Insights Live: Retirement Income Planning | Fidelity Investments
Jason 0 Comments Retire Wealthy Retirement Planning Tips for Retiree's
JONATHAN LAMOTHE:
Hello, everyone, and welcome to the latest
Insights Live, retirement income planning, going
from saving to spending. Today's webinar is the first
of two webinars we have focused on retirement income. Part two is going to
take place on November 9, and it's going to focus on
strategies for RMDs, IRAs, and more. So please ensure you
register for this one as well by visiting
fidelity.com/webinars or keep an eye out for the
email invitation. My name is Jonathan Lamonthe,
vice president of webinars here at Fidelity. And today, we're
going to be talking about a transitional period
in life, the time when you go from earning
income and saving it to living on those wages. We do have a lot
to get to today.
But I truly want to thank
you for taking some time out of your day to join us. I also want to point out that
if you are watching on a laptop or desktop computer,
you're going to see a blue button at
the bottom right hand corner of your
screen to download a great document filled with
a lot of resources that are focused around today's topic.
As always, before
we begin, I would like to mention that Fidelity
does not give legal or tax advice, and nothing
we discussed today should be interpreted
as legal or tax advice. The information we
are providing is going to be general in
nature, and it may not apply to your situation. If you do have legal
or tax questions about your specific
situation, we do encourage that
you talk to your tax professional or your attorney. So with that, I'd like to
turn it over to our moderator today, Ms. Ally Donnelly. Ally, it's all yours. ALLY DONNELLY: Thanks, Jonathan. And thanks to you, our
viewers for tuning in. This is going to be
a great discussion. And we also appreciate
you sending your questions during registration. They help shape
today's discussion. And if we can, we'll pop in
a few more live as we go.
Like Jonathan
said, retirement is a time of transition, when
it comes to your money, especially. You might be wondering what
your spending will look like or whether your
savings will last. We're going to cover all
of that and so much more. So let's meet our panelists. Panelists, could you introduce
yourselves and also share the perspective you bring
to the conversation. Rita, why don't you kick us off. RITA ASSAF: Great. Well, first of all,
thank you for having me. So I'm Rita Assaf. I am responsible for Fidelity's
IRA products and small business retirement products. And what that means is we
help clients understand which product is best for them,
and then how to save on them, and then how to spend
through them once they transition to retirement. ALLY DONNELLY: Terrific. Michelle. MICHELLE HOWELL: Thank you. My name is Michel
Howell, and I'm a vice president,
financial consultant. I collaborate with
individuals and their families to discuss financial planning
topics such as retirement income planning, tax-efficient
investment strategies, navigating financial transitions
such as death and divorce, retirement cash flow
strategies, and also wealth transfer techniques.
I've worked in this
space for over 20 years. And I'm located in the Edina
Minnesota Investor Center. ALLY DONNELLY: Excellent. Jerry, fill us out. JERRY PATTERSON: Well,
greetings, everyone. Jerry Patterson,
excited to be here. I am responsible for Fidelity
Investments Life Insurance Company. We focus on fidelity.com
insurance and protection offerings, including things like
long-term care insurance, life insurance, and annuity
income solutions. Prior to that, I spent
30 years with a number of large financial
services company focused on helping people manage their
money, plan for retirement, build estate plans,
and prepare for and plan for the unexpected. ALLY DONNELLY: Great. All right. Let's get into it. Michelle, I'm going
to start with you. As someone who talks to
clients every day, and you've worked with so many
people on this transition, so help us understand,
what are some of the challenges your
clients talk about in going from
saving to spending? MICHELLE HOWELL: Yeah. There are really
two major challenges I think of in this space as
clients are transitioning from saving to spending. For individuals who have
saved their entire lives, often, there's just a
psychological adjustment that needs to be made
around spending, right? So the best way I can
bring that to color is just through a client
example, one of my clients who's definitely a saver.
I mean, he is at
his core a saver. He also is very passionate
about running and likes to jog. And for years, we'd met
and discussed the fact that he had a very
solid financial plan, but he really wasn't spending
enough in retirement. And his goal was to add to
his discretionary expense by doing some other
things he enjoyed and pursuing additional hobbies. So one time, he
comes into my office and he says, Michelle,
you'll be so proud of me. I actually spent some money. And I was excited. I thought, OK,
well, what property are we going to discuss? Are we looking at a new
vehicle out in the parking lot? Like how did you
spend the money? And he proceeds to tell
me a story about how he went to a local shoe store,
bought four pairs of running shoes at a negotiated price
because he was buying in bulk and spent $500. For most of us, we would
chuckle at that, right? But for him, that
was a huge hurdle. That was a milestone in his
ability to spend in retirement. And conversely for those who
would identify themselves as more of a spender, there's
some coaching conversations that need to take place to
make sure that when you retire, you're not just jumping in and
spending too much too soon.
