Times are tough for everyone right now, but it’s an especially difficult time for the millions of baby boomers approaching retirement. Potentially retiring in the midst of a market crisis and severe recession has been added to the list of challenges retirees are already facing — longer life spans, delayed Social Security and employer pension benefits.
The decline in stock markets has likely reduced lifetime savings significantly for many people and declining real estate prices have lowered available home equity. Responsibility for secure retirement cash flow sits substantially with the individual. The fear created by the financial crisis may lead many people to assume they must work longer or cut back on consumption.
In a report entitled, “How the Financial Crisis May Impact Retirement,” UBS Wealth Management Research recommends that investors who are expecting to retire within the next few years implement a five-step process to help them make the assessments today that can secure their future:
Define your needs, wants and wishes. Not all financial goals are equally important to retirees. Some goals may prove to be unreachable due to a lack of assets, so it helps to prioritize and decide which goals are essential and which goals are just preferences — your wants and wishes.
Understand your net worth. Create a net worth statement, or simply list your assets. Obtain current valuations for assets such as your home, and estimate realistic growth rates. After inflation, growth rates for assets may be lower, and often, investors are too optimistic about what they can achieve in financial markets.
Budget for your lifestyle. While future investment returns are beyond your control, you can control your spending. Costs are often higher in the first few years of retirement when you may be traveling or fulfilling other life dreams. Later in retirement, spending tends to decline with lifestyle and then rise again due to health care costs. Your investment portfolio needs to be designed to meet projected expenses as they change over time.
Review your retirement plans and other investments, including tax status. Know what kinds of accounts you have, how they are allocated and what role they will play in your overall retirement plan. Keep in mind that how each is taxed — pre-tax, after-tax or tax-free. This will become increasingly more important as you start to think about spending down those assets. Reviewing your accounts or potential accounts will give you the information you need to make the best decision for asset location.
Have the right insurance coverage. This is just one example of how a seemingly minor detail of personal finance can have major implications on overall cash flow and retirement security. Good health care, liability and long-term care insurance packages are important to have to protect your assets from third-party claims and depletion. Reviewing and restructuring existing insurance coverage can help retirees protect themselves against unintended or unexpected cash flows.
The current economic climate posts challenging times for all of us, and individuals who are approaching retirement are in an especially unique financial position. However, careful assessment of one’s financial situation using the guidelines above will help individuals make the right choices to adequately prepare for retirement.
