11 Retirement Realities You Need to Know

Transcription

1 11 Retirement Realities You Need to Know

2 Wealth Enhancement Group wealthenhancement.com

3 Are You Ready to Retire? In many ways, starting retirement is like starting a new job. There are new things to learn, new rules and regulations, new opportunities and challenges. You ll face unique personal and lifestyle issues as well as specific financial realities. And, of course, the more you understand these new issues and plan for the future, the better prepared you may be and the more successful your retirement may be. 11 Retirement Realities You Need to Know is designed to alert you to the facts of retirement life you should understand in order to make better financial decisions now and in the future. Some of the points are tactical, such as planning for taxes on your Social Security benefits, while others are strategic, such as making asset allocation decisions that seek to help protect you during the next inevitable bear market. The 11 Retirement Realities 1. When you retire will affect your retirement income. 2. You re still going to be paying income taxes. 3. Social Security benefits can be taxed. 4. Your Social Security benefits might be reduced by 50%. 5. Inflation can threaten your standard of living. 6. Your living expenses in retirement might go up not down. 7. Medicare doesn t cover everything. 8. You re likely to live for a long time. 9. There will be another bear market. 10. Once a parent, always a parent. 11. Things are going to become more, not less, complicated. Planning for retirement (or optimizing your tactics and strategies if you are already in retirement) can make a big difference in your financial well-being. And, it will give you the satisfaction and comfort of knowing that you ve prepared for your future. That s why we invite you to schedule a free, no-obligation financial review with a financial advisor from Wealth Enhancement Group. You can ask questions about any aspect of retirement and financial planning, and your advisor will answer them as clearly and as straightforwardly as possible. It s a great opportunity for you and your spouse to learn more about specific retirement issues as well as to get a sense of whether our firm is a good fit for your financial planning needs. Call today to schedule your free review. Call today to schedule a free financial review

4 1 When you retire will affect your retirement income. Deciding at what age you re actually going to retire is both a personal lifestyle decision and a financial decision. Before you step into retirement, it s important to understand the financial implications. Remember, if you retire early, you ll have fewer years to accumulate wealth for your retirement. You might be dipping into your retirement savings sooner, and those savings will have to last even longer. Depending on the year you were born, your full retirement age will be between ages 66 and 67. You may begin drawing Social Security as early as age 62, but if you do, your benefits will be reduced by about 25% of their full value. Many people feel that 75% of a sure thing is the best personal choice rather than waiting until 66 or later to retire. You might also simply need the income to support yourself during those early years. Perhaps an even more important consideration when deciding the best age to retire is health insurance. Medicare benefits don t start until you reach age 65. If you retire earlier and if you will lose your employer-provided health insurance upon retirement, you ll need to buy health insurance, which can easily cost about $7,500 to $10,000 or more per person, annually. Whatever option you choose for health insurance early in retirement, know that it will almost certainly lead to higher annual expenses than while you were still working. If you are planning to retire before age 65, make sure you have a plan in your budget for these potentially higher costs of health insurance. If you were born between 1943 and 1954, your full retirement age is 66. You may begin drawing Social Security as early as age 62, but if you do, your benefits will be reduced by about 25% of their full value. 4 Wealth Enhancement Group wealthenhancement.com

