STAYING INDEPENDENT
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 fulfil 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
organisation.
LOOKING AHEAD
The decade before retirement is a good time to take stock of
assets and obligations and make financial choices aimed at
maximising 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
- 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 people because medical insurance may not cover all
health care costs. If you consider buying insurance to supplement
this, shop carefully for a policy that supplements rather than
duplicates existing 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.
- Itemise 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.
Government 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 "authorised 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. 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 financial counsellor, other
financial advisor, or a solicitor before deciding whether home
equity conversion is appropriate.
