Financing Retirement

By James H. Toms

As I enter my third year of retirement, I have had the opportunity to reflect on preparing for this period of my life. Like most, I didn’t spend much time thinking about retirement finances before declaring my independence, but now that I face the practical realities of day-to-day living with no “earned income,” sharing some thoughts about it seems appropriate.

Financing retirement

Financing retirement

Preparing for retirement finances has been made more understandable today than ever before. Many institutions such as Fidelity, Putnam Investments, T. Rowe Price, Charles Schwab, and Vanguard, to name a few, have excellent educational information on their websites. Following the advice and direction provided there will help you avoid pitfalls and will provide the general guidance and direction that will guide you as you accumulate assets in anticipation of retirement.

Saving for Retirement

The obvious and most fundamental step in preparing for financial security in retirement is setting aside a certain amount of your income each year as early in your career as possible. It is critical to begin saving as early as possible in order to be prepared in the event of declining health or simply declining energy to work as hard at age 65 as one is willing to work at age 30. This needs to be a commitment you make to yourself, and if treated by you like a tax—just like Social Security—the discipline of saving will be much less onerous.

I like to think of saving for lifetime income much like Social Security, in that, if you treat at least 6 percent of your income (in addition to Social Security contributions) like a tax, you will be off to a great start. Using a simplified employee pension (SEP), individual retirement account (IRA), or a 401(k) retirement plan to accumulate these resources provides an opportunity for some tax relief either in current dollars in the case of a conventional retirement plan, or future dollars in the case of a Roth IRA plan. These plans are relatively inexpensive to establish, and prototype documents, if needed, are readily available.

A conventional plan (401k, SEP, or defined contribution) allows one to accumulate dollars on a tax-deferred basis, meaning no tax is paid on the money contributed currently, but it, along with earnings on the plan, is taxed when money is withdrawn, presumably during retirement. In the case of a Roth retirement plan, taxes are paid on the contributions as they are deposited into your retirement account but may be withdrawn, along with earnings, tax-free after age 59½. Two excellent resources for details on these types of plans are rothira.com and irs.gov/retirement-plans/roth-iras.

There are important details to follow in order to achieve the maximum tax advantage of these types of plans, but the most important consideration is to begin saving now for the sum you will use to support your lifetime income requirement. The funds saved during your accumulation years may supplement income available from Social Security and will ensure you have options for your investment plan.

Asset Allocation

Once you determine the vehicle in which your assets will accumulate, deciding how to invest those assets becomes a necessary part of the lifetime income equation. Asset allocation, a frequently used term for “where do I put my money,” needs to be considered. Stocks, mutual funds, tangible assets (gold, silver, real estate, etc.), bonds, and certificates of deposits are all types of investments with varying risk/reward scenarios. Generally speaking, in the early years of your career, your portfolio may lean to a more aggressive investment style that often involves more risk. Real estate and individual equities (stocks) are two good examples of aggressive investments. Because each carries greater risk owing to its concentration in a single asset, one needs a longer investment horizon to avoid the need for an immediate distribution that has the potential to create a substantial loss. In other words, if invested in a single stock and that particular company’s performance in the short term causes that stock to lose value, you may face the prospect of a substantial loss if you should need to withdraw your money at that specific point in time. To avoid that loss, you may need to keep your money invested in that vehicle until the performance of the company improves and you are able to benefit from appreciation related to performance.

Diversification is a tool that many use to avoid the concentration of risk mentioned above. Mutual funds are frequently used to diversify investment. Because a mutual fund invests in a number of equities (generally stocks), the investment is spread among many stocks rather than focused in a single one. As a result, the performance of any one stock in the fund (composed of many stocks) has a lesser impact (better or worse) than the performance of a single stock. Many institutions, including those mentioned at the beginning of this article, offer services and advice aimed at helping you appropriately allocate resources according to your individual risk tolerance level (aggressive/moderate/conservative). Taking advantage of those services (often at no cost) can be extremely valuable in optimizing your investment return.

As you approach retirement, the level of risk associated with your assets most often should reduce to reflect a shorter investment horizon. One way of accomplishing this is by using a “set it and forget it” type tool offered by most financial institutions, often referred to as a target date fund. These funds are managed by investment professionals who often use a date closest to your retirement date to establish the level of risk built into the fund’s investments. So, if you plan to retire in ten to 12 years, you might want to look at a 2030 target date fund. The fund would be more aggressive in 2018, but as the 2030 date approaches, the percentage of assets invested in aggressive assets would reduce to a smaller level to reflect your need for less risk as retirement age draws closer. Often referred to as the “glide path” of a target date fund, this reduced level of risk often provides a reduced level of return, consistent with the reduced level of risk, while retaining enough equity opportunities to protect against inflation.

Social Security

In addition to personal savings, one needs to evaluate other sources of income, as well as potential expenses that are likely to evolve in retirement. Despite rumors of its premature demise, Social Security remains one of the pillars of most retirement income strategies . . . but it can be complicated, especially if you and your spouse are both eligible for Social Security benefits. Where the Social Security Administration (SSA) estimates that, on average, it will replace approximately 40 percent of one’s annual preretirement savings, one is likely to be best served by seeking professional advice to determine the optimum point at which to receive your benefit. A page on the SSA website, ssa.gov/planners/retire/applying1.html, provides excellent information on when to apply for benefits. Keep in mind that most folks need 40 credits earned (currently you earn one credit for each $1,300 of wages or self-employment income, or four credits once you’ve earned $5,200) during your working lifetime to be eligible for a Social Security benefit at the allowed age. Several institutions, such as Putnam, Schwab, and Fidelity, also have resources to assist in determining when to begin taking your benefit.