5 Many people think that once they stop working, they will be paying a lot less in income taxes. That may or may not be true it will depend on your individual situation. If the majority of your retirement savings is in tax-deferred accounts like a traditional IRA or 401(k), your withdrawals will be taxed at your prevailing income tax rate. Depending on the amount you withdraw, your taxes could be substantial, especially if you have fewer deductions, such as home mortgage interest costs if your home is paid off. This means that you need to plan for taxes. If you have been an employee for your entire career, your employer withheld taxes from your paychecks and you settled up with the IRS on your tax return at the end of each year. Maybe you re even used to getting a refund. But in retirement, unless you begin paying quarterly estimated taxes or your IRA custodian withholds taxes, you could be in for a nasty surprise when tax time comes around. # 2 You re still going to be paying income taxes. 3 Social Security benefits can be taxed. The rule is simple, hard and fixed. For a married couple, if your annual income is between $32,000 and $44,000 ($25,000 and $34,000 for singles), you may have to pay income tax on up to half of your Social Security benefits. If your annual income as a retired couple is more than $44,000 ($34,000 for singles), then up to 85% of your Social Security payments are subject to income tax. Even if you believe you won t have any income in retirement, there s still a good chance your Social Security benefits will be taxed. Remember, the money you withdraw from your IRA is money that is now taxed like ordinary income, almost as if you were earning a paycheck. IRA withdrawals, interest, dividends, rental income, and even a small hobby business can easily push your income to a level where your Social Security earnings are taxable. The important thing is to be aware of these taxes, especially if you are very close to the $32,000 or the $44,000 level. There are planning strategies that can potentially reduce the tax burden on your Social Security benefits. If you think you might fall into either of these income categories, be sure to consult with a financial professional and/or tax advisor. If the majority of your retirement savings is in tax-deferred accounts like a traditional IRA or 401(k), your withdrawals will be taxed at your prevailing income tax rate. Call today to schedule a free financial review

6 To make things even more confusing, there is another important rule you need to know concerning Social Security income and employment income (as distinguished from other kinds of income previously mentioned). If you retire at age 62 or any time before full retirement age and take Social Security, you are allowed an employment income of $16,920 per year (as of 2017) without incurring a reduction in benefits. For every dollar you make over $16,920, you will lose $.50 per $1 in Social Security benefits. (After full retirement age, there are no benefit reductions, no matter how much you make.) For example, let s say you are 63, retired, and make $26,500 from a part-time job and a hobby business. That s nearly $10,000 over the limit, which means at the end of the year you ll owe Social Security around $5,000. That could be a particularly painful check to write. Whether for lifestyle reasons or for personal satisfaction, you may ultimately decide a reduction in benefits is reasonable in exchange for continuing to earn additional income after retirement. The key is to know your options ahead of time and to make sure nothing comes as a surprise down the road. # 4 Your Social Security benefits might be reduced by 50%. Inflation of goods and services averages about 3.2% a year.* Right now, we are in a period of very low inflation. But over time, inflation will return, maybe at the high rates we experienced in the early 80s or maybe at lower rates. The smart bet is to plan on about 3% a year. While that doesn t sound like much, here s what it means: If you need $50,000 per year to live in retirement today, in 25 years you ll need $100,000 per year to maintain the same standard of living. That s because at 3% a year, the value of your money will fall by 50% over 25 years. Social Security is adjusted for inflation, giving you some protection, but your specific inflation rate might be different from the general inflation rate as a result of rapidly rising health care and long-term care costs. You have to keep growing your investments throughout retirement or you could find your standard of living dropping each year. Another way to say it is that investments like CDs, bank accounts and certain bonds that protect 100% of your principal will give you the illusion of safety while slowly guaranteeing a reduction in your buying power over time. A smart financial plan accounts for inflation and can help in the pursuit of a lasting retirement income. *Bureau of Labor Statistics If you retire before full retirement age, for every dollar you make over $16,920, you will lose $.50 5 per $1 in Social Security benefits. Inflation can threaten your standard of living. 6 Wealth Enhancement Group wealthenhancement.com

