Only 20% of adults have participated in any form of financial education*. Without proper financial training, many individuals struggle with managing debt, saving for retirement, and making informed financial decisions. Financial Literacy Month, observed every April, serves as a vital reminder that financial literacy is crucial but often missing.
We think of “teaching money” to our children, to teens and young adults, but for seniors the challenges change. Retirees who had a decent understanding of how to “do finances” when they were working can find that what worked BEFORE retirement may not be the best plan for getting them THROUGH retirement.
Below we’ll review some key areas retirees need to keep in mind. We’ll also insert key points to consider, either through more reflection and research, and/or with professional help.
While the future has many unknowns, we have the opportunity to neutralize common risks by planning.
Cash Flow Management
First seniors need to know what they’re making and what they’re spending. Now, just like with budgeting at any time of life, they compare the two. However, seniors are budgeting with a fixed income distributed over an unknown period of time. They need to consider if they need to adjust spending habits to align their expenses better with their fixed income. Taking more distributions from a portfolio means greater spending power to enjoy life experiences, but excessive spending may put a strain on the portfolio and limit what is available in the future.
Consider how much income should be withdrawn to support a lifestyle without concern that the spending level will deplete wealth.
Second, retirees need to assess their distributions from social security and pension. Delaying social security benefits will increase future payments but may require distributions from retirement accounts to cover spending needs, which would not be necessary if Social Security payments were to have been started.
By maximizing pension benefits (taking more out up front), pension income will stop when the pensioner passes and could leave the surviving spouse without needed income. However, on the other side, electing spousal benefit continuation will reduce the amount of income that is received.
Consider the best timing to meet financial needs over retirement for both partners.
Third, seniors need to consider their reserves and liquidity. Funds need to be readily available when they are needed for unanticipated expenses, but by keeping them liquid and risk-free, they are not earning much interest (or appreciating).
Consider how much is truly needed for liquidity, and what might appropriately be allocated to a strategy with limited liquidity and higher returns.
Risk Security
Many seniors are rocked when upon the death of a spouse, and even more so when this means a loss of income. When an individual passes, the loss of Social Security and pension income might be devastating if there are not sufficient assets in place to draw from. After reviewing distributions (social security and pension), we can consider what role, if any, should life insurance fill to provide financial sustainability for a surviving spouse.
The cost of health care and long-term care can also be devasting. Plan for long-term care costs (nursing homes, assisted living, home care). Review life insurance and health coverage needs regularly. Affordable insurance products may be available to cover these risks.
Personal property represents a substantial portion of the wealth that individuals own. It also poses potential liability, as do ordinary life activities. Individuals can protect the value of their wealth while protecting themselves from liabilities and possible lawsuits.
Consider the insurance coverage that best suits your areas of risk.
Fraud becomes an increasingly higher risk as we age and become more vulnerable. Do not feel rushed and pressured to make a decision without your loved ones, and do not share sensitive financial information over the phone. Then arm yourself with information about common financial scams that target retirees (online searches are a great place to start).
Estate Planning
As seniors think about their loved ones and beloved causes, it’s important to consider how to ensure smooth asset transfer.
First, it’s key to have an updated will with designated beneficiaries. Then, seniors need to consider how to structure their wealth to minimize the administration of the transfer, and optimize how much they leave behind (net of taxes) without negatively impacting their own personal financial situation. Toward the end of their life, individuals may be unable to care for themselves and their personal affairs, and they may have specific objectives for the distribution of their wealth. It’s important to communicate these desires well for one’s intentions to be realized.
Consider what steps facilitate the transfer assets to the intended recipients while minimizing the taxes.
While there are many financial areas to cover, it’s encouraging to know there are more resources available than at any other time in our history. Seniors can commit themselves to a lifestyle of learning. There is a plethora of free resources online, as well as the gift of local programs and professionals offering free workshops. Let’s use the springboard of Financial Literacy month to recommit ourselves to be lifelong learners.
* https://401kspecialistmag.com/just-20-of-adults-receive-financial-education-in-high-school/
