You’ve worked hard your entire life, raised a family, saved diligently, and now retirement is a few years away. In the last 10 years, you’ve seen your assets grow significantly as the markets have rebounded and your savings rate has increased. So what can you do in the years preceding retirement to best prepare?
FIRST THINGS FIRST: Get Organized
You want to begin organizing your financial life while you’re still working to ensure your retirement dreams become a reality. Take inventory of all of your financial assets, including any mortgages and debts. A key component of this is understanding what group benefits you may have with current and prior employers, including any pension plans, deferred compensation plans, stock options, and health benefits. Next, review current and future income sources, including any wages, pensions, social security, real estate income, royalties, etc.
DETERMINE WHAT AGE TO RETIRE
The age at which people will choose retire differs, based on multiple factors. From a financial perspective, the amount of assets you have is important – but that is relative to the amount of money you spend. Very simply, the person who spends $100,000 per year needs ½ as much in assets and income in retirement as the person who spends $200,000 per year. This seems intuitive; but this fact is frequently lost in much of the financial literature, and throughout the media, regarding retirement planning.
BUDGETS IN RETIREMENT
A hurdle many people face when planning for retirement entails putting together a budget to determine current and future spending. To make budgeting simple and easy, take an average of your credit card balances and checkbook expenses for six months. Multiply this number by 2 to determine your annual expenses. It’s that simple.
Although many people believe expenses will shrink in retirement, if you factor out the payoff of a mortgage and expenses for children that (hopefully) go away, most people will spend close to 100% of their pre-retirement budget. This level of spending persists during the ‘Go Go’ phase of retirement and typically last from retirement until age 75 – 80. At that point, as your body begins to slow down, so too will your spending. Typically this ‘Slow Go’ phase of retirement will see a 10-20% reduction in spending.
Don’t forget to anticipate ‘lumpy expenses’ that occur occasionally. These large expenses, which can derail a retirement plan if not anticipated, include future car purchases, wedding expenses, home improvement projects, healthcare expenses in retirement, etc.
TYPES OF RETIREMENT ACCOUNTS
In this pre-retirement period, you’ll want to maximize available retirement accounts. The most common retirement accounts are 401k and 403b employer sponsored plans. If you’re married, be sure both spouses are maximizing available retirement accounts, even if that savings encompasses a significant portion of one income. Don’t forget that everyone is able to make contributions to IRA accounts, including your spouse, as long one of you has earned income. Roth IRAs provide tax-free growth and distributions, and should be maximized if you qualify, based on your income. Don’t forget to utilize deferred compensation plans, 457b plans, simple IRAs and other plans offered by your employer.
WHEN CAN I RETIRE?
After you have all of your financial information organized, you’ve quantified your retirement budget, and you’re maximizing all available retirement accounts, it’s time to answer the question “When I can I retire?” To best answer this question, you’ll want to run a retirement projection to see if your assets and future incomes can sustain your desired spending. Key to this projection will be anticipating events that can derail a retirement plan, such as premature death, disability or a long term care illness to one or both spouses. Don’t forget to account for taxes in your projection, as this is a large expense we can’t avoid. Seeking the assistance of a financial planning professional to help answer this question is recommended.
Once you’ve been given the go ahead to retire, it’s time to sail off into the sunset. Keep in mind, even in retirement, you must still ‘mind the store’ and keep track of your finances. To learn more about achieving success in retirement, you’ll want to check out our next blog, Post Retirement Planning.