How many times can you use a source of money in your retirement plan? Turns out, just once, unless you know ahead of time WHEN something is going to happen, or if something was NOT going to happen. Since we don’t know either, we need to plan on what resources may solve which issues we have in retirement. That plan should be documented in some fashion, otherwise our minds begin to allocate limited resources to everything – and that’s when life happens.
You see, without a plan for resource usage, you increase the odds of running out of money for other things that come up in life. Why? Because everything may happen to you in life, and then resources run out. You increase the odds of having resources (assets or money) by planning on using them for specific issues in your plan. If somethings doesn’t happen, then those resources remain because you didn’t have to use them for something that doesn’t happen. Or, in an example such as Long Term Care Insurance, the premiums are all you’re out if such a life event requiring care doesn’t happen (if it does, then the insurance kicks in to protect other resources for other issues, or goals, in your plan). Like all insurance, you use “small dollars,” called premiums, to pay for small odds but “big dollars” events.
So, how can you plan on asset usage? How may you document such a plan so you don’t forget … or when something happens, you can refer to the document to remind yourself what asset you planned to use for such an event. Writing it down is important so that you don’t inadvertently use another asset that was assigned for some other “issue” you may face later, and now having used that asset, means you have a problem for the “new” issue you now face later on.
This document for writing it down to remind you, shouldn’t be too complex, and should be easy enough to quickly see how you’ve planned resource usage for “issues” you may face and wish to address in your plan. Note that if you don’t address certain issues, doesn’t mean you won’t face them. If means you didn’t address them, and thus your plan for the issues you did plan for are thrown into turmoil by something that did happen you didn’t plan for.
Here is a one page “dashboard” that may serve as a template to start your plan. I’ll walk through the various sections. The right side of the dashboard is blank – this is where you’d document your notes, thoughts and comments (or annotate what additional sheet of paper documents these by section, etc.) for your own specific and unique plan.
Couples have three general phases to plan for:
- Phase I: Both are here – Retirement Plan.
- Phase II: One is here as the survivor – Survivor Plan.
- Phase III: Neither are here – Estate Plan.
Singles would ignore Phase II since there is no survivor in this case. The dashboard is arranged under this point of view.
Most people naturally put their sole focus on Phase I – how to maximize retirement income. Putting your sole focus here means there are unplanned surprises, or at the minimum, surprises with little thought or plan that need to be reacted to.
Phase I – Retirement Income
Do you have pension income? If not – cross it off. If so – and here’s the key question – what survivor option was elected? Most retirees I encounter first coming to me after retiring, don’t remember! A perfect example of why to write it down on the dashboard. If NOT 100% survivor option, then Phase II for the survivor has a pay cut! Phase II address the question what’s the plan for that? For Phase I, the object is to document what retirement option was elected so subsequent plans take this irrevocable election into account.
What should you document on the Social Security line? At what age did you start Social Security benefits? Who’s benefit did you start with? Spousal or your own? Survivor or divorcee? Even singles should document this, since often times the may be an opportunity to switch benefits depending on what happens in your life and how you started benefits to begin with. Survivor, Divorce, Remarriage, etc.
What is your Retirement Savings spending plan? How was it determined? How is it updated? How often is it updated? Are there residual assets remaining for bequests? This is the most complicated to determine without professional help. For purposes here though, the point is to write down whether there are assets being used to supplement retirement income or not – and where are they?
Reverse Mortgages may be used in this phase too. Write down whether one has been used for this phase, or not?
This is a great place to point out that assets and resources can only be spent once! If a reverse mortgage is being used in this phase as retirement income in some manner (e.g., reducing income needs by paying the mortgage, thus having no mortgage payments; purchasing the retirement home; or plain and simple additional income; any other use where the reverse mortgage is actually accumulating a balance over time), then a reverse mortgage is unlikely to ALSO be available to also fully another issue later on!
Money (assets or resources) can only be spent once!
Here again, the point of this exercise is to document your plan and situation so you properly allocate your resources towards issues you may face.
Phase II – Lost Survivor Income
As I mentioned above, for those with pensions, there may be lost income to the survivor unless this was specifically planned not to happen through the pension election decision when the worker with the pension retired.
Social Security automatically has a pay cut to either retiree as the survivor (in general, the lowest benefit goes away, regardless of who goes first). Most people naturally put their sole focus on Phase I – how to maximize retirement income. But, how much money, or assets, is/are needed to replace that lost income so that the survivor maintains their current Standard of Individual Living (SOIL)?
What is your plan to replace this lost income?
Through life insurance? What kind? If term insurance, when does that term end? What is the plan after that date? Is the insurance of sufficient amount to replace lost income (what retirement income would the benefit produce under your retirement income scheme)?
Setting aside assets from the retirement funds can do this too. Those set aside can NOT be included in the current retirement income calculation because then there are no replacement assets to replace lost income later … in other words, if assets are already supporting current SOIL needs, including pension and Social Security, how could those same assets now kick in to provide more income? They can’t!
A reverse mortgage may be used for replacing lost income if it has not been already tapped … again, this goes to the same point I just made about assets set aside … a reverse mortgage can’t support current SOIL and then also replace income that has been lost with the decedent too.
Downsize/move is also a plan if a resource source is not available such as life insurance, asset set aside, or a reverse mortgage. It may be the default option, when there has been no plan otherwise, where expenses need to be reduced – i.e., SOIL reduced, because nothing was planned and put into place to replace the lost income that used to support expenses of your prior SOIL.
So, what is your plan to replace this lost income?
Phase III – Estate Plan
Resource management may result in assets outliving you … at least, a properly designed retirement income plan alone should have resources remaining because longevity, at any age, means that you always have years left regardless of age, and thus need assets to provide supplemental income for those remaining years regardless of age too.
Also, you (and/or your spouse), may go earlier than planned too!
Proper estate planning documents help avoid or reduce the burdens of intestacy. What documents do you have? WHERE are these documents so your heirs can find them (no documents – no proof they exist!)? What holdings do you have that pass to heirs via beneficiary designations (bypassing probate)? WHERE are the documents for those accounts and holdings?
Most people are aware of what health or medical insurance they have. I place it on the dashboard to differentiate specifically the difference between “acute care,” which health insurance is for, and “chronic, or custodial, care,” which people often confuse with the prior.
What is your plan to address Long Term Care costs?
You could self insure and spend your own resources down until you qualify (unless your income is also too high) for this type of care. The topic of Long Term Care is beyond the scope of this post … suffice it to say, this is an area most people do little planning for.
The questions of Long Term Care comes fundamentally down to – how are you going to pay for the costs of this care? What is the effect of your plan on your family?
Your retirement savings may be used. Long Term Care insurance may be used. A reverse mortgage may be used. Selling, or downsizing, the home may be used. What’s your plan?
Objective of the exercise: Plan and allocate the various resources and options available to you. Remember, money can only be spent once. So a resource is only available once – unless you’ve specifically planned out and separated resources specifically for different issues. Write down the plan in basic terms (or more detailed if you wish), so you don’t forget. WHEN something happens, refer to the plan.
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