Some years ago, John Bogle, of Vanguard fame, spoke at a bar association meeting in Philadelphia. Mr. Bogle, the author of many books on investing, including my favorite, “Enough,” talked about his early days establishing the concept of index funds. It was an entertaining presentation, but the real interest of those in attendance was shown in the questions afterwards. The gist of the questions was: John, what should we invest in? To me, this demonstrated a need for and a lack of understanding of financial planning. (The answer, by the way, was no load, low commission, mostly index mutual funds; coincidentally, the principal product sold by Vanguard.) Many years of involvement with my firm’s retirement plans, including many questions from colleagues about financial and retirement plan issues, have reinforced my belief that lawyers are woefully “under-advised” on financial planning leading up to retirement. Yet, my experience with those lawyers who have done comprehensive financial planning shows that careful planning over a period of years can have a very beneficial effect on the quality of one’s retirement lifestyle.
This brief article reviews some basics of planning finances before and during retirement. I believe that following a few simple rules can make a difference in financial well-being. And, as well, starting down the road to basic financial planning might be the impetus needed to seek more extensive and more expert financial planning advice. This is one of the themes of the Retirement Starter series of webinars that began a few months ago. Sponsored by the ABA Senior Lawyers Division, these webinars, extending over four years and lasting just one hour each, are presented by experts and experienced lawyers on a wide range of topics that you should consider at least by the time you reach age 60. The programs already presented can be accessed on the ABA website. Those yet to be presented will be featured in future ABA emails and promotional materials.
Start with a decision that everyone has to make: When to begin receiving Social Security benefits. Long before you get to the point of making that decision, you need to set up an account on ssa.gov, the website for the Social Security Administration. Doing so permits you to check the accuracy of your reported earnings online, which is the principal factor in determining the level of benefits you will receive. The website also permits you to check the financial results of choosing to begin benefits at various ages. For many people, waiting until age 70 to begin receiving benefits will be the best choice, because postponement will increase monthly benefits substantially. But it is not the only choice and it might not be the right choice for you. To decide, you should either study the Social Security website carefully or seek expert advice on making the decision.
Medicare is, similarly, a complex program, in which making the wrong decision can have serious financial consequences over the rest of your life. Medicare also has a very informative website, Medicare.gov, and a review of that website will help you to determine what choices you need to make. Some people will have a clear path to answering the questions of when to apply for Medicare and what options to choose (one of the most important: which prescription plan to select?). But most people will not have obvious choices, and these decisions are so important that, of all the steps suggested in this article, this is the one for which I would most strongly recommend obtaining expert advice. My preference would be to obtain this advice from someone who does not sell health-insurance related products; better to consult someone more likely to be impartial. Volunteer groups in some states will offer this advice free of charge. In Pennsylvania, for example, this advice is provided through the state Department of Aging. But if your only option is to pay for advice, it is probably worthwhile.
You will also need a supplemental insurance policy, to cover the expenses that Medicare does not cover, which can be significant. If you are near or have reached Medicare age, you are inundated with offers for private health insurance, which are often presented by athletes and entertainers we have almost forgotten. Be very careful in making a choice. The safest course might be to choose the best-known carriers. Again, you would be well-advised to ask for outside assistance in selecting supplemental insurance.
In summary on these points: with respect to Social Security, Medicare, and supplemental insurance, you need to spend the time to learn your options and the financial effect of your choices, or you need to obtain impartial outside assistance to make the best choices.
I have written previously for this publication on the topic of retirement plans, and I believe that paying proper attention to these plans is a key element of good financial planning and a successful retirement. Basically, whatever kind of access you have to tax-advantaged retirement plans, you should use it to the limit permitted by law. This includes pension and profit-sharing plans, 401(k) plans, 457 plans, individual retirement accounts of several types and tax-sheltered (403(b)) annuities. The tax benefits of using these types of plans are simply too good to pass up. Younger lawyers at my firm would sometimes say that they could not put money into retirement plans because they had to pay school and college tuition. My response was that this was a mistake. The tax benefits of contributing to the plans mentioned above are almost entirely lost if you do not contribute for a particular year. Find another way to pay for education and “max out” your retirement plan contributions.
How should you invest your retirement plan contributions? If your firm or other employer has a menu of investment options in its retirement plan, that is usually a safe bet. If you are not interested in choosing from a range of investments in the plan, you might choose, if it is available, a target date fund option. Target date funds, in effect, make the investment decisions for you. The investments in the target date fund adjust over time, becoming more conservative as you age. You “set it and forget it.” As an alternative, you might hire an outside financial advisor to help you select investments. But if you do so, you will need to know a lot about that advisor. There are many financial advisors, and some of them give very good advice. You will need to do the hard work necessary to find the right financial advisor for you. The lesson of this discussion is to choose careful, somewhat conservative investments for your retirement plan investments or find a financial advisor in whom you have confidence to help you choose investments.
The rules on distributions from retirement plans are very complex. The leading treatise on retirement plan distributions is over 500 pages long. I have written about distribution rules in an earlier article, and I suggest you take advantage of advice offered by your employer’s plan administrator or any financial advisor offered by the plan or by your employer. Failing to follow the detailed rules on required distributions from retirement plans can result in costly penalties, but for most people, getting advice on how to set up distributions initially is often sufficient to avoid problems. Most importantly, the decision you make on the amount of benefits you receive annually from the retirement plan will be closely tied to the estimate you make of your living expenses in retirement, to the extent not covered by other sources, such as Social Security. This decision, taking distributions to avoid penalties and to cover living expenses, will be another important determinant of the quality of your retirement lifestyle.
Another important part of your financial planning will be where you decide to live in retirement: the home where you are now living, in one of the so-called retirement haven states, or in a retirement community setting near your current home or elsewhere. The decision you make among these choices will have a significant effect on your financial well-being in retirement. In brief, pick a retirement lifestyle that that fits the resources you will have to fund that lifestyle. The same holds true for other decisions you make about retirement activities, including travel and buying a vacation home.
Much of this discussion leads to the advisability of having a financial planner. Some of the decisions described above are not complex, but unless you have experience in planning retirement/financial choices, you will probably benefit from engaging the services of a financial planner to help you make the best decisions specifically for you and your family. You cannot rely on people who give general financial advice on television or other media. You cannot merely parrot the choices made by friends or family members. But choosing a financial planner can be a challenge. Anyone can call him- or herself a financial planner. There are certifications available for financial planners, and that might give you some comfort that you have a well-trained advisor. You must choose the financial planner with whom you feel comfortable and on whom you feel you can rely. If you do, most of the questions and choices described above will be easier for you to answer.
Financial planning regarding retirement involves a few key decisions, but any one of them can make a great difference in how you enjoy retirement. One well-known book puts a complete set of rules on financial planning on a single 3×5 notecard. Most of these decisions will be easier to make if you have expert assistance from sources you can trust. Whatever you do, the most important step is the first one: deciding that you will begin the financial planning process.
About the Author
Robert H. Louis is of counsel Saul Ewing LLP, where he was a partner for many years. He has written and spoken on retirement and succession planning for over 20 years. Contact him at firstname.lastname@example.org.