Today’s typical retirement ages of 65 and 66 are merely reference points. Normal retirement age, and those who just want out, is in the mid-to-late 50s. These are the men and women you see jogging on a sunny afternoon while listening to alternative music through their earbuds; working out at the gym; windsurfing; playing tennis, or sitting next to you at the concert. Many are healthy, wealthy and wise.
Unlike their parents, when these 50-somethings think retirement, they think preservation of lifestyle. However, regardless of age, redefining the next stage of life has its challenges and rewards. Individual needs, wants and financial situations vary. Therefore, each age group shares similar anxieties that go together with lengthy retirements: cash flow, management and expense management.
Clearly, this is not your father’s retirement
Twenty years ago, the model for common sources of retirement income was the “three legged stool.” People say it is outdated. But is it?
- The first leg – a long-term pension. It does most of the work, like the engine that drives the train, and is the source of the majority of lifetime income. Pensions barely exist anymore. They were replaced by 401(k) and 403(b) plans.
- The second leg – Social Security. The extra horsepower. When added to the pension, it makes up the difference in necessary monthly income.
- The third leg – personal savings. The caboose. It’s the period at the end of a sentence, always there when you need it.
With lifespans increasing due to better health maintenance, you can assume your retirement standard of living will, too. Investors share the same philosophies: less tolerance of the downside and more ways to protect and upside their retirement income, not dumping everything into bonds and participating in the growth of the equity markets, without losing sleep over a bad market or bad market decision.
Set realistic goals for income and manage the cash flow
Clearly, among other things, unexpected retirement disrupts cash flow. Financial plans are projected on retirement age, not 55, for example. So when advisors shift a portfolio from growth to income – from accumulation to distribution – a planned and sustainable income stream supplemented by outside investments and tax-wise considerations must be created and managed to allow this process to work.
Life insurance has proven to be the more efficient vehicle when passing wealth to the next generation. Proper planning involves knowing if you have a significant enough estate to pass assets to the next generation and also provide some level of protection for a surviving spouse. Equally important is having clarity about what your objectives, concerns and how your family will survive if you are disabled.
Should you pay off your mortgage?
This question comes up a lot, as housing remains the number one expense. That’s why it is especially important to discuss income, and meeting living expenses, with your Hefren-Tillotson advisor to reevaluate your lifestyle and help you determine if you need the big house before you retire. These are typical concerns to consider.
- What is your personal tolerance for making a mortgage payment?If you have the assets, and there would be no strain on them whatsoever to make the payments, carrying a mortgage you can afford to pay is okay.
- Should you pay off your mortgage?If paying off, consider opening a home equity line of credit at the same time. Should you need to tap into it, you’ll have access.
- Should you sell, downsize and move somewhere cheaper?When you sell you pay off the mortgage and make a profit. Should you take that profit and pay cash for a townhouse that’s smaller but cheaper in the same general area? Profit is nice … not having house payment and putting that money in your own account is even nicer – as long as it costs less to run the townhouse than it did the house.
You don’t necessarily have to get rid of all debt. Obviously, if you’re paying 10% or more in interest, this is oppressive debt. It must go.
But by and large, maintain a good credit rating to show lenders you have borrowing, purchasing and bill-paying ability. Besides, why burn up your cash paying for everything when you don’t have to? It’s in your best interest to know where to draw the line on borrowing. Keep one credit card that you can pay off each month and earn rewards for doing so.