Logistics and also
monetizing a portfolio is probably the
number one concern people have when they're
transitioning to retirement. Here we've saved this big
pot of money, this nest egg all of our lives. But how do we actually turn
on that spigot of cash flow? How do we get from this nest egg
to monthly cash flow and income streams to support ourselves? And really, that's a question
that has some simple solutions. So at Fidelity, we like
to work through a concept and go through an exercise
called salary and bonus structures.
And while in retirement,
we can actually construct and replicate
the same compensation structure that
many people enjoyed while they were still working. For those who prefer
their retiree income to function like a salary
because of its consistency and reliability, we aim to
cover their essential expenses through reliable income sources
like Social Security, pensions, or other predictable
income sources. The other category of expenses
are discretionary or some of the negotiable expenses. And while working,
these are expenses that are often funded through
savings accounts, from a bonus, or some other windfall
source of income. These expenses are often not
rigid and time-bound either. So in retirement, we like to
create a scenario where you've got some flexibility so that
you can incur the expenses when you're comfortable from a
psychological perspective or perhaps after we've had
a nice run up in the market and you're feeling comfortable
about taking a larger distribution out
of your portfolio, to fund the fun stuff
like the three-week trip to Italy, the kitchen renovation
you've been building up for, or perhaps to take a
huge trip to celebrate a milestone anniversary
across your family.
ALLY DONNELLY: OK. So I'm definitely putting Italy
and milestone anniversaries on my list. But where should
someone start when they're trying to estimate
those retirement expenses? MICHELLE HOWELL: Ally, this
is really the fun part. Retirement is what you make it. From how you choose to prepare
for retirement and also how you choose to spend
your money in retirement. An easy place to
start here is just to think about expenses that
are essential in your budget. These are non-negotiable
costs that everyone incurs. Perhaps it's property tax,
utilities, insurance costs. If these expenses aren't
readily known, that's OK. There's an easy
starting point, which is the fact that most bank
statements as well as credit card statements actually provide
a yearly spending summary.
And we can use that
as the foundation for how we build your budget. As for health care,
at Fidelity we also do research in
this space, and we can help you estimate expenses
that you might incur prior to Medicare eligibility
as well as when you're covered by Medicare. And then from here,
you get to dream. What do you want to
you in retirement? What does that look like to you? What other hobbies
or lifestyle choices do we need to incorporate
in the budget? Is there regular travel? Are there golf memberships? Did you always dream of becoming
that master gardener and there are some expenses that you
need to approach to get there? Those are all things we
can tack into the budget after all of those
building blocks. Lastly, I would say don't
worry about having everything precise. The markets are
definitely not static nor are any of our lives. So things change, and it's your
financial consultant's role to keep up with all of
those shifts taking place. And along the way, we'll share
our experiences and working with others. We'll also give you insights
around other retiree habits.
And in some cases, we'll
provide some transparency and some tough conversations
if the expenses start to compromise the sustainability
of your overall retirement plan. ALLY DONNELLY: OK. So Jerry, let me turn to you. You hear everything
that Michelle is saying about estimating your expenses. But then where do you
start to actually create a plan to make sure you
can cover all the costs? JERRY PATTERSON: Yeah. So for sort of very
first starters, we use a discussion framework
at Fidelity called EPG. It's very popular
with our clients. And it's a great way to begin
the overall planning journey. It's also a great framework
to revisit a plan that you may have done in the past. And through this framework,
we organize the discussion around retirement planning
into three broad categories. E for emergency, P for
protection, and G for growth. E for emergency, we need to
ask ourselves the questions, are we prepared for an
unexpected financial emergency? Do we have enough liquid
funds, for instance, to cover our bills
for six months, which is a rule of thumb
that many people use.
The P for protection,
we ask ourselves, do we have a plan to protect
the income we need to cover our essential expenses? Michelle referred to
predictable sources of income like Social Security,
like pensions. But what happens
if you have a gap between your essential
expenses and Social Security or pensions? Can things like
annuities play a role to close that gap to make sure
that you can fund your income needs as you go
forward in retirement? Do you need long-term
care protection, or are you comfortable
self-funding a long-term care benefit if it should
occur during retirement? And then G for growth,
the big question is, how are you going to invest
the rest of your nest egg after you've set aside
that money for emergencies and you've installed the
protection solutions that you think you need as well? How important are
things like maximizing the legacy you leave to your
heirs versus maintaining your current lifestyle? So G for growth is
really at the heart of the investment strategy
underneath your nest egg.
