Navigating the five phases of retirement

If you retire at 65, there’s a chance your retirement will last more than 30 years. And that raises a lot of questions: What will you do with your time? Will you stay in the same house? Will you become a Wal-Mart greeter at 85 because you’ve run out of money? Even if you’re in your 40s, it’s not too early to start making plans. Here is a road map that will help you navigate the five phases of retirement.

Phase 1: 15 years prior to retirement, develop a financial plan

With 15 years to go before retirement, now’s the time to get your finances in order.

You need a plan — and we mean more than a stack of 401(k) statements. If you want help from a professional, ask yourself:

Do you want a one-time review or just a couple of sessions? Do you want continuing advice on how to invest?

Most important: credentials. The Certified Financial Planner, CFP, and the Chartered Financial Consultant, ChFC, require rigorous education courses and have tough testing requirements.

Fee-only planners don’t “sell” products and earn a commission, as stockbrokers and insurance salespeople do. To find one, try the Financial Planners Association Web site, at www.fpanet.org, or the National Association of Personal Financial Advisors, at www.napfa.org.

Phase 2: Six years before retirement get serious about how much money you’ll need

You should have estimated how much money you’ll need for retirement when you first started planning. Now it’s time for a reality check: Do you have to make corrections?

Your best estimate: Assume you’ll need about as much in retirement as you do now. If you spend less, you’ll be pleasantly surprised.

Now add up your other sources of income, such as Social Security and pensions. You can get a Social Security estimate at www.socialsecurity.gov; ask your human resources department for a pension estimate. Your savings will have to make up any shortfall.

Suppose your current expenses are $5,000 a month. You expect $1,600 a month from Social Security and $950 more from a pension. You’ll need $2,450 a month from savings, or $29,400 a year.

If you like, you can buy an immediate annuity that will pay $2,450 a month until you and your spouse die. For a 65-year-old couple, that will cost $422,654, according to ImmediateAnnuities.com.

The drawback: Inflation will erode the buying power of your annuity payments over time. If you want to give yourself a raise based on the inflation rate, most studies show that your initial annual withdrawal can’t exceed 5 percent of savings. So if you want a raise each year, and you want your money to last 30 years, in this example you’ll need about $590,000.

Phase 3: First year: Know how much you’re spending

When you were working, you probably imagined that you’d spend less money right after you retired. You’ll no longer spend so much on dry cleaning, commuting and take-out lunches, so you’ll start spending less the day you retire, right?

Wrong, says John Sestina, a financial planner in Columbus, Ohio. In his experience, most retirees spend more each year during the first five to seven years of retirement than they did when they were working.

“They do things like travel a lot more, establish a hobby, and they also do a lot of seeing the grandkids and making gifts,” he says.

Sestina says expenses start to decline after the initial retirement euphoria. Still, an early spending spree could put a big dent in your savings.

Consider tracking your expenses. You can use a spreadsheet or a software program, but a big notepad divided into 12 columns will also do.

Here are some spending categories to include, from Fidelity’s Retirement Income Planner:

“Housing. Mortgage, homeowner’s insurance, maintenance costs, property taxes and condo fees.

“Utilities. Electric, oil and gas, phone, cable and Internet service, water and sewer.

“Personal. Groceries, clothing, dry cleaning, health and beauty products.

“Health care. Health, dental and vision insurance, Medicare premiums, Medicare supplemental premiums, long-term care insurance premiums.

“Transportation. Auto loans or leases, registration fees, gas, insurance, maintenance.

“Recreation. Club memberships, travel, entertaining, dining out, movies, sports events.

Phase 4: Years 2-15: Make decisions about your mortgage

More than 25 percent of married adults age 65 and older are homeowners with mortgages, according to the Center for Retirement Research at Boston College. That percentage is sure to rise as baby boomers retire. Low interest rates and a hot housing market prompted millions of boomers to refinance their mortgages, extending the terms of their loans for years.

One way to deal with the debt is to use part of your retirement savings to pay off your mortgage. But unless you have a sizable nest egg, that’s probably not a good idea. You might need to make that money last for a long time, and taking a large withdrawal would reduce the amount available to you later.

Another alternative is a reverse mortgage. A reverse mortgage is a loan against your home that doesn’t have to be repaid until you move, sell or die. You and anyone else on the title to your home must be at least 62 to qualify. You can use a reverse mortgage to pay off your first mortgage.

A study last year by the National Council on Aging found that 13 million older homeowners are candidates for reverse mortgages.

But closing costs for reverse mortgages are high. For that reason, a reverse mortgage usually isn’t a good idea for homeowners who plan to move in less than five years.

For more information about reverse mortgages, go to aarp.org/money/revmort.

Phase 5: Years 16+: Plan for the inevitable path of life

Review your will, trusts and insurance policies to make sure that what’s left of your estate ends up where you want it to go. If you’re among the 60 percent of Americans who don’t have a will, talk to a lawyer about drawing one up. Otherwise, the state will decide who will inherit your assets.

You should also prepare for the possibility that you may be incapacitated. A durable power of attorney gives someone you trust the authority to pay bills and make financial decisions on your behalf. A medical power of attorney, also known as a health care proxy, authorizes someone to make medical decisions on your behalf. You should also have a living will, which will help your health care proxy carry out your wishes.

And finally, you should think about funeral arrangements. Some funeral homes let you prepay for your funeral, but you may be better off setting aside money in a certificate of deposit or other safe place. The Federal Trade Commission publishes a consumer guide to funerals. Go to ftc.gov and click on the “For consumers” link. The guide is listed under “Products and Services.”