If you spend a good portion of your day in a building like
an office or a school, chances are good that you've
participated in a fire drill. Those faux escapes give everyone
a chance to practice evacuating the building and give those in
charge an opportunity to identify and fix any potential
problems.
If retirement is on your horizon, it would probably make
sense to do something similar. Call it your "Retirement Fire
Drill." After all, sometimes you get to choose when you retire,
sometimes (through illness or layoffs) you don't. It's good to
be prepared.
So let's sound the alarm and pretend that today is the day
that you're transitioning into the next phase of life. How will
the planning you've done so far hold up in the real world?
Below are five areas to test.
Is your budget going to work?
You have made a retirement budget, haven't you? If not,
download a free budget worksheet . What will your sources
of income be once your paycheck stops? Do you have a realistic
estimate of how much that income will be? How about expenses?
Some people say you can live on about 70 percent of your
pre-retirement income, but is that realistic for you? There's
only one way to find out. Practice living for a few months on
the income and expenses that you've projected. Then re-examine
your budget and see if anything needs to change. If it didn't
work for a two month trial, it probably won't work for a 20
year retirement. Take what you learned and make adjustments as
necessary.
Is your asset allocation going to work?
If you retired today, how would your investments fare if we
had another downturn like 2008? Are you invested too
aggressively? Or how about if we got into a period like the
late 1970s and early 1980s when inflation increased by double
digits each year. Are you invested too conservatively for your
retirement income to keep pace? Shocks to your portfolio early
in retirement greatly increase your chances of running out of
money. You can minimize that risk by having your asset
allocation correct and by setting aside a year or so of
retirement income in cash so you can draw from that, rather
than your investments, in the event of a downturn.
Is your health care going to work?
You won't be eligible for Medicare until 65. Are you
planning on retiring before that? If so, how are you
planning to bridge the gap? Even if you wait until 65, do you
have enough set aside to pay for the premiums and co-pays
required under Medicare? Have you budgeted in the cost of a
Medicare supplement policy? Are there any health care issues
(e.g. dental work, operations) that you should take care of
now, before transitioning into retirement? And what about long
term care? What if you or your spouse became disabled or needed
ongoing professional care? Do you have a plan to pay for that
care that doesn't include spending down all of your assets and
leaving the healthy person in a financial bind?
Is your income strategy going to work?
If you and your spouse are 65, there's a 72 percent chance
that one of you will live to age 85. There's a 45 percent
chance that one of you will live to age 90. Will your income
last that long? Are you taking a sustainable amount from your
investments each year or are you in danger of running out of
money because you're taking too much? Will part of your income
(such as a pension or Social Security) disappear when you or
your spouse dies? Can the surviving spouse live on the
remainder? Rework your budget to factor in one or more of those
income shocks and then think about how you would respond.
Is your estate plan going to work?
If you plan on moving to a different state, have you checked
with your attorney to see if your will and estate plan
documents will be valid in the new state? What if you became
disabled or incapacitated? Do you have powers of attorney that
specify who takes charge? If that person is your spouse, what
happens if he or she dies before you? Does your will reflect
your current wishes? Do you have the correct beneficiaries
listed on accounts and insurance policies? Are your documents
organized and easily accessible? Do everything you can to have
your affairs in order.
How did you do? If you encountered a few problems, don't
worry. One of the great things about a drill is that it's just
practice. Take the information you learned from the fire drill
and tweak your plans to give yourself a better outcome. That
way you'll be ready when the real alarm bell sounds.
FPA member Joseph R. Hearn is the Vice President at
Teckmeyer Financial and author of the books If Something
Happens to Me and The Bell Lap: The 8 Biggest Mistakes to
Avoid as You Approach Retirement.