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November 21, 2016
November 21, 2016
Sometimes, the little things make a big difference.
You probably remember the proverb about how for want of a nail, eventually, the kingdom was lost. As you edge toward retirement, you don't want to lose your kingdom because of a detail you hadn't figured on.
Budgets and expense planning can be that overlooked little thing. Without a proper budget in place, your entire retirement plan might fail.
We can all agree that the laborious chore of budgeting is not glamorous; it's not the shiny thing that captures our attention. We don't usually talk about keeping track of household expenses while we're socializing with friends. But effective budgeting--like checking on that nail--will help pave the way for a more successful retirement.
Ways to invest your money seem always to be the first item of discussion with financial advisers. Don't get me wrong, investments play an important role for retirees, but I find in today's income-starved landscape, saving money through effective budgeting can translate into windfalls and can raise your bottom line more than the returns from any particular investment.
Here are a few "unsung" factors to consider when planning for retirement, beyond how to invest your savings:
Paying down debt.
Yes, if you have credit card and other revolving debt that is costing you 15% or higher in interest and finance charges, most agree this should be paid down or off. But what about a mortgage that carries an interest rate of up to just 3% or 4%
Many financial advisers recommend keeping the mortgage debt and investing the funds that could ultimately pay off that debt. But is that right for you? I have found many families simply prefer to remove the risk and unknowns and pay off the mortgage, especially if they can do so without incurring too much tax.
By not having a monthly mortgage payment, they are more confident that, no matter what happens in the markets or to their retirement assets, they always will have a roof over their heads and a place to call home.
I suggest you strongly consider the option of paying off your mortgage--even at a low interest rate--if you are conservative with your finances.
One reason advisers may recommend not paying off the mortgage is so clients will keep these funds in investments. This may be the right thing depending on the source of funds and other factors, but the adviser may be paid more to manage these funds than if the client pays off their debt. If you decide to go the route of investing these funds instead of paying off the mortgage, just make sure you fully understand the plan of attack, and be prepared if investments fail to earn enough to pay off that home debt later.
Study your health care options extensively.
Whether you are eligible for group coverage, Medicare along with a supplement or even a Medicare Advantage plan, how to pay for health care costs--which tend to mount as you age--is an important decision.
There are a myriad of health care options out there. On top of that, you'll find a variety of choices for prescription medications, which tend to blind-side some retirees who hadn't figured in the ever-rising costs of medicine. You should look at each option to determine which suits you and your budget best.
Don't forget to pay yourself.
Be it through investments, annuities or withdrawals from retirement accounts, budget a way to reimburse your savings account in addition to your fixed expenses. Having discretionary money means you get to enjoy things you want to do and maybe even some things you hadn't planned, such as trips abroad to soak up different cultures or the occasional one-time experience to attend an event.
Many financial advisers tell you to squirrel away four to six months of income for emergencies that can thrust themselves into your life without warning. That's good advice. Even with a focused monthly and yearly budget, things happen that sap our savings. We all have that one-time expense that can create havoc in the budget. Planning for that may be difficult, but has to be done.
You have to figure a way to replenish, through investments, both discretionary "mad" money and emergency funds. If you don't, your savings that may have been a good amount at the beginning of your retirement will dwindle and eventually disappear.
Budgeting expenses should be talked about before any advice is doled out about investments. If you can save $200, $300 or $400 a month by sticking to a budget, those savings would easily eclipse any profits realized by most investments. Think of it this way: if you are saving $300 to $400 per month by utilizing a budget and income plan, how much would you need to have in savings that may only pay 1% or 2% in today's interest rate environment without a plan?
That's like having tens of thousands--maybe even hundreds of thousands--of extra dollars over the course of your retirement. A budget plan, rather than an investment plan, should be the primary focus of a smart retirement plan, and a good financial adviser will stress the importance of budgeting expenses after retirement.
Isaac Wright, president of Financial Dynamics & Associates, is a comprehensive financial planner who has helped retirees for more than 15 years. He also is author of Navigate Your Way to a Secure Retirement.
Keith Morelli contributed to this article.
Investment advisory services offered through Global Financial Private Capital LLC, an SEC Registered Investment Adviser.
Copyright 2016 The Kiplinger Washington Editors
This article was written by ChFC, President, Associates, Financial Dynamics and Isaac Wright from Kiplinger and was legally licensed through the NewsCred publisher network.