Retiring Later But Planning Now

by Carrie Schwab-Pomerantz, CFP®, President, Charles Schwab Foundation; Senior Vice President, Schwab Community Services, Charles Schwab & Co., Inc.
February 28, 2008

Dear Carrie,

Do you have any advice on financial planning for older working citizens?

—A Reader

Dear Reader,

With more and more Americans choosing to work longer—and continuing to work at least part-time during their retirement years—this is a very important question. Financial planning is an ongoing process and, as you get older, you want to take steps to remain financially as well as physically healthy.

You don’t mention your age or the particulars of your financial situation, so I’m going to keep my comments very high level. But they should give you food for thought and provide some practical guidelines you can apply to your personal circumstances.

First and foremost, I think it’s important to realize that you won’t always be working. Whether it’s due to the economy, your health or personal choice, chances are you’ll phase out of your full-time employment at some point. To help make sure you’re financially prepared for the future, here are some ideas and recommendations you can follow today.

Review and adjust your investment plan
I’m assuming you already have an investment plan in place. If not, that’s absolutely the first thing you need to do. It would be wise to meet with a financial advisor to make sure you have an asset allocation plan that matches your goals and that your investments are adequately diversified across and within asset classes.

While it’s generally recommended that you gradually shift to a more conservative asset allocation as you get older, there’s no set timetable or precise formula for making a change. The right mix for you depends on your unique circumstances and feelings about risk. And no matter what your age, you want to keep some opportunity for growth.

Consider this general guideline as you review your own investment plan:

Start with a moderate allocation in your sixties. For example, 60% stocks, 40% bonds/cash might make sense.
Shift to a moderately conservative allocation during your seventies. A sample allocation could be 40% stocks, 60% bonds/cash.
Move to an even more conservative allocation for your eighties and beyond. For instance, 20% stocks and 80% bonds/cash could provide lower risk while maintaining an opportunity for some growth.

Also consider consolidating your assets. For instance, if you have assets in a 401(k) or similar plan with a previous employer, moving them into a Rollover IRA will give you more flexibility and control while maintaining the benefit of tax-deferred growth. And with all your assets in one place, it’s easier to see the big picture.

Set aside a cash cushion
Everyone should have at least three months of expenses in a very liquid account (for example, a savings account). But as you near retirement, you should increase this to 12 months. You don’t want to be forced to sell your longer-term investments at the wrong time in case of an emergency.

If you can, you might also consider keeping an additional two to four years living expenses in ultra-short or short-term investments, longer-term CDs, or a deferred fixed annuity as part of your fixed income allocation. Your money can keep growing, but you will less likely be forced to sell when stock prices have declined.

Increase your retirement savings
As I mentioned before, chances are you won’t always be working. So it makes sense now to take a good look at your retirement plan to make sure you’re on track. Do you know how much money you’ll need? Should you be saving more? Since you’re still working, you have the chance to increase your savings. One way is to earmark any annual salary increases or bonuses for your retirement account. Here are some additional thoughts on how and where to save:

If you have a 401(k), contribute up to the maximum company match. That match is virtually “free” money.
Pay off non-deductible consumer debt.
Contribute more to your 401(k) or to a traditional or Roth IRA. Don’t forget the available catch-up contribution for those 50 and over—$5,000 for a 401(k) and $1,000 for an IRA.
Contribute to your taxable brokerage accounts now and enjoy the current favorable long-term capital gains tax treatment when you make future withdrawals.

Make sure you’re covered
With rising health care costs, adequate insurance is an important part of any financial plan. While you may be covered by an employer’s group insurance now, it’s a good idea to look into health insurance options for the future. If you can continue with a group policy until age 65 when you’re eligible for Medicare, you’re lucky. Individual policies are far more costly than group policies and can be more difficult to get. But even with Medicare coverage, you’ll want to consider supplemental health insurance options and associated costs.

Long-term health care insurance is another issue. It can be expensive and premiums vary widely. However, according to the U.S. Department of Health and Human Services, at least 60 percent of people over age 65 will require some type of long-term care services at some point in their lives, so you should give it some serious thought.

You can keep premiums down by buying a high-deductible policy or one that has a longer waiting period before benefits are paid. And more and more employers are now offering some type of LTC insurance. Look into your options and shop carefully.

Check on your Social Security benefits
It’s smart to factor Social Security into your long-term planning. Your annual Social Security Statement shows you the estimated amount you can expect. It’s up to you to decide when to take it.

If you start to take Social Security payments before what the IRS designates as your “normal retirement age” (between 65 and 67, depending on when you were born), your benefits are permanently reduced, but you'll receive monthly checks for a longer time. Delaying Social Security past this age results in fewer checks over your lifetime, but you get credit for waiting, which means each check will be larger.

Here’s an important caveat: If you take Social Security before your normal retirement age and you’re still working, your benefits will be reduced $1 for every $2 you earn above the annual limit ($13,560 for 2008). After you reach your normal retirement age, you can make as much money as you want and still receive your full benefits, but income taxes may still be a factor.

The Social Security website is a great resource for the latest information. You’ll probably also want to talk to your tax advisor.

Think about your estate plan.
How you transfer your wealth should also be a part of your financial plan. An attorney can help you decide on a will, a trust or both. Here are a few things you can do yourself:

Talk to your family about your estate plans so they know what to expect.
Make sure your beneficiaries are up-to-date, especially if there have been any changes in your family circumstances.
Look into a Charitable Gift Account. It’s an easy and efficient way to manage charitable giving, while providing tax benefits.

Meet with a financial advisor.
This is a time in your life where meeting with a financial advisor may be the best course of action. An advisor can answer specific questions and help you zero in on tax issues, your tolerance for investment risks and market fluctuation, and other factors unique to your situation that may be beyond the scope of this column.

And, once again, I can’t stress enough the importance of retirement planning. Even if you want to work forever, you may not be able to. Have a transition plan in place. Think carefully about what you save and what you spend. Preparing now for the eventual day when you’ll provide your own paycheck will give you the peace of mind that you can continue your lifestyle, whatever the future holds.

Good luck!

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction and investment strategy for his or her own particular situation. Any examples provided are for illustrative purposes only and not intended to represent a specific recommended course of action you should pursue or imply results you should expect to achieve.

Data contained here from third-party providers are obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

(0208-3925)

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