Longer retirements present new challenges

Published 7:03 pm Friday, December 9, 2011

For anyone, retirement is an important milestone, and with today’s lengthening life spans, those retiring at or around age 65 may have two decades or more still ahead of them. With that in mind, it’s vital to structure a retirement plan — including disciplined spending budgets and realistic portfolio withdrawal rates — that can help you enjoy yourself longer, with confidence you won’t outlive your money. This is especially true for women, who typically live longer than their mates.

Longer retirements also mean retirees need to create reliable income streams that do not rely on dipping into their principal, at least not in the initial years of retirement. Developing an income stream usually involves working with components such as Social Security, a pension plan, IRAs, an investment portfolio and other assets. Each person’s mix of investments will be different, but the key is to not deplete them too quickly.

While there are a number of sophisticated computer models that produce formulas predicting how long a well-balanced portfolio will last at various annual withdrawal rates, a little common sense may serve pretty well. It’s obvious that the more you take out each year, the quicker you’ll deplete your retirement portfolio. The key is to find a balance. One quick tip: although many people want to celebrate retirement by splurging a little, the beginning phase of retirement is a time to be extra-cautious about spending so that more of your principal can keep working for you.

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Distinguish between needs and wants

Longer retirements also call for a relentless focus on expenses. You will have to be very honest about the difference between needs and wants. Develop a detailed cash flow plan — before you retire — that shows exactly where your money will come from and where it will go. Although many people assume their living expenses will decline when they retire, that may not be true. In fact, it may take a few years in retirement before you really have a good grip on what your actual expenses are.

Two of the biggest challenges for retirees are healthcare costs and inflation. Both are essentially unknowable, and both can have a major impact on your financial situation. It’s wise, therefore, to build a margin of safety into your spending plans, recognizing the reality that prices are going to rise and that you are going to have higher healthcare expenses as you age. For example, you may want to assume that your medical costs will rise 8 percent annually, while all of your other expenses will increase 4 percent every year. If they don’t rise that much, you come out ahead. But if you’ve planned for higher expenses, you’re less likely to get caught short down the road.

A critical part of planning for longer retirements is ensuring both spouses can manage the finances. Because discussing death isn’t easy, many couples don’t acknowledge that the spouse who handles the money (usually it’s one person) may be the first to go. That can create real problems, because it means the surviving spouse may have to begin handling financial matters, just when he or she is also struggling with the grief and disruption of a major loss. If you haven’t planned for one spouse to take over from the other, you haven’t planned sufficiently.

We’re fortunate to live in an age where many of us live longer and fuller lives. Now we need to plan accordingly. Work with your advisor to develop a plan suited to your unique needs, and stick to it.

This material was prepared by Raymond James for use by its advisors. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.

Stephen P. Poitevint is a Registered Principal and Financial Advisor with the firm of Raymond James Financial Services, Inc., member FINRA/SIPC, and is located at 908 Tallahassee Highway in Bainbridge, and can be contacted at (229) 246-7208 or www.poitevint.com.