Are you prepared for a 30- or 40-year retirement? Whether or not you choose to work with a financial professional, it is imperative that you retire with a plan.
The Social Security Administration estimates that the average 65-year-old woman today will live to age 86 and a 65-year old man today will live to age 84.
Are you prepared for a 20-year retirement? How about a 30- or 40-year retirement? It could happen!
About 25% of today’s 65-year-olds will live past 90, with approximately 10% living to be older than 95, according to Social Security Administration projections.
For generations prior to Baby Boomers, Social Security was often supplemented by a pension. Most people facing retirement in the next decade do not have the luxury of a pension. Instead, you will probably need to live off of Social Security and any savings you have accumulated during your working years.
In what order should you draw retirement income from different savings? How do you maximize your Social Security benefits? How do you cover healthcare costs? And how do you make all of these decisions work together in a tax efficient manner, to increase your chances of a successful retirement?
In developing your plan, the following are key components.
You should have an investment plan that is unique to your goals and situation.
Many women (and men) retire with a random collection of investments, and no real strategy. Some are big on “chasing the return” – assuming risk they really shouldn’t in pursuit of higher returns. Others are very risk-averse, so fearful of what stocks might do that they stay out of the market entirely. In the current low interest rate environment, that represents an easy way to fall behind and lose purchasing power to inflation.
You need a middle ground. While protecting what you have is a priority. At the same time, the possibility of a 15-, 20-, or even 30- or 40-year retirement means your retirement nest egg has to keep growing.
Claim your Social Security benefits carefully.
If your financial situation and health permit, delaying Social Security is usually a wise move for single women. For every year you wait to claim Social Security, your monthly payments get about 8% larger.
Married women can look at spousal claiming strategies such as the “file and suspend” approach and claiming spousal benefits first. This may help to maximize the Social Security benefits you and your spouse receive.
Minimize the impact of taxes.
Conventional wisdom says that retirees tap their taxable accounts first, followed by tax-deferred retirement accounts, and finally tax-exempt Roth individual retirement accounts. But this withdrawal strategy could unintentionally increase a client’s overall tax burden, including boosting the portion of Social Security benefits subject to income taxes. There is also the potential to trigger higher Medicare premiums when income rises above certain thresholds.
It may be more tax efficient early in retirement to withdraw funds from tax-deferred accounts first to take full advantage of the 15% tax bracket. In future years, after the taxable account is exhausted, the retiree can take tax-deferred income first for up to the top of the 15% bracket and then withdraw any additional funds from a tax-exempt Roth account.
To help you integrate these decisions into a comprehensive retirement plan, you may want to consult with a CFP® (CERTIFIED FINANCIAL PLANNER ™).
When choosing a financial professional, it is important to work with someone who sees retirement through your eyes, with a wealth management approach designed for the long term. Many women prefer to work with a female CFP® advisor who understands the particular challenges that many women face in saving for retirement (time out of the workforce due to childcare or eldercare, the emotional toll of divorce or death of a spouse).
Whether or not you choose to work with a financial professional, it is imperative that you retire with a plan.
About the Author:
Lisa Hay has over 15 years of experience as a CPA and is a CERTIFIED FINANCIAL PLANNER™. She helps bring clarity to the complex world of markets, taxes, estate planning, retirement and other life and career transitions. As a fee-only fiduciary advisor, Lisa is 100% committed to her client’s best interests.
By taking a holistic approach to wealth management, and coordinating all of the different pieces of your financial puzzle, she makes sure your financial life is optimized and efficient.
Learn more about Lisa’s unique and refreshing approach to providing financial counsel to women.
Image: American Advisor Group