b) without the 10% early withdrawal penalty tax. You will still pay income taxes of course; Uncle Sam wants that part of your retirement account. And be careful, depending on the other income you have, the amount of income taxes you owe could be even more than has been withheld, so be sure to calculate quarterly estimated taxes so that you are not caught by surprise.

If you roll your 401(k) over to an IRA rollover account, you lose this “age 55 separation from service” exception, because it only pertains to employer plans, not IRA rollovers.

50 if you are a fireman or policeman

If you are a qualified public safety employee of the state or local government, such as a police or fireman, the age is even lower – 50 years old.

Retire early?

In general most folks need to work and continue saving their money until their mid to late 60s so that they can save enough to retire. But for those that have been strong savers and have learned to live well beneath their means, an early retirement is a possibility.

For a lot of folks who retire as early as 55, they have resources besides retirement accounts that they tap into, for example; from the sale of a business or money they have put into regular brokerage accounts over the years after they put the maximum contributions into their retirement accounts. If you don’t have money in non-retirement accounts that can get you through to age 59 ½, then the “age 55 separation from service” exception might be the solution for you.

Run the numbers

Only in a few situations would it make sense to tap into the retirement accounts as early as 55 years old. One situation that comes to mind, is in the case of someone who has maxed out their contributions in their work plan since the time they started working, and they have a balance in their current employer’s retirement plan that is large enough to live off of for a four or more years. They have run the numbers and have enough retirement assets to live off of, however they do not have enough in non-retirement accounts to live off of until they turn 59 ½, perhaps due to putting kids through college or paying off the mortgage.

Really check your numbers to make sure that you can afford to retire at 55, taking the impact of inflation into account. Inflation has a significant impact on retirement planning. Consider that starting to spend down your portfolio at such a young age, when you could easily live another 35 or 45 more years could jeopardize your financial future. However, if once you have done the analysis you can afford to retire early, then you deserve to enjoy what you have worked so hard for and this “age 55 separation from service” exception to the 10% early withdrawal penalty tax is one way to help you do that.

Financial Doing: Because if it’s just Financial Planning, it will never happen!

Posted on June 1, 2012October 1, 2018

I have a theory that just about everyone has important financial To-Do items sitting on their To-Do list. However, those financial To-Dos often just sit there because there isn’t a looming deadline to make them seem urgent (“Save for college and retirement? Oh that’s so far away!”). You can read more about my philosophy in It’s on your To-Do. Let’s get it To-Done!

Let’s say you decide to address those To-Do items so you create a financial plan. Well a plan will not help you if you do not implement it! So let’s take you from Financial Planning to Financial Doing! For those of you who have taken the step of creating a plan, I would like to give you some easy things to do so that you can get some momentum going on your path to Financial Doing!

Here are some quick things you can do and knock off of your To-Do list…

Social Security

If you are under 60 years old, the government does not mail you a Social Security Benefits statement any more. Learn how easy it is to pull up a copy of your statement online in my blog post Full Social Security Statements Now Available Online.

Annual Credit Report

You know you should get your free copy of your credit report each year, but with so many advertisements you aren’t sure where to go. I clear up the confusion in my blog post Annual Credit Report: Where to go to get your free credit report.

Lost Money

This one is just a “no brainer”; it takes only a few seconds to check to see if you have lost money. One in ten Missouri residents does. Are you one of them? Missouri Unclaimed Property: Are you due some money?

Take the first step today to change your Financial Planning to Financial Doing, I promise, it will feel great to finally start attacking the To-Dos!

Retirement Planning: Inflation and the Jetson’s car

Posted on March 30, 2012March 30, 2012

When I teach retirement income planning classes I love to ask attendees to jot down how much they paid for their first house, then I ask them to write down how much they paid for their last car. While I don’t ask them to share these numbers with the class, it does start a lot of discussion. And laughter. What usually comes out of this exercise is the fact that most of the retired folks in the room paid more for their last car than they did for their first home!

Inflation takes quite a toll on the wallet. We notice this happening as the price of items rise and rise over the years; milk, gas, property taxes and, as in the example above, cars.

If you set up house at the age of 22 and retire at the age of 65 that is a span of 43 years. That gives you 43 years to earn income and invest for the future.

If you retire at the age of 65 how long do you want to plan for in retirement? Do you plan for 90 years old? 95? 100? Depending on your age, gender, health, and longevity in your family, retirement can last 25, 30, 35 or more years!

And if you plan on retiring early, you might be retired for as many years as you worked!

Let’s say you finish college at 22 and work until you are 62; you worked 40 years. If you live to 102, you would be retired for 40 years.

If you think inflation is a challenge while you are in your earning years, imagine what it is like during retirement when you are tapping into the portfolio that you created for retirement.

Here is some food for thought. Let’s take the car example from above and see what type of impact inflation has on car prices during your retirement years.

Last year and the first two months of this year, the Toyota Camry was the best-selling car in America. The 2012 Toyota Camry LE model has a base MSRP of $22,500 in today’s dollars. Not the least expensive model, the L, but not the more expensive models, SE or XLE, either.

Let’s use an example of a 55 year old who is thinking of replacing their car every seven years in retirement. If the car sells for $22,500 now and inflates at 3% a year, they want to know what a Toyota Camry LE would cost at the following ages:

At 65 years old a 2022 Toyota Camry LE is estimated to be $30,238
At 72 years old a 2029 Toyota Camry LE is estimated to be $37,189
At 79 years old a 2035 Toyota Camry LE is estimated to be $45,738
At 86 years old let’s assume they are still driving, not as much as they used to, and mostly during the day, but their family insists that they have a reliable car, so they relent and end up spending $ 56,252 on the 2043 Toyota Camry LE.

If they maintain the car well and don’t put a lot of miles on it, they could look to knock off a quarter to a third of the price with a trade in if they are trading in every seven years.

What if your tastes run more toward Lexus than Camry? Let’s look at this example with the 2012 Lexus GS (again not the most expensive model, nor the least expensive) with a base MSRP of $46,900 in today’s dollars.

Let’s use the same example of a 55 year old who is thinking of replacing their car every seven years in retirement. If the car sells for $46,900 now and inflates at 3% a year, they want to know what a Lexus GS would cost at the following ages:

At 65 years old a 2022 Lexus GS is estimated to be $63,030
At 72 years old a 2029 Lexus GS is estimated to be$77,519
At 79 years old a 2035 Lexus GS is estimated to be $95,338
And at 86, in this example as well, they listen to their family and buy a new car so they have a reliable car, making the family feel better. They end up spending $ 117,254 on the 2043 Lexus GS . The good news is, the year is 2043, so it is the Jetson’s edition so it can fly.

In discussing future plans with families, I find that car replacement during retirement years is the most frequently forgotten item when individuals plan on their own. But having read this, you know to factor it in. Many people make the mistake when planning of assuming that they can keep the same car throughout retirement. Keep in mind that you may be retired for almost as many years as you were working. Think about how many cars you owned while working and consider if it would be realistic to have one car for a period approximately as long as that. You will possibly be driving more in the early years of retirement, because retired people are the busiest people I know. They have been putting off all the things they wanted to do; now they get to do them! But the amount of driving does slow down significantly in the later years for most, but not for everyone. Also, consider if you have more than one driver, you may be replacing more than one car in retirement. Forewarned is forearmed! If you haven’t already, be sure to account for car replacement and the inflation of the car prices in your retirement projections.