Everyone Needs a "To Do" List. My wife and sister-in-law are the two most compulsive list makers I have ever seen. I would be seriously worried if I ever saw either of them without a list. I tease them about their compulsiveness but I secretly admire how much they accomplish by staying focused on a list.
I Don't Live By A List. But I freely admit that I might get more of the right things done if I did. One place where a list is particularly valuable is before you retire or decide to devote less energy to the world of work. Ideally, the list should be started at least a year before the event. The following list may not be totally comprehensive but it contains a number of things that you need to think about before you leave your job.
1. How Much Income Do You Need? It's surprising but a lot of people hate the exercise of putting together a budget or spending plan. Still, it's very important that you determine how much income you need to replace the income you are earning from work. I have clients tell me they need $5,000 a month only to find that the average from the past six months is $8,000. If they need only $5,000 a month what happened to the extra $3,000 they brought home every month. Now is the time to be realistic in estimating expenses. Of course, this is not to say that you can't identify areas where expenses can be cut but you might also add expenses for travel, recreation, etc. While I don't want to belabor the issue, the more through you are in this step, the more secure your retirement will be.
2. How Much Income Will You Have? In this exercise consider only those sources of income that you will have that are relatively secure such as a company pension, social security, or income from high grade government or corporate bonds. If the result of this step is equal to or greater than from step 1, you should have a relatively worry free retirement. If not, you are going to have to figure out how to make up for the shortfall.
3. The Most Secure Means of Meeting the Shortfall is Cutting Expense. Many retirees just accept the fact that they will always have a car payment and that a few dollars in credit card payments are acceptable. In fact, they usually aren't. Automotive and credit card interest is not deductible and it is quite difficult to achieve an after-tax return on investment equal to the interest paid on cars and consumer debt. Becoming debt free, with the possible exception of mortgage debt is a worthwhile objective.
4. Pay Particular Attention to Your Mortgage. Often, the best means of improving your post retirement cash flow situation is retiring or re-structuring mortgage debt. In order to do this, you sometimes have to think "outside the box". If you think your low interest mortgage with 10 years remaining is worth holding, think again. Often, it is the high principal payment, not interest, that is hurting your cash flow. Sacrificing cash flow today for a paid for house when you are 75 is a poor choice for many retirees. Of course, you can pay it off if you have funds available to do so but be very careful making these choices. A wrong decision here can have a profound effect on your retirement security for years to come.
5. Pay Attention to Social Security. In the 70's and early 80's the standard advice was to take your social security at age 62 because you will draw more than enough during the next three years to make up for the difference between the benefit now and that of age 65. Now that interest rates are lower and life expectancies are higher, this might not be the case. The most important factor is whether or not you might work part or full time after retirement. If you retire at age 62 and are forced to return to work because of boredom or financial pressures, you will be severely penalized for every dollar you earn over a set limit. (Somewhere around $12,000). You might be forced to pass up an attractive employment opportunity or pay that penalty if you receive your benefits early.
6. Don't Neglect Your Health Care. Many retirees have become accustomed employer- provided health care benefits at little or no cost while they were working. They are often shocked at how much they will have to spend to take over this responsibility themselves. The most critical time is the gap between retirement and medicare eligibility. Even after medicare takes over there can be problems such as the shrinking number of physicians accepting medicare or the high cost of drug benefits. You have six month after becoming eligible for medicare and electing to pay for medicare part B which covers doctor benefits. You have the same six months to decide a on supplemental policy. After the six month period you will pay a penalty for medicare part B and you may not be able to get a supplemental policy if you are in poor health. Medicare also has a drug benefit for little cost but you may still have to pay more than you are accustomed for prescriptions.
I didn't expect to devote so much space to this post. Obviously, I am leaving a lot out. I will cover some more in subsequent posts.
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