Unexpected Retirement Expenses

Preparing for a successful retirement takes years of planning, saving, and dreaming about the years when you will no longer be working. When planning for retirement we recommend you think about the amount of monthly income you need to maintain your lifestyle.

However, there are some expenses you may not think of before retiring.

1. Home Repairs: Before retiring take inventory of the age of your house. What are some of the items that may need to be updated? Then come up with a plan for how to have cash on hand to pay for each of those repairs.

Some of the most expensive items include your home’s: HVAC, roof, pipes, septic system, deck, siding, and plumbing.

Planning for home repairs can alleviate a lot of financial burden by either repairing items before retirement or by creating a reserve home repair fund, in addition to an emergency fund.

2. Healthcare Costs: Did you know the average couple will spend about $250,000 on healthcare during their retirement? Even if you believe you will not spend that much on healthcare, it is a good idea to plan for the unexpected, especially with the rising cost of healthcare.

Although Medicare is available at the age of 65, it does not cover all medical expenses. There are additional premiums and expenses for prescription coverage. Dental and vision insurance is not covered by Medicare, so private insurance will be needed if you would like this coverage.

If you are planning to retire before the age of 65, be sure to know how much the cost of private healthcare will be. The premiums are a lot more than individuals think.

3. Purchasing Power: The average price of a movie ticket in 1974 was $2.00. Fast-forward to 2015, the average price was $8.50! That is a 3.4 percent increase in cost per year and a good example of the power of inflation.

Inflation is hard to see as it happens slowly over time, yet it is crucial to plan for in retirement.

• If you retired today with a monthly income of $3,000 and an inflation rate of 3 percent, in the year 2040 you would need about $6,000 per month to maintain the same standard of living.

• Outpacing inflation with a risk appropriate, diversified portfolio can help to minimize the risk of purchasing power.

4. Spending too much early on in retirement: Yay! You made it to retirement. You’ll have more free time, which often means spending more money. It might be spent on visiting loved ones, traveling, golfing, lunching, or starting new hobbies.

Before you retire, make sure to have a realistic amount of money you will spend each month. Make sure to include your day to day expenses, healthcare costs, taxes, home repairs, utilities, travel expenses, and any other items that may be important to you.

5. Longevity: If you know the exact day you will pass away, planning for retirement is easy. That’s not the way life goes. If we plan based solely on previous generations’ life spans, we may not plan for a long enough lifespan.

Planning beyond age 90 is a more conservative plan. Although you may need to reduce your monthly income, you will have a well-rounded plan that will help your income last for your lifetime.

Planning for retirement can be a daunting task, yet with the right team on your side you can be set up for success and live out the retirement of your dreams.

Financially Empowering Your Adult Children

With life expectancy increasing each year, saving for retirement is becoming more important. You’ve worked hard your entire life, sacrificed to take care of others, and now, as you’re nearing retirement or are in retirement, it’s your time to live out your retirement dreams!

Sounds great, right? But then you realize the amount you’ve planned to live on each month is not enough because you are helping your adult child out each month financially. You could be helping them out with their mortgage, car loan, student loan, or the emergencies that come up each month; and you realize your retirement dreams will either have to wait or be downsized.

According to Consumer Credit, 31 percent of parents financially support an adult child on a monthly basis.1 If you find yourself in this situation, it’s time to set yourself free of the financial burden and empower your children to stand on their own feet.

Here are some ideas to empower your child:

Set boundaries
Let your child know you love and support them and want them to be able to take care of themselves without relying on you.

Have a candid conversation about your retirement plans and how your independence is impacted because of the money required to support them.

Explain that if something major does come up, you will be there for them. Define what those issues are and are not. For instance, compare medical emergencies to their kids’ need for new clothes. One you cannot plan for and the other you can.

For more information, the book, Boundaries: When to Say Yes, How to Say No to Take Control of Your Life by Henry Cloud is a great resource.

Create a game plan
Whether your adult child has just graduated from college or has a family of their own, it is critical to come up with a plan that will enable you to live your retirement dreams and allow your child to achieve financial independence.
Create a timeline long enough that your child will be able to get their finances under control.

Help them create a budget that will enable them to live on their current income. If expenses are higher than take-home pay, sit down and work through it by looking at their needs versus wants.

Budgeting is a great way to know how much money can be spent on items such as groceries, gas, clothing, etc. Once money is used up for the month, they will have to wait until the next month to purchase certain items.

Use personal growing experiences
Transparency can demonstrate to your child where you are financially and why it is important for your child to prosper without relying on you.

Use examples from your past where you wish you would have made better financial choices. Be sure to include what you learned and how the experience changed you. Your children will see that they too can make it out of a tough financial situation.

Financial conversations can be difficult. Yet, they are crucial to both your financial freedom and your child’s financial success!

1. http://www.consumercredit.com/financial-education/infographics/the-cost-of-supporting-adult-children-or-elders.aspx

Tax Harvest

Tax Harvest

The fall harvest is in full swing and will shortly be coming to an end. This is also a great time of year to do some financial harvesting to help you pay less in taxes.

If you are the owner of a non-retirement account, you could stand to benefit from a concept we call “tax-loss harvesting.”

If you have a well-diversified portfolio, you in essence have different “crops” inside your account. Each year one crop may do better than another. You can use the proceeds from the well performing crop to offset the losses in the poorly performing crop. In investing we use the losses from the poorly performing crop to offset the taxes that you would normally pay on the crop that had a bountiful harvest.

Without getting too technical, here is an explanation of how taxation works in non-retirement accounts. Keep in mind this doesn’t apply to retirement accounts like an IRA or a 401(k), which are only taxed on the amounts withdrawn.

Each year in non-retirement accounts you are taxed on dividends and interest, just like you are taxed on interest you earn in the bank. There may also be a capital gain; for example, selling a piece of land for more than you bought it. Capital gains like this are only taxed in the year in which the asset is sold. Where tax-loss harvesting helps is using capital losses in some investments to offset the gains in other investments.

Let’s say you have an investment that made $10,000 this year. First of all, congratulations! If you sell that investment you may pay $1,500 in taxes. However, if you have other investments that have lost $10,000, you can sell those investments to offset the gains in the other investment. This would save you $1,500 in taxes. The proceeds can then be invested in a third investment for future growth.

If you have a bad stock-market year and you only have losses, there is still a silver lining: each year you can still offset your ordinary income by up to $3,000 in losses. If your losses are greater than $3,000 you can carry the losses to the next year, or until you have capital gains that will offset the losses.

There are some limitations imposed by the IRS to prevent people from selling and repurchasing the same investment to realize a gain or loss. If this transaction is done within 30 days it is considered a “wash-sale” and your purchase/tax benefit will be disallowed. You can, however, purchase a separate, unrelated investment to avoid the wash-sale rule. Much of the time, this isn’t necessary as an individual will have enough investments with gains and losses to offset each other.

As the fall harvest comes to a close, be sure to look at your non-retirement accounts to see if there is some harvesting you can do to save yourself on taxes. As always, you can contact one of the friendly representatives at Smedley Financial to see if tax-loss harvesting would benefit you.