The decisions of when to retire, how to fund your retirement and what your retirement will look like are some of the most important questions you will answer in your lifetime. And the answers are both financial and non-financial.
“When can I retire?” is one of the most common questions I hear from clients. It’s a simple question, but not such a simple answer.
There are several important financial considerations as you move closer to retirement, and the best time to think about these is years before retiring. Understanding your financial story as far in advance as possible will ultimately help you build a much more secure future.
So let’s start at the beginning…
What does your ideal retirement look like?
First, think about your ideal retirement in a non-financial way. Local Birmingham attorney and author Rob Couch wrote a book shortly after retiring entitled, “Now What?: So You Think You Want to Retire”. His book focuses on well-being, mental fitness, resilience, spirituality, and laughter as the keys to a well-spent retirement. In this vein, what will you do when you are retired?
- What does a “good” retirement mean to you?
- What will you do to keep busy?
- What will you do to be fulfilled?
- Will you work part-time in the same field or another field?
- If you are married, what does your spouse think about the plan?
- Who is on your “team”? Do you have a trusted financial advisor, accountant, attorney, or therapist to help you with the transition?
Are you financially positioned to retire?
Unfortunately, many people do not think about looking at retirement readiness until they are mere months away from wanting to retire.
You may have been working hard much of your life, saving in your 401k, putting children through college, and working your way up in your company. But, you haven’t made time to figure out, “Do I have enough?”
Here are a few key components that can make or break a retirement plan:
Not understanding your spending
When planning with my clients, we typically set out to plan for a specific goal in terms of after-tax dollars per month to spend in retirement. Most of the time, however, pre-retirees do not know what they are spending each month, meaning that we are not planning for the right goal. It is better to plan early to meet an actual spending goal rather than take what you can get and fit retirement spending into what your assets can provide.
Not understanding your net worth
It is important to understand what you owe and what you own. In general, paying off all consumer debt and possibly your mortgage will put you in a better position for retirement.
If you have revolving consumer or credit card debt, it indicates that you are spending more than you are bringing in, complicating the question of defining a spending goal for retirement.
Additionally, do you know what assets are liquid (easily accessible and converted to cash) and which are illiquid (like real estate, private business holdings, illiquid investments, etc.)?
Individuals retiring right now are eligible for Medicare, the government-sponsored health insurance program, at age 65. There is some cost, especially when adding a Medigap, a prescription drug plan, or Medicare Advantage plan, but it is far less than purchasing health insurance in the open market.
According to a report published in July 2019 by eHealth, an individual in the age group 55-64 will pay an average premium of $799/month, with women typically paying higher premiums. Additionally, you will need to plan for higher deductibles and costs in general.
Taking too much investment risk (or not enough)
Bonds, or safer investments, have been yielding less income now than in earlier periods and often at rates that do not keep pace with inflation. 10-year Treasury yields were 5.1% in December 2000 compared to 1.6% at the end of April 2021.
On the flip side, taking too much investment risk and encountering a bear market shortly after retirement can impact the success and longevity of your plan. You will likely need to take some investment risk, and how much investment risk depends on the goal and whether you are on track to meet that goal.
Sources of income
Older generations often managed retirement cash flow by spending dividends from stocks and income from bond holdings. As mentioned above, bonds are yielding historically low amounts with no expected meaningful change on the horizon.
Investing only in high-dividend yield stocks can expose you to additional risks, and dividends are not guaranteed, especially during times of economic stress. An approach that balances capital appreciation with income produced lends itself to a more diversified approach.
Planning to take social security at the earliest age
Current retirees can claim a reduced amount of social security benefits at age 62. While that may help you make the numbers work early in retirement, it can jeopardize retirement spending if you live into your late eighties or nineties. Each year that you wait to file for social security after full retirement age increases the benefit amount by 8%, a return that can’t be matched in any other guaranteed investment!
How and when to prepare for retirement
If you have not worked with a financial advisor before, or if you are working with an advisor or broker who has not helped you look at actual retirement projections, now may be the right time for a second opinion.
If you are not sure if you are on track and have not looked at your goals and resources by the time you are ten years out from retirement, it is time to do so. You are hopefully in your peak earning years, have less family demands, and have more ability to make changes if you are not on track. Specifically, here are some things you can do.
- Meet with a fiduciary financial advisor who will make recommendations in your best interest
- Pay down or pay off debt
- Track your spending and understand what it costs to maintain your living standard
- Examine your investment risk level and savings rates
- Understand your healthcare options
- Look up your social security statement at SSA.gov
Get started today!
We cannot manage what we do not measure, and retirement readiness is a prime example of this idea. Proactive planning can go a long way and have better outcomes than reactive decisions close to your desired retirement date.
If you would like help deciding when you can retire, and how best to prepare, I would be happy to discuss your situation. No matter where you are in your retirement journey, there is no better time to start getting organized than right now. Get in touch and let’s get you on the right path.