A good conversation
using this framework usually leads to the development
of very specific goals and investment and
protection strategies to ensure that you're
going to meet those goals. I'd encourage you
try it yourself. You take a piece of paper,
write E, P, G across the top. Write down the
questions that come to mind when you think
about emergency, protection, and growth. And even write down the answers. That's exactly the
kind of conversation we go through with
our clients when you meet with
people like Michelle at the beginning of
the planning process. And like I said, our
clients find the framework a really, really great
place to start the planning conversation. ALLY DONNELLY: Yeah. And I think that is. Like get the
conversation started.
Even if it's in your own
head, because when you really start to think about
it, that's where things come to take shape. But Rita, I have to
ask you, so Jerry's got this great framework. But how do you then
allocate your resources to fit those different
types of expenses? RITA ASSAF: It's
a great question. So in general, a
retirement income plan will cover different
income streams to cover different expenses.
And the reason for this is
it allows for flexibility, but it also reduces risk
that too concentrated on one income source. So in general, what we say
is to protect your income from market risk. Essential expenses– so
think of housing, utilities– these should be covered by
guaranteed income sources like Social Security,
like annuities. And the reason for that
is because they keep up with inflation. And actually, this
just in this morning, the Social Security
Administration just announced that they are
increasing 2024 Social Security benefits by 3.2% because
of cost of living. And this is a little
over from 2023, which was I believe around 8.7% But it has been higher
than the average that we've seen over
the last 20 years, which has been generally around 2.6%. But then when you look at
discretionary expenses, this is where you want these
covered by your savings or investment income so that
if there is a market downturn, you can cut back without hurting
your day-to-day expenses. And I also would echo
what Jerry just mentioned, which is an emergency fund.
So just like today the general
rule of thumb as you're working is if you happen
to lose your job, can you cover about six
months worth of expenses through your emergency fund? Well, we also want to consider
that in retirement as well. And can you tap into available
cash or short term investments should an emergency arise? ALLY DONNELLY: Yeah. Let's look out a bit
further because all of you here have mentioned change time
and again, that life is not static. So most of us don't keep
to a single spending plan year-after-year realistically.
And I mean, retirement
could be 30 years or more. So how does spending
during those years typically change over time
from what you see with clients? RITA ASSAF: So we've generally
seen sort of three stages that clients can experience. And they will vary, obviously. And they come with
different spending habits. So the three stages– and I'll try not
to trip over this– are the go-go years, the slow-go
years, and the no-go years. But by understanding
these stages and their different
spending habits, it can make you feel
much more confident that when you go to
your retirement plan, you're covered for all of these.
So I'll start with
the go-go years. These are generally at the very
beginning of your retirement. You're excited, you're active. You might be traveling, you
might be trying new hobbies. So you're generally
spending more because you're out and about. And then there are the slow-go
years, which is generally a period of transition. So you might be moving from an
active lifestyle to one that's a little bit more balanced. You might be spending more
time on relationships, friends, time with children and
your grandchildren. And it usually means
you're spending sort of comes down a little bit. And your priorities may shift. So you might be more concerned
about financial security and ensuring that
your savings last. And then finally, there
are the no-go years, which is generally
dependent on your health. This is the hardest to predict. It's also the most
emotional because it really does depend on your health.
And it generally
means that you're less active because of it and
that you have higher health care costs. It's also when you're
typically contemplating end of life plans or legacy plans. And this is where planning
does become critical because you want
to ensure you have sufficient savings to cover
these medical expenses and potentially long-term care. ALLY DONNELLY: Yeah. Yeah. I mean, of course, health
care spending is significant. But Jerry, once we hit
65, there's Medicare. So is that kind of a blanket,
so to speak, for our health care expenses? JERRY PATTERSON:
Great question, Ally. Medicare continues to be a
critical financial pillar in the US retirement system. Despite what you see
in the headlines, it's still an
important safety net for millions and
millions of Americans who are retiring and depend
on it for health care.
And for those of you who are
at that critical age of 65 or getting close, don't forget
that open enrollment starts in three days on October 15. So it's right before us. It's top of mind for a lot
of Americans right now. I think what's important
to note about health care and Medicare when you
retire is not everything is covered under Medicare. And even of those
items that are covered, it's not always covered 100%. And there's a lot
of costs we're going to face in our older years
that feel health-related that aren't covered. These include things like
certain prescription drugs, dental care, chiropractic
services, long-term care.
And even things like
foot care and acupuncture are not covered. And don't forget that we're
all responsible out-of-pocket to pay 20% of all
medical costs incurred and Medicare pays the rest. And this can add up to a lot
of money as we grow older. And the likelihood of
these costs emerging increases as we go grow older. In terms of how to address
those gaps and what gaps you may have is a really,
really, really important step in your overall planning. It's important to investigate
plans that are out there, whether that's things like
Medicare Advantage plans, whether it's Medigap or
med supplemental plans or standalone prescription
drugs or standalone dental plans or vision plans.
