If you think saving for retirement is hard, just wait until you get ready to retire.
While it sounds like spending the money you've saved might be the easy part, it's far from it. The confounding factor of not knowing how long you'll live forces many retirees to walk the tricky line of spending frugally enough to last their lifetime, while not being so overly penny-pinching that they don't enjoy their retirement.
What makes matters more challenging are the decreasing popularity of pensions, which give pension holders a predictable amount of retirement income, and the rise of retirement plans like 401(k)s, which don't, and instead may overwhelm retirees with questions like, "What do you want to do with this $500,000 you've saved?" or "Which retirement accounts do I draw from and which investments do I sell in order to pay the least in taxes?"
And now there's a new type of financial planning professional — the Retirement Income Certified Professional, or RICP, which specializes in this stage of life. But is this a credential you need in a financial planner? We'll take a closer look.
This new credential was created by The American College of Financial Services. So far 270 people have become RICPs since the first full set of classes ended in May, and 2,900 more people enrolled in the coursework, according to Dave Littell, the RICP retirement income program director at The American College. The college designed it because of demand in the adviser community, he says. (Most of the people who become RICPs are already Certified Financial Planners™ or chartered financial consultants.)
And that's a key point: While some RICPs are Certified Financial Planners™, many are not. When you seek out your financial planner, one of the most important things is to make sure that your CFP® has enough retirement experience to help you.
"Ask about the planner's length of experience in working with pre-retirees and retirees, whether that is their primary client target, and what types of recommendations they typically make for those clients," advises Ellen Derrick, a CFP® with LearnVest Planning Services. "Because of the large dollar amounts that people typically have to invest by then, working with a fee-only planner can also help avoid any bias toward high-commission investments that may or may not be the best idea."
A good planner, she says, should have a solid knowledge of all types of income investments. "And of course," she adds. "Personal recommendations are a plus! If you can find someone who has been retired for several years and has been happy with their financial planner, that gives you a great place to start your search."
Here are five situations in which that expertise may come in handy.
1. You're in your mid-fifties and don't know what to do next
Five to ten years before retirement, you'll probably start thinking about what retirement might look like. At this time, your financial planner will likely help you figure out if you have a shortfall, and if so, how to catch up. If, however, you're on track, then a whole host of other questions opens up — like how to invest and help protect the money you've saved.
"There are trade-offs to make and no one likes to make trade-offs," says Littell. "But seeing an adviser and building a plan is about having someone help you decide what is really important to you: Do you want regular income, and are you willing to give up some of your assets for that predictability, to get a monthly check? Or do you care more that there's a possibility to have more income, recognizing that takes on more risk and you could have less income?"
If you decide that you want to "buy" yourself income when you retire, the various strategies a planner can help you weigh to receive income may include buying discounted bonds that mature at full face value at a later date (e.g., you pay $7,500 for a bond that returns $10,000 principal at a later date), deferred income annuities that promise a predictable income, or, for people who are hoping for a higher return, deferred variable annuities and deferred index annuities that provide a minimum amount of income if the annuity doesn't perform as expected.
As you can see, these are dizzying questions — and we haven't even looked at the other side: Deciding against buying yourself future income and instead keeping some or all of your money in the market. Some people go this route if they are bigger risk takers, aren't comfortable buying annuity income at today's interest rates, or have other income in retirement.
2. You're retiring and don't know what you should do with your 401(k)
If you have a 401(k) at work, when you retire, the plan will likely offer you a choice between taking an annuity (that usually starts paying out right at your retirement date) or taking the full lump sum. If you decide on the lump sum, a financial planner could help you figure out how to do so without paying taxes on the whole amount — by rolling it into an Individual Retirement Account, which would also have the added bonus of giving you more flexibility with your investments.
3. You don't know when to start taking Social Security
"People assume that if they retire they should immediately claim their Social Security benefits, and there are a lot of reasons you might want to defer," says Littell. "For the vast majority of people today who don't have a guaranteed source of income, Social Security is … an inexpensive way to buy income for life."
Although you can start taking your Social Security as early as age 62, you'll receive a decreased amount. But deferring isn't the automatic answer for everyone, either. A financial planner may be able to help you figure out when is the right time for you to begin — based on whether you are married or single, how long you are projected to live, and whether you need more annuity income or inflation protection.
4. You don't know how you should handle health care
If you retire before 65, you should figure out how to insure yourself, especially because, according to Littell, it could be expensive (like $20,000 a year for a couple). However, the new Affordable Care Act health exchanges could open up cheaper plans than were previously available.
Once you become Medicare-eligible at 65, a retirement planner can help you make some choices — whether to take traditional Medicare or a Medicare Advantage plan, which is offered by a private company and might have more benefits though generally a more limited group of doctors. If you go with regular Medicare, you may want to supplement your coverage, because traditional Medicare has some gaps. Then, there's the question of whether to enroll in Medicare Part D, drug coverage and, if you do so, which provider to go with.
A financial planner can help you make the various choices that will help you minimize your out-of-pocket costs, as well as analyze what potential future health problems could do to your retirement plan.
5. You don't know whether you should buy long-term care
"Let's say you're in your 50s or 60s, and you're seeing your parents spending all their assets on buying home care, and you suddenly realize, 'I should be concerned about long-term care expenses and needs.' People often see a relative or family member go through that and realize that they should have a plan," says Littell, adding that about 70 percent of today's 65-year-olds will need long-term care at some point.
Long-term care is not only extremely expensive — $87,000 a year for a nursing home, $20 for a home health aide for one hour — but also not typically covered by health insurance or Medicare. A financial planner can help you explore what option is best for you — while some people know that they can rely on family members to care for them, others may need to buy long-term care insurance when they are still well enough to be eligible for it.
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