Lifestyle choices, cash reserves, tax planning, estate planning, insurance, education funding and planning for life after work (retirement) are all important considerations for any comprehensive financial plan. While developing a game plan that ties all of your financial priorities together may help you to pursue your goals, it is critical to be sure that the plan you are implementing is appropriate and tailored to your goals.
Unfortunately, many people implement plans that are base upon strategies, scenarios and assumptions that may prove unreliable and unsustainable which in turn, can lead to undesirable outcomes. Use caution if you are considering the strategies below.
It is common for many of us to sometimes feel like we will never have enough money to retire. The fear associated with this often leads savers to look at extending their working years as a possible solution. While this can make sense for some, too often people assume that they will “never stop working” and use this as the solution for their financial planning concerns. While we are all living longer than ever before, relying on your ability to work forever may not be advisable or realistic as an assumption. Health issues, ageism and skill obsolescence may all contribute to limiting the length of our careers and or the earning potential during this phase of our life. While retraining and selecting high demand fields can improve job marketability, there is no way to predict how long health will allow one to work on either on a full or part-time basis. The problem with a “work forever” assumption is that its feasibility is largely out of your control, making it a challenging assumption to base your financial plan around. Bottom line – too often people make assumptions about how long they have to work without ever establishing a real financial plan to gain clarity.
Life expectancy assumptions
In addition to the “work forever” plan, many savers use a shortened life expectancy assumption to make retirement seem more feasible. In other words, they employ the “I am not going to live that long so I will not worry about it” method. This is yet another assumption that is based upon something you are unable to control and we all know that life expectancies are being extended, not shortening. According to the social security administration, at age 62, the probability of a man living to age 90 is 21 percent, the probability of a woman living to age 90 is 32 percent, and the probability of at least one member of a married couple living to age 90 is 47 percent. It is critical for those planning their future to consider the impact of longer life expectancies on the sustainability of their plan. Have you saved enough to have sufficient assets to age 90 or 95? Have you optimized your social security to help with longevity planning? Be careful when underestimating how long you might need to provide for the financial needs of you or a surviving spouse.
Because a home is usually one of the larger investments a person makes, downsizing or “rightsizing” your home is often viewed as a way to reduce costs and improve the quality of retirement. For many retirees, housing expenses can make up a sizable portion of their budget. Trading in a larger, more expensive home for something smaller may be a great way to reduce costs – especially if you can use the equity proceeds to eliminate the need for a mortgage on your next purchase.
Downsizing proceeds may also allow you to pay down other debts, replenish cash reserves or even provide a much-needed boost to your retirement savings. While this seems like a very logical plan, downsizing often falls short of expectations when it comes to being a panacea for improving your finances.
Reducing the size of your home may not necessarily reduce expenses as much as you might think. Why? Real estate tax reductions may be off set by new home owners association fees. Net proceeds after paying off debts, realtor fees, moving expenses and costs associated with the next home often net out less than people think. Its not that rightsizing your home is always the wrong approach it's simply that people need to have realistic assumptions about how much it will benefit their financial position once complete. Too often, people assume that downsizing will solve the majority of their financial concerns and it is important to be realistic with this approach.
Financial planning should use realistic strategies and assumptions that help you to pursue your goals. Since everyone’s situation is unique, consider speaking to your financial advisor to determine the most appropriate approach for your.
Kurt J. Rossi, MBA, CFP®, CRPC®, AIF® is a CERTIFIED FINANCIAL PLANNERtm Practitioner & Wealth Advisor. He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com, www.bringyourfinancestolife.com & www.Independentwm.com. LPL Financial Member FINRA/SIPC.