There's a whole host
of solutions out there that can help you
close those gaps and address things like
coinsurance and copays if those are things
you're uncomfortable with or to get you coverage
that for things that you're not going
to get under Medicare. So there are
solutions out there. And in the planning process,
it's really important as you hit 65 or you start to
creep up on 65 to investigate all those options
because they don't all work in perfect harmony.
So sometimes when
you choose one, it doesn't make sense
to choose another. And sometimes, one
perfectly covers the gap like let's
say you're looking for dental insurance
that's not covered through original Medicare. Well, Medicare Advantage
might provide you with that coverage
you're looking for. But this is an
important, important step in your planning process as
you transition into retirement for sure.
ALLY DONNELLY: Yeah. Yeah. I mean, clearly, health care
is a major expense for retirees that are on people's minds. But Rita, how can someone start
estimating what their cost might truly look like? RITA ASSAF: Yeah. So health care
expenses in retirement are also the biggest stressor. In our research,
that's what we've seen. It's how do you even
try to estimate that? So Fidelity has done some
research around this, and they found that a single
person aged 65 in 2023 would need almost $158,000 saved
after tax to cover health care expenses in retirement. And for a couple aged 65, they
would need almost $315,000. So that's just on average. It'll obviously vary for
your personal situation. But this is where Medicare
research will be important. And Fidelity has resources
that can help you, and our financial professionals
are great at walking you through this. But as Jerry just
mentioned, there are different Medicare options. There's also supplemental. So you want to do your
research to understand what different options
are appropriate for you and what the premiums
would be and what the out-of-pocket
costs would be.
And this includes
what prescription drug plans there are because that's
the biggest unknown as well. And out-of-pocket expenses can
vary by the different Medicare option you choose. And it can include monthly
deductibles, coinsurance, copays. So one way to estimate
these costs is once you settled on
an option, calculate your monthly premium based on
the type of coverage you have. And then keep cash for
out-of-pocket expenses. And out-of-pocket
expenses can vary, but you can also
look at expenses that you might have seen in the
past, how many times have you visited the doctor in the
last year, how many times have I gone for acupuncture,
those types of things to help come up
with that estimate. And Michelle said this earlier. It's not going to be
perfect, and that's OK.
But even getting to
this level of detail will just make you feel
a lot more comfortable. ALLY DONNELLY: Yeah. Yeah. Let me follow up there because
estimating costs are one thing. But how do you help
folks strategize how they're going
to manage the costs? RITA ASSAF: One
way to help manage the costs is through health
savings accounts or HSAs. So you might have
heard about these. They're often described
as triple tax-advantaged. And what that means is that
the contributions are tax-free. The investments grow tax-free. And your withdrawals on
qualified health care expenses are tax-free. But in order to
contribute to an HSA, you will need to be enrolled
in what you generally hear is an HSA-eligible health plan. These tend to be higher
deductible type health plans. But you know I would say,
even if you don't have access to an HSA, it's usually
prudent to set aside some cash specific for health care. But since we're on
the HSA kick, there are some interesting things how
you can use HSAs in retirement. I would say one watch out is
that once you're on Medicare, you cannot contribute
to your HSA.
Otherwise, you'd be
subject to tax penalties. But once you are on Medicare
and if you've had an HSA, you can actually use it to pay
certain expenses like premiums. And a real fun fact about the
HSA is that after you turn 65, you can use it on
whatever you want. It does not need to
be on health care. So you want to buy a boat? You can do that. But it won't allow you to
take full advantage of the tax savings because you are required
to pay state and federal taxes if applicable.
But this is similar then to a
401(k) when you're taking out a withdrawal, you do have to
pay state and federal taxes. So pretty much puts
it on par to that, but you do lose that
third tax advantage, which is being tax-free when
used on health care expenses. ALLY DONNELLY: Now, those are
great things to point out. I mean, clearly, the
cost of health care often exceeds what
we're estimating. So what other
spending curveballs tend to pop up that you
can think of, Jerry? JERRY PATTERSON:
Good question, Ally. And yeah, health care can be one
of those definitely curveball costs. You can have health care shots
deep in retirement that can have huge financial
consequences. . But there are
other things that I think are important
to think about that could come at you infrequently
or even as a one-time cost.
Think about the need to replace
your car during retirement. For me, I've always liked to
drive a car under warranty. And that requires me to go into
car-buying mode every three to five years. And I'm in that mode right now. And I bet there are
plenty of folks listening that share my sentiment that
that's not a fun mode to be in. But I'm there again right now. But given the likelihood
that I'm probably going to drive a lot less in
my retirement years, that's probably an approach
I need to rethink.