Your normal retirement date (NRD) will be determined by your birth year and represents the point in time when you will be eligible for your full benefit (as determined by the Social Security formula). You may be able to claim your benefit as early as age 62 or as late as age 70. Keep in mind, however, that there are consequences if you elect either of these “early” or “delayed” benefit options. If you declare an early option, your full Social Security may be reduced by as much as 30 percent, while if you are able to delay until age 70, your full benefit will increase by approximately 8 percent for each year you delay beyond your NRD.

Health Insurance Protection

The need for health insurance protection in retirement is perhaps one of the least emphasized retirement needs. All too often there is an assumption that original Medicare will “kick in” at age 65 and take care of all medical expenses. This is far from the reality. Assuming you have participated in Medicare during your career, you will have been paying for Medicare Part A coverage all along, and you will be covered automatically at age 65 for most hospital services, skilled nursing facilities, hospice care, and home health care without additional expense. However, other expenses such as physician services, ambulance costs, and lab and X-ray services are covered under Part B, and prescription drugs are covered under Part D, both at an additional cost. For 2018, the standard Medicare Part B premium is $134, which is deducted from your Social Security benefit or billed monthly if you are not yet receiving Social Security or if you have other coverage such as employer-provided health insurance. In addition, you may be charged an income-related monthly adjustment amount (IRMAA) based on your modified adjusted gross income amount (over $85,000.01 if filing as single, over $170,000.01 if married filing jointly) from your prior year’s federal income tax return.

In addition to these premium expenses, there are often deductibles and co-pays that can be as much as 20 percent of the cost of the service. To provide financial protection, many individuals opt for a Medicare Supplemental Plan, which generally provides coverage for that remaining 20 percent of non-covered expenses. For personalized help with Medicare questions, you may call the Centers for Medicare & Medicaid Services (CMS) at 800/633-4227. Be sure to have your Medicare card with you. Keep in mind that Medicare does not cover custodial care (long-term care), and this can be a substantial drain on your retirement assets.

Another choice for health insurance coverage after age 65 is Medicare Advantage, sometimes referred to as Part C. Medicare Advantage plans are usually offered by local insurance carriers and frequently replace Medicare Parts A, B, and D for a small premium and provide comprehensive coverage that is similar to the benefits available if one purchases Medicare with a Medicare Supplemental plan. Many of these plans have no premium, but the carrier does receive the amounts that are deducted or paid to Medicare, so if you select a Medicare Advantage Plan with zero premium, you will still be required to pay the Medicare billed premium for parts B and D.

Long-Term Care

Perhaps the most daunting concern as one ages into retirement is the potential need for long-term care (LTC). While Medicare and Medicare Advantage plans typically cover skilled nursing facilities for up to 100 days, custodial care for long-term medical needs is typically not covered. These often include nursing homes, assisted-living centers, and/or memory care units. Costs vary across the country but can range from $5,000 to $15,000 per month (or more). Paying for these sorely needed services can strain even the most financially successful people, and the stress created for family members can be equally devastating.

Long-term care insurance is available in most states to help with LTC expenses. This coverage provides for a set amount of reimbursement of facility expenses if confinement is required. These plans can be expensive and usually need to be purchased long before services are needed. Benefit periods are most often limited to two or three years before the premiums become too expensive for all but the most financially successful among us. While an expensive option, the benefits provided are very welcome if this level of care is required. Many of these types of policies provide a return of premium (usually a percentage of the premiums paid) if the benefit is never used.

Another method of covering these expenses requires an equal amount of advanced planning. Permanent (whole) life insurance is a cost-effective tool that can accumulate cash value or whose death benefit can be used to “reimburse” the estate in the event that lifetime income assets must be used to fund long-term care. A death benefit of $300,000 to $500,000 is, in most circumstances, adequate to fund three years of assisted-living care, which is considered by many a reasonable period for which to plan. Accumulated value in life insurance contracts can be borrowed against if short-term needs arise, and in most cases the value of that loan would be deducted from the death benefit of the life insurance, often leaving a substantial death benefit for family needs. Depending on your situation over time, this vehicle can cover your financial requirements from many perspectives and, while building your practice, provides protection for your family in the event of a premature death.


The above discussion provides only general guidelines about accumulating assets for retirement. Disciplined and consistent investments over time, including such time-proven strategies as “dollar cost averaging” and “buy and hold,” are the key to building a portfolio that is most likely to serve you well when it’s time to enjoy your retirement. Considering finances in anticipation of retirement may seem frightening, but with some forethought and additional planning, you can eliminate much of the anxiety created by the many unknown factors of aging. The advice of a good financial planner starting in your early 50s can be invaluable at that moment when you decide to “hang it up” and enjoy the fruits of your labor.

By James H. Toms

James H. Toms is a lawyer and retired law firm administrator for two large Boston-based firms. Over his 40-plus-year career, he worked in the employee benefits arena and was a member of firm investment committees. He currently serves as treasurer for Lawyers Concerned for Lawyers in Boston, Massachusetts. He is admitted to practice in the Commonwealth of Massachusetts and the Federal District Court for the District of Massachusetts.