Last week we identified four bases you need to cover in your planning for retirement income: you need contentment for emotional health, a baseline budget for financial health, and a budget for both expected big stuff and unexpected bad stuff to make sure neither causes your financial house to collapse on your head.
A few years ago the Employee Benefit Research Institute released a study showing that “Households between ages 61 and 70 that made withdrawals even though they were not yet required to take IRA distributions (i.e., not subject to the required minimum distribution rules, or RMD) made larger withdrawals than older households, both in absolute dollar amounts as well as a percentage of IRA account balance.”
That sounds to me like some 60-somethings who may be spending too much money too early in their retirement. The chances they will run out of money seems very high to me.
When you are planning for your retirement income needs, keep a few things in mind about timing. Retirees tend to go through at least three spending phases:
Phase one: the go-go years. These are the early years of retirement, in which you have the most energy, the most health and the most money. Investments you’ve made in fitness and nutrition tend to pay off here, hopefully adding life to your years.
It is reasonable to assume you’ll spend more money during this phase of your retirement than any other. Just don’t overdo it.
Phase two: the go-slow years. Energy and possibly health have declined to the point that travel is less attractive than it once was. More and more of your life is lived within a five square mile radius of your home. You can assume you’ll spend less money than you once did.
Phase three: the no-go years. No one wants to think about getting to this stage. Perhaps you will not. But according to the federal government, about 70% of people will need some form of long-term care during their lives.
It is at this point that the roads diverge for those who prepared well and those who prepared poorly.
If you are unprepared and find yourself one of the 70%, you’ll have no choice but to spend your nest egg on long-term costs. The average cost of a nursing home stay in America is over $200 a day. The cost of an assisted living facility is about $4000 a month. And I personally know several situations where the family is paying over $10,000 per month to keep mom or dad at home.
You can prepare well by transferring this financial risk off of you and onto an insurance company with long-term care insurance. Also an estate planning attorney with expertise in this area is important. With either insurance or legal services, make sure you are working with a licensed experienced professional.
Want to be best prepared for these phases? Then start another phase now – the preparation phase.