But I still need to
incorporate and anticipate that cost is going to come
whether it be 3, 5, or 10 years down the road. I think it's important
to incorporate that into your planning. Other big expenses
that can emerge are things like
paying for a wedding. Probably something people
don't plan for enough, but it happens a lot is
moving closer to your kids or moving somewhere else. And that can be a big cost. Or buying that RV to check
that trip to Glacier Park or to visit the largest
ball of twine in the world off your bucket list
might be another thing you need to plan for. And these are all things that
just need to be incorporated. I think it might
have been Michelle or maybe it was Rita was
talking about building a salary plan and a bonus plan. You almost have to
have this bonus plan with delayed frequency
to anticipate these big costs that could
emerge deep into retirement. Another one that's
really important to plan for is long-term care
because the way long term care emerges is it's usually
unexpected, it happens quickly, and you're suddenly required
to come up with liquidity.
So let's say you end up
going into a nursing home when you're 87. Those costs can range from
$9,000 to $13,000 a month. That is a huge unexpected cost. And most people when
they're deep into their 80s don't have $13,000 a month in
liquid funds easily reachable. So those are the kind of things
that when you talk about curve balls you got to incorporate
into your thinking and your planning for sure. ALLY DONNELLY: Yeah. I mean curveballs are
curveballs for a reason.
It's challenging. I want to follow up on one of
Jerry's comments, Michelle, about big purchases. So lots of clients
have asked us, is it OK to take on
debt in retirement? RITA ASSAF: Ally, the short
answer here is yes, right? Having come through the last
15 years of historically low interest rates, I
do often see clients carrying mortgage or auto
loan debt into retirement. Obviously, the compromise
that gets made, though, is if you're using a
number of cash flows to support debt paydown,
there's less cash flow to be spent on other
discretionary and lifestyle items that you might want to
incorporate in your retirement budget. The other thing I think
of here is actually just loan qualification. So often, lenders
are really focused on the recurring monthly
income sources like salary, pension, annuity income, any
automated payments coming from investments more
so than net worth or what you have on
your balance sheet during that
underwriting process.
And so when working, this
is less obvious to us because we have
compensation, we're maybe accustomed to
just looking at our W-2 and documenting
that compensation. In retirement, underwriting
can be more challenging because depending on
how much of your income is actually automated
versus being distributed on an ad-hoc basis,
the underwriting can look different. One other lending
consideration for those who actually have
non-IRA assets is something called a
collateralized line of credit.
And that's a mouthful. But really all it
is a line of credit that backs a brokerage account
in your investment portfolio. And this allows you
to actually borrow using the value of
your investments without having to sell
down your investments and incur capital gains. And it can be paid off any time. Since the brokerage account
collateralizes the loan, there's just less scrutiny
around where you're receiving your income
sources in retirement, and that can also be an option. ALLY DONNELLY: That's
really interesting. I didn't know that. OK. So once you have a
handle on your expenses, you need income, obviously,
to support the spending plan. So help us flesh out what
are some typical sources of retirement income. JERRY PATTERSON: Absolutely. So there are many typical
sources of retirement income. The obvious ones would be
Social Security, pensions, rental income,
dividends and interest from investments, and
also distributions from the investment portfolios.
Those are all the most common
sources of retiree income. And most retirement
income strategies incorporate several
of these sources just for diversification, as
Rita mentioned earlier. At Fidelity, we do believe
that essential expenses should be covered by guaranteed
sources of income. And again, those include
Social Security, pensions, and annuities, guarantees. Despite most employers no longer
offering traditional pensions, there are easy ways to convert
portions of our savings into monthly income streams
just like a pension. And those instruments
are called annuities. ALLY DONNELLY: Now, we get a lot
of questions about annuities. And Jerry, I know this is
the sweet spot for you. So help us understand how they
can fit into the overall plan. JERRY PATTERSON: Thanks. Well, first and foremost,
there are many different types of annuities.
I happen to be in a meeting with
an annuity provider this week. And this single company
features 23 different flavors of annuities. So there's a lot of
different kinds of annuities. And many of them feature
guarantees of principal or your retirement income in
the the insurance companies that issue them. For clients who value the peace
of mind and predictability that comes with
guarantees, annuities can play a really important
role in your overall savings and investment plan. Fixed income
annuities, for example, can help you close
that gap that Michelle was talking about between
Social Security and pension if you have pension income
and your essential expenses to ensure that you
have your bills fully covered by predictable sources
of income while you're retired.
