You’re not retiring yet, but you can see it on the horizon. You’ve been putting money away for a while and are starting to dream about all of the things you’ll do when you’re no longer working.
Will your financial situation support those retirement dreams? What should you be doing now to enjoy the retirement you want later?
These five factors will help you answer those questions for yourself.
1 – Define Retirement
Those rules of thumb you see about how much income you’ll need when you retire can’t capture the most important questions: What does retirement mean for you? How do you define retirement?
If you dream about traveling the world, for example, your income needs will be very different than if your plan is to go fishing every morning. Will you stay in your existing home, or move and downsize? If you do, will you walk away with significant equity from your home and significantly cut your housing expenses? Will you move to an area with a lower cost of living?
After retirement, will you be working part-time and bringing in some income? Will you turn your hobby into an income source? When it comes to retirement, one size definitely doesn’t fit all, which is why the first item on our list is to define what retirement looks like to you.
Answering that question will help you set up your finances to support the retirement you want. You can ignore all of those articles that say you’ll need 70% or 80% of your current income in retirement, instead, work with your financial planner to calculate the number that matches your dreams.
2 – Manage Expenses
There are usually three major expenses in retirement. The good news is that you can take steps now to control all three.
The first one is housing. Even if your mortgage is paid off and you plan to stay at your home, you’ll still be paying for housing—maintenance, upkeep, utilities, taxes, insurance—and you’ll have to budget for that. If you plan to sell your home and move to a place that’s smaller and cheaper, your monthly expenses will decrease, but they won’t disappear.
Now is the time to start thinking about where and how you’d like to live in retirement, and then analyze what that means financially.
The second major retirement expense is healthcare. Will you be able to continue using your current healthcare plan in retirement? If so, what will it cost? Do you plan to retire at 65 or older, when you’re eligible for Medicare? If not, how will you insure yourself between the time you retire and the time when Medicare kicks in?
Besides your job, there are other places to find healthcare coverage, such as your state’s insurance exchange. If you belong to a union, professional society or organization, many of them offer healthcare coverage as well. This is a decision you want to make well before retirement.
The third major expense for many in retirement is debt. Ideally, you’d pay off your mortgage, credit cards and any other debt before retirement. Retiring debt-free will lower your financial anxiety level significantly. If that isn’t possible, have a plan in place to pay off all remaining debt as early in your retirement years as you can.
Balancing all three of these items will take some work, but working with your financial planner can help ensure you’re prepared and able to enjoy your approaching retirement.
3 – Understand Your Income
Where will your income come from in retirement? For many, the list includes:
- Social Security
- Work-related pre-tax retirement accounts, such as a 401(k) or 403(b)
- Personal retirement accounts, such as a traditional or Roth-IRA
- Work-related income, such as severance or a consulting contract
- Part-time income from a job, small business, etc.
For many, when to take Social Security is a question. Benefits can be taken between age 62-70, and the monthly amount will vary widely depending on when you file for Social Security. Filing at 62 rather than at 66 and some months, which Social Security considers full retirement age, can reduce benefits by as much as 30%. Waiting until age 70 to collect can boost your monthly check as much as 30% over what you would have received at your full retirement age.
This also depends, for example, on whether you work until age 70 or retire early but delay taking social security. The Social Security Administration has a free calculator and lots of other information available. Sign up for a Social Security account and you can see how different decisions would affect your benefits.
Be aware that filing Social Security is a one-time decision. Consult with your financial planner to analyze when you should file.
When it comes to withdrawals from your investments, the rule of thumb is to withdraw no more than 4% annually. Although there are no guarantees, that withdrawal rate (or less) should be sustainable for your entire retirement. There are many variables, of course, such as the investments in your portfolio and the market itself. A market downturn just as you’re retiring, or an unexpected major expense, can alter your situation significantly. Again, this is a decision to make in consultation with your financial planner.
4 – Know the Finish Line
Retirement is not a finish line. It’s the next chapter in what will hopefully be a long, well-lived life. Your investments need to reflect that you may be retired for decades.
That means still holding some equities (stocks) to capture growth. Fixed income (bonds) funds can help reduce risk and help you weather any future bear markets. But with today’s low interest rates, bonds alone aren’t likely to generate the income you need.
The key is a portfolio that stands a high likelihood of growing over time and generating the income you need in retirement. Your financial planner can help you design and manage the portfolio you’ll need to sustain yourself in retirement.
5 – Pay Attention to Taxes
Knowing how much you can withdraw from your retirement accounts is important. Knowing which accounts to withdraw from, and how much is equally important. You want to be as tax efficient as possible.
Federal regulations generally require you to start taking withdrawals from your IRA, SIMPLE IRA, SEP IRA, or retirement plan account when you reach a certain age, currently (thanks to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019) when you reach 72. Roth-IRAs do not require withdrawals as long as you’re alive.
Again, working with a financial planner to choose the most tax-efficient sources of income from your accounts is a wise idea. If you won’t be retiring for another few years, you may also want to ask your financial planner to help you decide how much you should be contributing to your different retirement accounts to give you the best set-up when you actually retire.
It’s exciting to be nearing retirement. Make sure you have a plan to enjoy the retirement you’ve been dreaming about.
Interested in learning more about what you can be doing now to set yourself up for retirement? Check out our lunch & learn here.