Yesterday I had lunch with a friend who is considering retiring in July. She is 62 and has worked as a teacher for over 30 years. My friend is widowed with a grown son and four grandchildren. (Thankfully, her son will not be a financial burden... he is a successful engineer). According to her retirement estimate, my friend's pension will be about 72% of her current working income. My DF wanted to "pick my brain" because I retired last August, and she's searching for other perspectives on anything and everything related to retiring, especially some of the financial aspects.
So we chatted about what she's done to prepare for retirement. My friend has a 403b account ("small" in her words... not sure what that means) and a savings CD with about "one year's gross salary." DF owns her home that is almost paid for and has no other debt. In talking to my friend, here are some things she DID NOT take into consideration:
1) Inflation: although the state teacher's retirement system guarantees an annual 2% COLA, inflation will likely be higher. DF said she would use her 403b funds as needed to keep pace with inflation.
2) Health insurance: she will not be eligible for Medicare until almost 3 years after her retirement, so she has to plan for health coverage once COBRA runs out. (She thought COBRA would go on until she is eligible for Medicare, but I think it is only 18 months.) She said she would substitute teach to help pay for her health insurance until age 65, or take money from her savings.
3) Paying for increased cost of travel: after retirement, DF will reduce some expenses, but she didn't take into account that travel, a priority for her, might incur more expenses. She said she would use her savings or take on part-time work to pay for travel. Fortunately travel is a "want" and not a "need."
All in all, it seems my friend is on track to retire. She shared that she currently lives on about 80% of her net income, so that is another big plus for her. DF will use her retirement benefit "lump sum" to pay off her small mortgage. And, since she will no longer have a mortgage payment, she will try to add to her savings each month.
I did advise my DF to meet with her HR department regarding COBRA, and a financial planner and/or accountant to get specific financial and tax advice. Taxes in retirement can be an unpleasant surprise if you're accustomed to sheltering income and then find you have few deductions. However, I was happy to share some of the steps I took in my own retirement planning. My DF is doing exactly what I did prior to making the decision to retire... talking to others who have been through the process and leaving no detail to chance.
Retirement Planning Pitfalls
April 16th, 2009 at 07:15 pm
April 20th, 2009 at 07:11 pm 1240254708
April 20th, 2009 at 08:32 pm 1240259566
My former employer generously pays health benefits for life for retirees with at least 15 years of employment, so I was lucky. My friend works for a different school district (than the one I worked for), and it only provides COBRA for retirees. She knew about COBRA but not that it would run out after 18 months. Since her pension will be about $5,000-$5,500 a month, she can afford to pay for health insurance for a few years. My friend looks forward to traveling and spending more time with her grandchildren, so I am happy for her.