For many of our
clients at Fidelity, this strategy has been a game
changer where our clients are able to neutralize
effectively the need to worry about covering
essential expenses like those pickleball
league dues. Those would probably
be essentials for me by the time I retire, but
to each his own, I guess. Many annuities
feature various fees. And some of these fees
can be high at times. It's really important for
you to understand those fees and the trade offs
that might be occurring between the investment
returns might have otherwise enjoyed versus
the value of the guarantees to you. You should also think
about the ratings and the financial strength
of the insurance companies that issue these
annuities as you may be staking your retirement
security and certainty on them. ALLY DONNELLY: I
was wondering when pickleball was going to
come into the conversation, so thank you. But Rita, I want to dig into
Social Security specifically.
There's always questions
about the right age to claim benefits. How do you counsel clients
on what considerations they should bring
into their mind before they make that decision? RITA ASSAF: Well, I would
say Social Security is just confusing. It's always a challenge. There's a lot of
myths out there. And there's headlines out
there as well of like, will Social Security last? We can't predict the future. But for now, Social
Security is here. And it should be considered as
part of your retirement income plan. But there are some things
to consider to help you decide when to claim. So first, I'll just say
that you can actually start receiving Social Security
benefits as early as age 62.
But you're entitled to your
full Social Security benefits when you reach your
full retirement age. And you might see
this shortened as FRA. So that FRA will depend
on your date of birth. Right now, the FRA for people
turning 62 and 2023 is age 67. So that group can actually start
to get their full retirement benefits at age 67. But here's where
waiting to claim is actually a benefit for
you because it can result in a higher monthly average. So for every year you delay
past your full retirement age, you get an 8% increase in
your monthly Social Security benefit. So if you wait till
age 70, that could be as much as a 24%
higher monthly benefit. So it really does help
to think about delaying and if you can make
that gap work for you.
But you also want to think
about planning Social Security when to claim with a
spouse because that does come into effect
and could actually maximize your lifetime benefit. ALLY DONNELLY: Interesting. So waiting to claim can
make a big difference. But if you're married, you
have to coordinate the decision with your spouse. Tell me more about that. RITA ASSAF: Yeah. And this is where
it gets confusing. So spouses actually can
get up to 50% of what we call primary worker's benefit. So if your spouse didn't
work for some reason and you're the
primary breadwinner, they actually can get about
50% of your retirement monthly benefit as their
own Social Security. But here's where
delaying doesn't help because if the
primary worker claims before their full
retirement age, then their spouse will
have reduced benefits. It's also important to
note that spouses max out on their Social
Security benefits at their full retirement age.
That means if the primary
worker delays till age 70, for example, and their
spouse is also age 70, the primary worker will
get that extra benefit, but the spouse will not. Also, you want to consider
if your spouse qualifies for Social Security
benefits of their own. So if they do, they will
get that amount first. If for some reason your
Social Security is higher, your spouse will get
that additional amount so that the
combination of benefits equals that higher amount.
We know that this
can be a lot, but we do have resources
and a tool that can help you assess your
options and work through that. ALLY DONNELLY: OK. Perfect. When we talk about
investments, how can someone determine
the right amount of risk to take, Michelle? MICHELLE HOWELL: Yeah. Since retirement can encompass
multiple decades of time, it's imperative that
we maintain a focus on investing for growth to help
offset inflation and longevity risk. Most would be
surprised to recognize that you can be invested
too conservatively and create just as
much of a detriment around your retirement
plan as being invested too aggressively. As an advisor, I
tend to cringe when I see articles that simplify
portfolio construction by simply taking the
number 100 less your age and using that as the sum
of the percentage of stock is what you should carry into
retirement because that's far too simplistic, right? Retirement planning is
just not one-size-fits-all.
It should be tailored it's
specific to everyone's individual situation. And two plans don't
really look alike, right? Everybody has different
investment preferences. They've got a different
history and context that they approach
investing from. And strategic allocation
between stocks, bonds, and cash and everything in between, all
the different sub asset classes should really be measuring
our own risk tolerance, our personalized
distribution needs, and just the greater context
of our own financial plan. ALLY DONNELLY: Yeah. Yeah. Rita, what's your perspective? Anything to add there? RITA ASSAF: I want to
support what Michelle just said, which is, you want to have
a diversified investment mix. It's going to be personalized
based on how comfortable you are with market volatility, your
overall financial situation, and how long you're
investing for. So your diversification
will look different than anyone else's
because you might be more concerned about inflation. So if that's the case,
may you look into tips.
So Treasury-plated protected
securities or commodities. But you also want
to consider growth. And I know a lot of
people fear growth type investments in retirement,
but they do also help against inflation. And that's where
you want to consider stocks and mutual funds. So it will vary. But having a diversified
investment mix personalized to
your goals will help you have a more balanced
plan to help you. ALLY DONNELLY: OK. All right. What about a risk that can also
be a gift, particularly for us, longevity? Women tend to outlive
men, Michelle. And if that's your
life situation, that makes a difference. MICHELLE HOWELL: Absolutely. Women, on average, tend to
outlive men by five years. So let's unpack that, right? So whether you're single
or whether you're married, there's additional income
needed to support ourselves in retirement. And that often comes in tandem
with additional expenses dedicated toward
health care costs while we're living
those extra years.
