Planning for financial independence in later life

STAYING INDEPENDENT

Planning for financial independence in later life

TAKING STOCK

As retirement approaches, it is important for every household to

assess its financial identity (assess its finances). Waiting too

long might mean missing one or more opportunities to preserve

maximum financial independence in the future. To help get you

started, can you say "Yes" to the following statements?

                                                     YES    NO

We talk regularly and frankly about finances

and agree on our goals and the lifestyle we will

prefer as we get older.

We know our sources of income after retirement

how much to expect from each, and when.

We save according to plan and are shifting from

growth-producing to safe income-producing

investments.

We know where our health insurance will come

from after retirement and what it will cover.

We have reviewed our life insurance and

considered options such as converting to cash

or investments.

We each have our own credit history.

We each have a current will or living trust.

We know where we plan to live in retirement.

We have anticipated the tax consequences of

our retirement plans and of passing assets on

to our heirs.

Our children or other responsible relations know

where our important documents are and whom to

contact if there are questions.

We have executed legal documents, such as a

living will or power of attorney, specifying our

instructions in case of death or incapacitating

illness.

THE KEY IS PLANNING

"If only I'd known then what I know now ...."

Looking to the future is key to financial planning at any age,

but especially in the decade or so before retirement. For many

households, retirement is a time to fulfil dreams and delayed

ambitions. It also can be a time of anxiety if you postpone

thinking realistically about the ways your financial identity

will change -- income, savings, investments, credit, insurance,

job benefits, and perhaps living arrangements. Meeting the

challenge of financial management will help remove uncertainty

and increase your available options. Both partners need to be

involved in retirement planning and may wish to discuss their

plans with adult children.

Many people neglect planning. Some prefer to leave financial

decisions to the other partner, while others simply find it too

difficult to talk about money. Whatever the reason, if you have

not yet begun planning, you may want to seek pre-retirement

planning advice from a professional or a community service

organisation.

LOOKING AHEAD

The decade before retirement is a good time to take stock of

assets and obligations and make financial choices aimed at

maximising future resources. These years are typically a peak

earning period and they offer the chance to reduce major debts,

such as a home mortgage, and increase savings and income-

producing investments. Households faring the combined expenses of

educating children and caring for aging parents may find saving

difficult during pre-retirement years. In these cases, making a

realistic financial appraisal is more useful. These are questions

you might ask yourselves:

 * What are our sources of retirement income and how much will

each provide-monthly or in a lump sum?

 * Social Security

 * Pensions

 * Savings and investments

 * Sale of assets

 * Home equity

Find out all the options for receiving your pension benefits and

whether they are insured. Find out if pension benefits will be

reduced if you receive Social Security. Read carefully and

consider the consequences of signing any documents relating to a

reduction in spousal pension benefits. One of you may need this

income if the other dies.

When estimating how much income can be expected from these and

other sources, remember to take inflation, taxes, and market

fluctuations into account. Depending on your anticipated income

potential, you may decide to postpone retirement a few years, or

plan to work part-time.

 * Is our health insurance adequate for retirement?

The cost of serious or long-term illness is a major burden for

many older people because medical insurance may not cover all

health care costs. If you consider buying insurance to supplement

this, shop carefully for a policy that supplements rather than

duplicates existing coverage. Long-term health insurance for

nursing home or home health care is new. Examine all the terms of

any such policy before you buy.

MANAGING WHAT YOU OWN AND WHAT YOU OWE

Professionals say that retirement income should be 60-80 percent

of current income to maintain the same standard of living. If

your financial picture does not correspond to this guideline, you

might prepare a budget and a cash flow statement based on income

and expenses during the preceding 6 to 12 months in order to

identify gaps in income and find ways to cut spending.

On the expense side:

 * List current expenses such as housing, food, health care,

transportation costs, and other financial obligations.

 * Include a contribution to savings. Experts recommend a

reserve fund to cover 6 months of basic expenses.

 * Itemise personal expenses for such things as clothing, travel,

entertainment, and hobbies.

 * Develop habits such as price shopping, menu planning, coupon

dipping, and monitoring your use of credit to guard against

overspending.

On the income side:

 * Think through contingency plans in case expenses begin to

outpace income or one partner becomes seriously ill.

 * Remember that credit histories in your individual names can

be invaluable in retirement, or in the event of widowhood or

divorce. Credit can be essential to meet unexpected or emergency

expenses.

Government regulations prohibit age and gender discrimination in

the granting of credit. Lenders must treat all income alike,

whether from employment, retirement benefits, or other reliable

sources. Still, it may be easier to get a national credit or

charge card in your own name while you are employed. If you have

never been employed, you can still build a credit history by

becoming an "authorised user" on your spouse's account.

 * Consider selling assets or converting life insurance into

cash as another possible way to meet expenses.

 * Investigate Home Equity Conversion (HEC) as an option if you

own or nearly own your home and need money. There are several

kinds of home equity conversion loan plans, including Deferred

Payment Loans and Reverse Mortgages, where you borrow against

home equity and receive monthly or periodic cash payments.

Unlike home equity loans or lines of credit, reverse mortgages

involve no monthly repayments as long as you live in your home or

until a predetermined date. These plans do involve costs for

application fees, closing costs, and interest, and they may

affect eligibility for public benefits programmes. Generally, you

can decide how to spend the money. Reverse mortgage plans are not

all the same, so it is important to read the loan documents

carefully. Check with a trained financial counsellor, other

financial advisor, or a solicitor before deciding whether home

equity conversion is appropriate.