Am I Ready to Retire?
How often do you ask yourself that very question? If you are like me (60ish, grown children, nearing end of mortgage payments, like my job though retirement does sound nice), it is probably often. When you consider all the major transitions in your life (off to college, first job, get married, start a family) no other transition is as welcome and feared as your retirement. Does it really have to be that way? If you benefit from one theme of this article, it would be that with some thought and careful planning you can enjoy a retirement that is a comfortable and happy one.
What are you waiting for? It is never too late to start planning for your retirement. Like anything in life, the more planning you can do the better your chances of having a good outcome. Starting about 10 years before your expected retirement is a good idea – be prepared to sharpen your focus about 5 years out.
A personal journey. Planning for retirement requires you to make assumptions about your life and the world around you. Your path to retirement is a personal one with twists and turns that are unique to you and your circumstances. Focus on the factors that you can control like your retirement date, asset allocation or risk profile, savings at retirement and anticipated spending plan. Understand that there are several important factors, like how long you will live, inflation and the performance of financial markets that are all outside of your control.
It is all about your expenses. Focus less on how much you will have, and more on how much you will need. If you are 5 years out, start keeping accurate records of your expenses. Watch your cash flow (in and out) closely each month. Prepare an annual budget that categorizes expenses as essential (utilities, food and medical) or discretionary (travel and entertainment). As a general rule-of-thumb, assume that in the early more active years of your retirement you may need about 70-80% of your pre-retirement income to live comfortably.
Don’t be too conservative. Managing your asset allocation or risk profile is just as important in your retirement years as it was during the years of asset accumulation. We advise our clients that a glide path which reduces equity (stocks) exposure over time is typically the best course. We work with our clients to help them find the risk profile best suited to their needs and comfort level while acknowledging that too little risk (being too conservative) could have a negative impact on their retirement.
Be flexible. Planning and then executing a retirement plan is challenging. What works for friends may not be suitable for you and your circumstances. Do not make the mistake of implementing an initial withdrawal strategy and think you are forced to always use that approach. The order in which you withdraw from your accounts is critical – withdraw from taxable accounts first, then your IRA and then Roth. If possible, wait on making your first withdrawal from your IRA until you reach RMD (required minimum distribution) age in the year you turn 73.
It is about more than just money. Once you are comfortable with your financial plan, make a plan for your life. Find purpose in each day that goes beyond your work. Enjoy your new freedom but understand that a happy retirement needs both purpose and direction. If your social life is tied to your work, get out there and make new connections. If you have not been physically active, start an exercise plan and invest in your future health and well-being. Make sure you and your partner are on the same page and that your “happiness” expectations are shared ones.
Live your life. Yes, making lifestyle spending changes can be difficult. Do not focus on the challenges of retirement, rather think of all the new opportunities that await you. Take a moment and think about the things you enjoy doing now and how they may fit into your retired life. What are you passionate about? Lastly, recognize that to be truly happy in retirement takes more than just sensible financial planning. Your new life awaits – go live it!