Additionally, women
tend to be caregivers, so there are added expenses
associated with that, traveling to see our loved
ones, care needs to support our loved ones. And all of those expenses
need to be incorporated into the budget at that time. Longevity risk for
everyone really demands some alternatives
to the way that you plan. So there are some obvious
considerations here like work longer, save more,
spend less in retirement. Maybe invest with a little
bit more growth in mind to grow the asset
base over time. But for many, that's just
not a comfortable situation. Rita just mentioned that often
carrying more stock allocation into retirement can be
uncomfortable for folks as they experience fluctuation. Alternatively, there
are specific investments that Jerry mentioned that really
address longevity risk directly by creating an income stream
that you can't outlive. And those investments
are the annuities that were just discussed.
And they can be designed to
convert a lump sum of money into a series of payments
that you can't outlive. Or perhaps they can be
designed to cover a particular withdrawal percentage from your
portfolio that you also cannot outlive. ALLY DONNELLY: Excellent. Excellent. I mean, this is just
so much to think about. I'd love it if each of you
could share a few takeaways you want to leave our viewers with.
Rita, do you want
to get us started? RITA ASSAF: Sure. I would say rip
the Band-Aid off, just get started with that
retirement income plan. I know it can be hard. Our fear and our emotions
can get in the way of it. It's scary and
it's overwhelming. But we found that people who
have a plan feel more prepared, have greater peace of mind. And you don't have to
do it all yourself. Your financial
professional can actually help you take the
stress out of it.
I would also say, keep
revisiting that plan because if you
constantly check in, you can help
prepare for anything that comes up unexpected. And then finally, I would
say, enjoy retirement. It's an exciting new chapter. You earned it. Have fun. ALLY DONNELLY: Yeah. We're pivoting from fun to
Jerry, back to expenses. What would you say? JERRY PATTERSON: I agree
with both sentiments. No, but I do agree very much. Getting started is
often the hardest step. But there's nothing that
gives more peace of mind and more security
as you transition to retirement than
having a plan. And having a good handle
around expenses is key in core to an effective income
plan in retirement. And I challenge everyone, give
yourself a homework assignment whether you do it
yourself or you sit down with a financial advisor. This is definitely something
we can help you with. We have tools to do it. But even in your
own kitchen, put a piece of paper down in
front of yourself and write, if you're retiring
in the year 2030, you're 2030 spending plan. And think in terms of
essential, discretionary, and one-time expenses.
And start to think about,
which of the expenses I have today when I get to
2030 are going to go away. Am I really going to
need to buy work clothes? Am I going to save
on commuting costs? What are the new expenses
that are going to emerge? The annual river cruise,
the cost of golf cart fuel. Ask yourself questions
like, is the cost of pickleball an
essential expense? Or one that's probably
real and close to heart is visiting my kids
on a regular basis.
Is that essential expense
that I have to plan for? So really getting your
hands around expenses is, like I said, key and
core to your retirement plan and your spending plan. In my own life, I'm going
through this process right now. And I did just as I described. I wrote down on a piece of
paper essential, discretionary, and one-timers. And I have a
25-year-old daughter where I'm afraid
the one-timer might happen while I'm in retirement
when she actually gets married.
We'll see. But that's going to
be a real cost for me that I've got to be
prepared for now as I start to think about expenses
as I transition to retirement down the road. ALLY DONNELLY: Yeah. Yeah. Maybe you can combine the
wedding and pickleball at the same time. Michelle, I hope you don't mind,
but we're being mindful of time and we want to get to a few
of the clients questions. So Rita, I'm actually
going to ask you to take this first one from clients. We want to do a deep
dive on Roth and RMD during our November show. And there have been
a lot of questions on this topic in the chat today. So why don't we cover
some basics right now, what they're whistle. One viewer asked, is converting
money from a traditional IRA to a Roth IRA good
strategy to mitigate some of the tax hit on the RMDs? So Rita, take this
one, if you would.
RITA ASSAF: So this might
frustrate some viewers, but the answer is, it
depends, and depends on your personal situation. So when we talk about
a Roth conversion, we're talking about
moving money that's been tax-deferred to tax-free. So usually, money that's
been in a traditional IRA to a Roth IRA. But you do have to pay taxes. And the reason
why some people do this is because they're
not eligible to contribute to a Roth IRA directly
because of the income limits that Roth have. But if you think about
Roth conversions with RMDs, a lot of people will
think, well, if I do that, then I no longer have to
take RMDs in the Roth IRA.
