Planning for Financial Independence in Later Life
Planning for Financial Independence
in Later Life
TAKING STOCK
As retirement approaches, it is important
for every
household to assess its financial identity (assess
its
finances). Waiting too long might mean missing
one or more
opportunities to preserve maximum financial independence
in the
future. To help get you started, can you say "Yes"
to the
following statements?
YES NO
We talk regularly and frankly about finances
and agree on our goals and the lifestyle we will
prefer as we get older.
We know our sources of income after retirement
how much to expect from each, and when.
We save according to plan and are shifting
from
growth-producing to safe income-producing
investments.
We know where our health insurance will come
from after retirement and what it will cover.
We have reviewed our life insurance and
considered options such as converting to cash
or investments.
We each have our own credit history.
We each have a current will or living trust.
We know where we plan to live in retirement.
We have anticipated the tax consequences of
our retirement plans and of passing assets on
to our heirs.
Our children or other responsible relations
know
where our important documents are and whom to
contact if there are questions.
We have executed legal documents, such as a
living will or power of attorney, specifying our
instructions in case of death or incapacitating
illness.
THE KEY IS PLANNING
"If only I'd known then what I know
now ...."
Looking to the future is key to financial
planning at any
age, but especially in the decade or so before
retirement. For
many households, retirement is a time to fulfill
dreams and
delayed ambitions. It also can be a time of anxiety
if you
postpone thinking realistically about the ways
your financial
identity will change--income, savings, investments,
credit,
insurance, job benefits, and perhaps living arrangements.
Meeting the challenge of financial management
will help remove
uncertainty and increase your available options.
Both partners
need to be involved in retirement planning and
may wish to
discuss their plans with adult children.
Many people neglect planning. Some prefer
to leave
financial decisions to the other partner, while
others simply
find it too difficult to talk about money. Whatever
the reason,
if you have not yet begun planning, you may want
to seek
pre-retirement planning advice from a professional
or a
community service organization.
LOOKING AHEAD
The decade before retirement is a good
time to take
inventory of assets and obligations and make financial
choices
aimed at maximizing future resources. These years
are typically
a peak earning period and they offer the chance
to reduce major
debts, such as a home mortgage, and increase savings
and
income-producing investments. Households faring
the combined
expenses of educating children and caring for
aging parents may
find saving difficult during pre-retirement years.
In these
cases, making a realistic financial appraisal
is more useful.
These are questions you might ask yourselves:
* What are our sources of retirement income
and how much
will each provide-monthly or in a lump sum?
* Social Security
* Pensions, IRAs, Keoghs
* Savings and investments
* Sale of assets
* Home equity
Find out all the options for receiving
your pension
benefits and whether they are insured. Find out
if pension
benefits will be reduced if you receive Social
Security. Read
carefully and consider the consequences of signing
any
documents relating to a reduction in spousal pension
benefits.
One of you may need this income if the other dies.
When estimating how much income can be
expected from these
and other sources, remember to take inflation,
taxes, and
market fluctuations into account. Depending on
your anticipated
income potential, you may decide to postpone retirement
a few
years, or plan to work part-time.
* Is our health insurance adequate for retirement?
The cost of serious or long-term illness
is a major burden
for many older Americans because Medicare does
not cover all
health care costs. If you consider buying "medigap"
insurance
to supplement Medicare, shop carefully for a policy
that
supplements rather than duplicates Medicare coverage.
Long-term
health insurance for nursing home or home health
care is new.
Examine all the terms of any such policy before
you buy.
MANAGING WHAT YOU OWN AND WHAT YOU OWE
Professionals say that retirement income
should be 60-80
percent of current income to maintain the same
Standard of
Living. If your financial picture does not correspond
to this
guideline, you might prepare a budget and a cash
flow statement
based on income and expenses during the preceding
6 to 12
months in order to identify gaps in income and
find ways to cut
spending.
On the expense side:
* List current expenses such as housing,
food, health
care, transportation costs, and other financial
obligations.
* Include a contribution to savings. Experts
recommend
a reserve fund to cover 6 months of basic
expenses.
* Itemize personal expenses for such things
as clothing,
travel, entertainment, and hobbies.
* Develop habits such as price shopping,
menu planning,
coupon dipping, and monitoring your use of
credit
to guard against overspending.
On the income side:
* Think through contingency plans in case
expenses begin to
outpace income or one partner becomes seriously
ill.
* Remember that credit histories in your
individual names
can be invaluable in retirement, or in the
event of
widowhood or divorce. Credit can be essential
to meet
unexpected or emergency expenses.
Federal regulations prohibit age and gender
discrimination
in the granting of credit. Lenders must treat
all income alike,
whether from employment, retirement benefits,
or other reliable
sources. Still, it may be easier to get a national
credit or
charge card in your own name while you are employed.
If you
have never been employed, you can still build
a credit history
by becoming an "authorized user" on
your spouse's account.
* Consider selling assets or converting
life insurance into
cash as another possible way to meet expenses.
* Investigate Home Equity Conversion (HEC)
as an option if
you own or nearly own your home and need
money. There are
several kinds of home equity conversion loan
plans,
including Deferred Payment Loans and Reverse
Mortgages,
where you borrow against home equity and
receive monthly
or periodic cash payments.
Unlike home equity loans or lines of credit,
reverse
mortgages involve no monthly repayments as long
as you live in
your home or until a predetermined date. These
plans do involve
costs for application fees, closing costs, and
interest, and
they may affect eligibility for public benefits
programs such
as Medicaid. Generally, you can decide how to
spend the money.
