The legendary Paul McCartney, who turned 70 this year, wrote “When I’m 64″ when he was 16 years old. And one theme in the song is clear: 64 sounds like a lifetime – or the end of a lifetime – to a teenager. Those of us in our 40s, 50s and early 60s realize, however, that 64, and retirement, are right around the corner.
What we may have lost sight of is how long retirement is likely to last. While we do not feel like age 64 is the end of a lifetime, many of us may not have a strategy that prepares us for the reality of being retired for 20, 30 or even 40 years. Here’s my birds-eye view of why and how we need to prepare ourselves, including tips on making the most of Social Security benefits.
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If the cost of what we buy increases every year by 4 percent (not an unreasonable expectation for inflation), then we will see our costs double every 18 years. For someone who retires at age 62, that implies that by the time they are 80, the cost of gas could have gone from $3 per gallon to $6 per gallon and a monthly grocery tab of $600 could double to $1,200. The two questions that retirees and pre-retirees should ask themselves are “am I ready?” and “are my investments protecting me from these risks, or are they actually exposing me to them?”
To answer the first question, you may need to put your retirement distribution strategy through some tests. What will happen if you live into your 90s? Before you scoff at that notion, consider that the fastest growing segment of the population is over age 85. For many of us, retiring on Social Security or a pension that may (or may not) keep up with inflation simply won’t cut it. We need to be prepared to supplement that income from our own assets.
Living longer may mean that it’s more advantageous to draw Social Security later – perhaps age 66 or even age 70. Delaying taking Social Security has two benefits. First, the annual benefit grows each year (increasing as much as 8 percent a year, depending upon your age). Second, once you have reached full retirement age, there is no limit to the amount of income that you are able to earn. Prior to age 66, Social Security benefits are taxed heavily for annual earnings that exceed $14,640 (in 2012). This means that not only can you sock away more money by working a few additional years, but by delaying Social Security, your payment will be higher each month.
For someone who retires and then puts all of their money into Certificates of Deposits (CDs), your assets may be exposing you to one of the biggest threats facing you in retirement – inflation. Historically, savings accounts, CDs and money markets have not kept up with inflation. The assets that have kept pace with inflation and (over the long-term) provided additional growth is ownership in companies – yes, stocks. While it may not be wise for someone who is retired to have all of their assets in stocks, it does make sense to have a balanced portfolio that provides for plenty of cash on hand and also allows other components of your portfolio to grow for the later years.
Approaching retirement poses many questions, but two of the most important ones are: When will you begin taking Social Security? Which assets should you draw income from first? A thoughtfully designed retirement strategy can help you answer these questions and more. So you’ll be ready when you’re 64 – and beyond. That gives both Sir Paul McCartney and you something to sing about.
More from Megan Poore: 3 Good Ways to Meddle in Your Adult Children’s Lives
Megan Poore, who is not 64 but is looking forward to it, is a senior advisor associate with Lucien, Stirling & Gray Advisory Group in Austin, Texas. She can be reached at firstname.lastname@example.org.
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