Will I ever be able 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 of 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 comfortable and happy and rewards you for your many years of hard work.
What are you waiting for? It is never too late to start planning for your retirement. Like anything in life, the more planning you are able to 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.
It is all about your expenses. It seems logical to focus on the amount of savings we must accumulate during our working years in order to provide for our retirement. That is ok, but, we suggest that a focus on how much money we will actually need in retirement is a better approach. If you are 5 years out, start keeping accurate records of your expenses. Watch your cash flows (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. While a young worker may be very comfortable with an 80/20 allocation (80% stocks and 20% fixed income and cash), the risk profile of a soon-to-retire worker may be better matched with a 60/40 or balanced (50/50) allocation. 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. In a somewhat contrary view, some retirees may consider increasing portfolio equity exposure if market returns early in retirement are poor.
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. There are several viable strategies, including, fixed dollar amount, fixed percentage amount, inflation-adjusted and withdrawing only investment earnings (dividends and interest). The commonly known 4% rule is simple to use. Withdraw 4% of your portfolio in the first year and then in the second (and each subsequent year) withdraw the previous year amount adjusted for inflation. A more creative approach might be to combine strategies to target specific needs. For example, use an inflation-adjusted strategy for essentials and withdraw investment earnings for travel and entertainment. Adjust your discretionary spending based on market performance – spend a little less if the market is down and allow yourself to enjoy that great trip if the market rallies.
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!