Reverse mortgage plans are not all the same, so
it is important
to read the loan documents carefully. Check with
a trained HEC
counselor, other financial advisor, or an attorney
before
deciding whether home equity conversion is appropriate.
LEGAL MATTERS
You can use several legal tools to maintain
control over
your affairs in later years. These will enable
you to decide,
while healthy and alert, what you want done in
the event of
death or disability. Be sure to discuss any arrangements
with
your survivors to save them from facing difficult
decisions and
to give them peace of mind, knowing they are complying
with
your wishes.
* Wills--If you do not have a current will,
the state, not
you, will decide how your assets are divided.
Such legal
documents as Living or Revocable Trusts offer
ways to
avoid probate.
* Trusts--This device lets you decide who
would be
responsible for your financial affairs if
you became
unable to manage them yourself.
* Powers of Attorney and Living Wills--Powers
of attorney
typically assign responsibility for financial
matters to
another person. Some apply to health care
decisions as
well. You can use a Power of Attorney or
a Living Will to
state in advance your wishes in case of an
incapacitating
or life-threatening illness. Doing so is
essential if you
want your family to know the circumstances
in which you
wish to decline life-support measures.
RELOCATING OR STAYING PUT
Where to live after retirement is a major
decision.
Perhaps you plan to relocate to a more favorable
climate or to
be near family. Research the consequences of such
a move in
terms of the basic cost of living, access to health
care, and
state and federal tax obligations.
If you are considering the advantages
and disadvantages of
selling your home, whether or not you plan to
relocate, these
are some questions to ask:
* Can we afford monthly payments for mortgage,
taxes,
utilities, and maintenance?
* Will one or both of us be able and willing
to take care
of the house?
* Is the house a suitable place to live
as we grow older and
less agile?
* Will we need to draw on our home equity
as a source of
income or credit, or would we have more options
if we sold
the home and invested the proceeds?
In addition to owning a home or renting
an apartment, a
number of other housing options may be available
in your
community, many of which offer savings on housing
expenses.
These are some alternatives to consider:
* House-sharing for help with chores or
added retirement
income;
* Group living in a private home or one
sponsored by a
social services agency;
* Accessory apartments, or mobile or manufactured
homes,
including ECHO (Elder Cottage Housing Opportunity)
housing
which, if zoning laws permit, can be installed
on the
property of an adult child or other relative;
* Condominiums or cooperatives which have
the advantages of
home ownership without the burden of maintenance;
* Retirement communities which may offer
companionship,
recreation, and sometimes medical and housekeeping
services.
SPECIAL CONSIDERATIONS
An important part of financial planning
is anticipating
how to handle bad times. Prudent planning includes
learning
about public and private benefits programs. In
most
communities, governmental and private agencies
offer services
to help care for older persons, such as low-cost
medical
clinics, home health care, housing options, adult
day care, and
chore services.
The local Social Security Administration
office has
information about entitlement programs such as
Medicaid,
disability insurance, food stamps, and Supplemental
Security
Income. Ask about your state's Medicaid "divestment"
rules
which permit transfers of some assets to other
people if done a
specified length of time before applying for Medicaid
(usually
at least three years). Divestment is a precaution
some take to
avoid "spousal impoverishment" when
all the family's assets are
spent before a sick family member can be eligible
for Medicaid
assistance.
When arranging family matters, it will
ease your
survivors' emotional burden if you let them know
your
preference for funeral or memorial arrangements.
You can handle
these matters yourself by planning through a non-profit
cooperative memorial society or by prepaying at
the funeral
home of your choice. If you decide to pre-pay,
be sure you or
your survivors can cancel the contract should
you move or
change your mind. Planning ahead and using comparative
shopping
skills can save thousands of dollars in funeral
expenses.
PLANNING TO STAY INDEPENDENT
It's never too early to start retirement
planning, and
never too late to make adjustments in your financial
situation.
Whether wealthy or not--and it is probably more
important for
those who are not--investigating your options
and making
practical choices now can allow you to stay in
charge and meet
future financial goals.
FOR MORE INFORMATION
For additional information and brochures...
Consumer Information Catalog
Pueblo, CO 81009
Cooperative Extension Office--local office
is listed under
State, Federal or County Government in the phone
directory
American Association of Retired Persons
Consumer Affairs, Program Department
1909 K Street, N.W.
Washington, DC 20049
(202) 728-4355
Federal Trade Commission, Public Reference
6th and Pennsylvania Ave., N.W.
Washington, DC 20580
(202) 326-2222
National Foundation for Consumer Credit
8701 Georgia Avenue, Suite 507
Silver Spring, MD 20910
(301) 589-5600
American Council of Life Insurance (ACLI)
1001 Pennsylvania Avenue, N.W.
Washington, DC 20004-2599
(202) 624-2455
Health Insurance Association of America (HIAA)
1025 Connecticut Ave., N.W.
Washington, DC 20036-3998
(202) 223-7780
Continental Association of Funeral and
Memorial Societies, Inc.
7910 Woodmont Avenue
Bethesda, MD 20814
(301) 913-0030
This is one of a series of brochures about
building and
maintaining a financial identity--both as an individual
and as
a partner in a two-income household. The series
is about
selecting and using financial services and service
providers.
It covers credit, investments, financial services,
job
benefits, and financial planning.
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