7 6 Your living expenses in retirement might go up not down. The rule of thumb is that your post-retirement expenses will go down to 70% or 75% of your pre-retirement expenses. Your biggest savings probably will not come from traditional spending on goods and services. You will be saving primarily because you won t be contributing to your retirement fund anymore and you won t be paying FICA and Medicare taxes. Together, this might reduce your actual expenses by 15% to 20% or more, especially if you are self-employed. If you pay off your mortgage before you retire, or if you sell a larger home and downsize to a debt-free property, you ll also lower your monthly cash needs. However, the likelihood of reduced living expenses during retirement is really a myth, especially for people who retire in excellent health and now have the time to travel or seek a variety of other experiences. You may no longer have regular commuting expenses or need new business attire, but you ll likely travel more, eat out more often and even spend more on entertainment, like going to the theater or sporting events. Moreover, more people are starting their retirement with a mortgage with many years left on it, and perhaps even have another mortgage on a second home. Here s what we ve found with many of our clients: Those in their 60s Retirees in their 60s often actually increase their pre-retirement spending with more travel, hobbies and entertainment. They are having fun, which often costs money. Those in their 70s start to spend less than they did in their 60s and so they tend to fall below pre-retirement spending levels. Mortgages are usually paid up, even on second homes, and travel has become less appealing. For clients in their 80s, personal expenses fall off even more, with the big exception of health care. increase their pre-retirement spending with more travel, hobbies and entertainment. Unfortunately, the more money you spend in your 60s, the faster you draw down your investments. At the same time, you worked hard and saved well, so you deserve to have fun in your retirement, especially in the early years when you are most energetic. How you plan your disbursements is very important and can be quite complicated. A professional opinion can go a long way to ease your mind and provide you with a safe plan for withdrawals. Call today to schedule a free financial review

8 7 Medicare doesn t cover everything. When you are eligible for Medicare at age 65, it doesn t mean you are home free for health insurance. Medicare doesn t cover everything, so most people should have Medicare Supplemental Health Insurance. This can cost between $150 and $300 per month per person, so be sure to include it in your retirement budget. Some drugs that you might find yourself in need of could cost more than $5,000 a month, so it s critical to plan for extensive health care costs in retirement. Remember: Insurance is to protect you and your spouse from being wiped out financially in the event of a worst-case scenario. Moreover, Medicare doesn t cover long-term care. Long-term care insurance is probably the last thing you want to spend your hard-earned money on, and it can be costly. If you start buying it in your 50s, the cost can range from $2,500 to $6,000 a year. The older you are when you start a policy, the more expensive it becomes, but the benefit can be worth it. It is important to choose the right plan for your situation and your budget. With actual long-term care, such as a nursing home stay, costing $5,000 to $10,000 a month, it is very difficult to self-insure for that amount, especially since the average person needs 3 years of long-term care.* Remember, if one spouse is in a long-term care facility and the other isn t, nearly all regular living expenses must still be met and Medicaid doesn t cover longterm care until your assets are depleted to a fairly low level. Fortunately, you can reduce the financial risk of long-term care with various optional insurance policies and new, innovative strategies that are now available. Today there are many good long-term care policies available, including some with higher deductibles and lower monthly payments. Choosing the right plan for your situation and your budget is something a skilled financial advisor with access to insurance experts can help you with. *U.S. Department of Health and Human Services 8 Wealth Enhancement Group wealthenhancement.com

9 8 You re likely to live for a long time. While the average American is likely to live to age 79, you are not the average American. In fact, according to the U.S. Census Bureau, if you ve already made it to the age of 65, you and your spouse are likely to live for nearly 20 more years. That means you should have enough assets to draw on for a long time or you will be in danger of outliving those assets. In our experience, most people underestimate their longevity. While illness or accident can strike at any time, most people will live a lot longer than they think 5 to 15 years longer. So even if you think you ll only make it to 77, you need to plan your retirement assets to last until you re 90. However, as we all know, our time will end someday. That means we should have a responsible and smart estate plan that minimizes taxes, carries out our wishes and is simple and clear for our heirs to administer. The more assets you have, the more important it is to plan your estate strategies. You can protect your heirs from paying these taxes, or at least a portion of them, through a variety of devices, including trusts such as a Credit Shelter Trust. This most people trust allows a surviving spouse to preserve the applicable exemption of the deceased spouse so that underestimate the money in the trust is not taxed at the time of the their longevity. first spouse s death or when the second spouse dies. In our experience, Estate planning and incorporating tax efficiencies into that plan is probably where you ll receive the biggest return on your financial services fees. Since this area is so complex and there are so many options, we highly recommend that you consult with an estate planning specialist who can explain, for example, how charitable contributions offer unique tax benefits and provide the satisfaction of seeing your money put to use for things you deeply care about. With proper planning, you and your favorite organization can enjoy the maximum value of your gift. Most organizations have specialists who can help set up these plans, but it is always a good idea to work with your own professional financial advisor as well. Call today to schedule a free financial review