But this is where you need
to be careful because there are some considerations. You want to look at
your tax bracket. Will it be higher in
retirement or now? So that's a
consideration for you. Do you want to maximize
the money you're going to leave to heirs that may
be doing a Roth conversion can help because it'll earn longer
because you don't have required minimum distributions? Are you not
taxed-diversified, meaning are all your assets and
tax-deferred accounts? That's a consideration
where you want to consider a Roth so that you
have different tax treatments and you can better control your
taxable income in retirement. But here's where you
may not want to consider converting to a Roth.
If you're really in
retirement or near retirement and you need money,
like that could actually impact your taxes and
you wouldn't have time to recoup the taxes
that you would have paid on the conversion. You also want to be careful
because if you're doing a Roth conversion and you're
receiving Social Security or you're on Medicare, the
Roth conversion can increase your taxable income, which
means the Social Security benefits could be taxed and
your Medicare costs could rise. So there's a lot here. And if you're really worried
about RMDs and their tax impact, there are also
Qualified Charitable Distributions or QCD, which is
an option where you're donating to charity, use that RMD
to donate to charity, and you wouldn't
have to pay taxes. So that's why the answer
depends because there's a lot of elements
that go in there. And in next month's
webinar, I know we'll deep dive into these topics. ALLY DONNELLY: Yeah. Yeah. There's a lot there, right? Jerry, I want to get one
more viewer question in as we wrap up these last few minutes.
But this viewer asked, how is it
best to plan for long-term care if you're already over 65? JERRY PATTERSON: Great question. And we get a ton of
questions from clients about long-term
care, and am often startled at the confusion
that's out there. I just looked at some
research last week, and it was shocking to see
how many people of all ages think they already
have the protection because in their mind, they
think their health care insurance pays for that or they
think Social Security backstops that for them or Medicare takes
care of it when they retire. For those of us that
are 65 or older today, we have a 70% chance of
incurring some long-term care costs in retirement. So it's real, and it's going
to happen to more of us than less of us. And if you're already
retired and you're wondering about long-term care,
if you're relatively healthy, you can still seek out and
secure insurance protection if that's something
you want to explore.
You don't automatically get
declined because of age. It's based on health
and medical history. If you're going to
self-fund it, this is one of those
things I talked about before, I think you got to look
at it as a potential one-timer. And it's often a
potential one-timer that hits way deep in
retirement when you're older, and so it becomes harder to
surface the kind of liquidity you might have to come up with
to fund a long-term care event. So again, let's assume you're
going into a facility– I think I shared earlier– costs can range from as much
as $9,000 to $13,000 per month. And imagine if you're
late in your 80s and you suddenly have to come
up with the funds to self-fund and support a cost like that,
it's big and it's significant. But it's something you
got to think about.
So even if you're
already retired, if protection is a route
you're interested in, I'd encourage explore it. And if you're going
to self-fund it, really imagine what
self-funding looks like deep in your retirement
years where you're going to be expected to
deliver a significant amount of liquid funds to
fund those costs. ALLY DONNELLY: Terrific. Terrific. Thank you. Michele, your voice is so
important in this conversation. Help us understand what your
takeaways are from today. MICHELLE HOWELL: Thanks, Ally. Just three things, right? I agree with both Rita
and Jerry, don't delay. Start the planning
conversation today. The best retirements
have been well planned, and they are not
filled with trepidation around money in retirement. You have more enjoyment
because of that. And also, don't let the
fact that you may not have tracked expenses
become some sort of artificial roadblock
to the conversation.
Let your financial consultant
help you with this. We can help break this
up into smaller pieces. Secondarily, be transparent. The best financial plans are
built around full disclosure. There's no need for
you to be embarrassed about how you want to spend
your money in retirement or about the time you may have
sold out of your portfolio because you were anxious
due to market fluctuation. These are really
important things for us to recognize as your
financial consultants so that we can help prepare
you for these events and build a plan
that's all-weather.
You wouldn't want your
doctor to design a treatment plan without assessing
your overall health, right? Lastly, commit. Financial planning is
an iterative process, and it begs clients
and advisors coming to the table with an open mind. So my best relationships
are with clients that I meet with
multiple times a year and they always come in
looking for new ideas.
ALLY DONNELLY: Excellent. Excellent. Well, Michelle, thank you. And thank you to
all of our panelists for their great insights. This was a terrific discussion. And thank you to you, viewers,
for sending in your questions. If you're interested in learning
more about retirement income, tune in for our November
panel on RMDs and Roths. It's going to be a
good conversation too. And to learn more about other
financial planning topics, subscribe to Insights from
Fidelity Wealth Management. I'm Ally Donnelly. Thanks for being here. We hope we see you again soon..
