One of the advantages of being a financial adviser who specializes in working with pre-retirees and retirees is I get unique insights into both the benefits and regrets of retirement planning. Based on those insights please consider the following before you retire.
1) Purchasing or refinancing a home
Remember banks lend money based on your income not your assets. I recently met with some folks who retired in their mid 50s. They will be living primarily off their savings until their pensions and social security income starts in their 60s. Unfortunately, they did not refinance their home while they were working and had good income. Even though interest rates have dropped, they are not in a position to refinance their mortgage because banks want to see a history of income before making a loan. Drawing interest and dividends from an investment portfolio is not looked upon favorably by lenders unless you have at least two years of income history from that source. So be sure to refinance or purchase your retirement home while you still have good income. If you have already retired, then you might consider using a single premium immediate annuity (SPIA) to generate income over a five-year period of time. The banks will look more favorably at income from a guaranteed SPIA contract than they would monthly draws from a money market account.
2)Budgeting for individual health insurance
One of the biggest expenses facing people who retire early is the monthly expense for health insurance. Not too long ago, I met with a couple who retired in their late 50s; who did not research and understand the full cost of health insurance before they retired. Many people’s employers provide their health insurance so they are not aware of the cost for individual health insurance plans.
Currently, a married couple in their late 50s, in Kitsap County, could be looking at monthly premiums for a high deductible HSA-qualified health plan that would start at $920 per month based on an $8,000 family deductible per year for the couple. The premiums would increase as deductibles decrease.
Federal health insurance premium tax credits do exist that may help reduce your out-of-pocket insurance premiums when you purchase the insurance through the government healthcare exchange. For example, if we use the same information for the couple above, then they would be eligible for a health insurance premium tax credit based on their modified adjusted gross income (MAGI). If their MAGI for the year was $55,000, then they would receive a $704 per month tax credit toward their premiums, and their out-of-pocket insurance premium would be reduced to $219 per month. If their MAGI was $63,000, then they would have to shoulder the entire $920 per month since they would not eligible for any of those tax credits. Click here to learn how to estimate your income for the marketplace.
Remember that income from a Roth IRA is tax free and is not counted toward your MAGI. If you are over age 59.5, have met the 5 year holding requirement and the distribution counts as qualified (non-taxable), then you may want to consider taking some of your retirement income from your Roth IRA instead to ensure your MAGI remains below the threshold to qualify for the premium tax credit. Click here to see a chart of the current income ranges that qualify for the premium tax credit. Also if you have health insurance through an employer plan (or former employer) or buy it privately then there is no credit to be had.
3) Creating a cash flow plan
Retirement is all about cash flow not your net worth. Without income you do not have retirement. Your income will determine your lifestyle in retirement so you need to understand exactly how you will meet your income needs. A good retirement cash flow plan should start with a good budget to fully understand how much money you spend every month/year. You should make conservative assumptions about future inflation and the rate of return at which your money will grow. Remember the sequence of returns within your portfolio can make or break your plan.
If you experience a significant loss in the year you retire, then it may be devastating to your overall future cashflow. You should also take into consideration your health and your family’s history of longevity to make informed decisions about when and how to start social security and pension income.
If you are married, then you also consider the impact on your cash flow if one spouse were to pass away or have an extended medical issue that required ongoing treatments or care not covered by traditional health insurance or medicare. I’ve learned the more conservative an income plan that covers that gap between your guaranteed income and your budget, the more confidence people have as they transition through retirement.
We can all learn from one another. There is a collective intelligence in specialization. You do not have to plan for retirement alone. Find someone who you can trust who specializes in retirement planning, and get a second opinion. “An ounce of prevention is worth a pound of cure.” Sometimes an outside perspective can help you see things that you may not be trained to see.
What are some of the things you have learned as you prepare for or transition into and through retirement?