10 9There will be another bear market. As the saying goes, It s not if, but when. Bear markets (and recessions) are a fact of our economic system. Although most are not nearly as severe as the downturn we experienced in late 2008 and 2009, a bear market is defined as a 20% or more drop in stock market value. While past performance is no guarantee of future results, historically, the stock market has always come back, and nearly always over a relatively short time period. However, if a bear market hits when you need to withdraw money from stock-based sources to pay for living expenses, a child s wedding or a grandchild s education, it can be devastating to your retirement investments. In fact, during your retirement years, it is highly probable that you ll experience one to three bear markets. While that fact may be discouraging, it is something to incorporate into your retirement plan. That s why it is so important to diversify your assets according to when you need to withdraw them. We advise clients to think of their assets as falling into three main categories: money you ll need to access in 1 to 5 years, 6 to 15 years, and then 16 years and beyond. Investments for these different circumstances need to be set up to work for your needs now and can be rebalanced as time goes by or if circumstances change. The asset strategies within these broader categories should also be diversified based on your overall goals, risk tolerance and income needs. Setting up and then managing this 3-tiered investment plan is both an art and a science and it requires a deft touch because it involves balancing money and emotions. A skilled financial planner can help you find the balance with a goal to provide you with a level of security that lets you sleep at night while simultaneously helping your assets grow to combat inflation. During your retirement years, it is highly probable you ll experience 1 to 3 bear markets. 10 Wealth Enhancement Group wealthenhancement.com

11 10 Once a parent, always a parent. One of the many wonderful things about being a parent is seeing our children develop into responsible adults with their own homes and careers and everything that entails. It is a source of satisfaction when our children are out on their own and economically self-sufficient. But as a parent of adult children, it is extremely likely that there will be times when they come to you with financial needs or opportunities. Maybe it is for a down payment on a house or for a loan to start a business or for help in putting a grandchild through college. Or perhaps they have hit a speed bump in life, like a divorce or job loss, or just need help getting new tires for the car or the roof repaired. It is a good idea to plan in advance for some assets that can be easily accessed and aren t subject to fluctuations in the stock market. Many of our clients find themselves opening their checkbooks more than once for their adult children. Those occasions usually come up unexpectedly and have to be dealt with immediately. That s why it is a good idea to plan for those occasions in advance with some assets that can be easily accessed and aren t subject to fluctuations in the stock market. Of course, you might also be faced with your own needs for sudden cash due to a major household repair, a legal claim or an unexpected medical condition. For any and all of these contingencies, an emergency cash reserve fund should definitely be a part of your overall financial plan. Call today to schedule a free financial review

12 11 Things are going to become more, not less, complicated. Retirement planning is going to become more complicated as time passes. With fewer pensions and more complicated tax, estate and legal regulations, it is simply harder to get everything organized, allocated and protected correctly. On top of that, handling large investments that must last for a long time can be very complex and it can be hard to keep track of everything. But there is help. Financial planners, like those at Wealth Enhancement Group, can help you manage your money when it comes to retirement planning, estate planning, insurance needs and tax planning. A financial plan must be smart, comprehensive and provide a good balance so that you can be confident it is achieving your financial goals and meeting your financial needs. The sooner you begin this process, the better; however, it is never too late to make improvements and do things even better. Remember that financial planning isn t a one-time event but rather an ongoing process that is continually refined and modified to meet changing situations and conditions. At Wealth Enhancement Group, we have an entire team of specialists and advisors to help develop your financial plan. Once your financial plan is established, we conduct annual reviews to help ensure your plan stays in alignment with your values and financial goals. Financial planning isn t a one-time event but rather an ongoing process that is continually refined and modified to meet changing situations and conditions. 12 Wealth Enhancement Group wealthenhancement.com

13 You ve worked hard your entire life to save for retirement. Now is the time to help ensure your financial future. We don t expect you to be instantly persuaded by our brief overview of the realities you face as you approach retirement. We do, however, hope you re interested, and maybe even intrigued, by the possibility of working with Wealth Enhancement Group and benefitting from our expertise. The best time to explore your options is right now, particularly if you re within 10 years of retirement. Call Wealth Enhancement Group today at to schedule an appointment for a FREE, no-obligation financial review meeting. Our licensed and registered professionals will happily answer questions related to your financial plan for retirement, and they ll explain how our team-based approach to wealth management may be the best fit for your needs. Make an appointment with a Wealth Enhancement Group advisor to review your financial plan. In this meeting, we will: Determine where you are now and what you want to accomplish. Review your current investment portfolio. Identify opportunities to protect principal and boost retirement income. Make asset allocation recommendations. Provide ideas to help you pursue your goals. At Wealth Enhancement Group, we believe we offer a fundamentally different approach to planning for retirement. Our firm was founded on the belief that all hardworking individuals, families and business owners should have access to the same level of knowledgeable expertise, sophisticated strategies, dedicated resources and unparalleled service typically offered to the ultrawealthy, enabling you to relax and enjoy your life now and throughout retirement. Since the mid-1990s, we ve based our organization on one principle: Do what s right for the client. By putting you first, we seek to provide advice that is always in your best interest, and to ensure that your financial future is based on your values and goals. Call today to schedule a free financial review

14 What we believe. Unique Roundtable Approach. We believe a team approach delivers better results than a single advisor can offer. At Wealth Enhancement Group, we call our team of specialists and advisors the Roundtable. It s a diverse team of financial professionals experienced in all aspects of financial planning including retirement income planning, tax strategies, investment management, estate planning and insurance working together to inform your Client customized plan. The Roundtable meets regularly to share best practices and stay on top of industrywide trends, opportunities and challenges. Investment Management Risk Mgmt Insurance ROUNDTABLE TEAM Financial Planning Dedicated Financial Advisory Team Estate Planning R O U N D TA B L E T E A M Proudly Independent. As an independent, privately held firm, we offer unbiased advice based on your values, goals and an objective analysis of market conditions. We have no proprietary products, no bosses on Wall Street, and no sales quotas to meet so you can be confident you re getting advice that s in your best interests. We offer a clear fee structure, and we actively work to reduce costs that don t deliver real value, such as those associated with commissions. As your steadfast advocate, we pass those savings on to you. Long-Term Partnership. We build and nurture a lasting relationship with you based on a thorough understanding of your values, situation and goals, so we can adjust your plan to meet your changing needs. Our approach aligns your financial plan with what s important to you and your family. It s just one of the reasons our client retention rate exceeds 97%.* Strategies Tax Retirement Income Planning To schedule an appointment with an advisor, call us today at or visit our website: wealthenhancement.com * Average annual retention rate January 1, 2010 through December 31, 2015 based on client households with assets greater than $100K in our existing offices. 14 Wealth Enhancement Group wealthenhancement.com

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16 Call us today. Understand your options for retirement planning and investment management by scheduling a free, no-obligation financial review meeting (For best service, please call between 8 a.m. and 5 p.m. CT) Corporate Headquarters 505 N. Highway 169, Suite 900 Plymouth, MN Advisory services offered through Wealth Enhancement Advisory Services, LLC (WEAS), a registered investment advisor. Certain, but not all, investment advisor representatives (IARs) of WEAS are also registered representatives of and offer securities through LPL Financial, member FINRA/SIPC. Wealth Enhancement Group and WEAS are separate entities from LPL. Wealth Enhancement Group is a registered trademark of Wealth Enhancement Group, LLC. wealthenhancement.com CF11R /16