You're not retiring just yet, but you can see it on the horizon. It's an exciting time because you're starting to dream about all the things you'll finally have the freedom to do. As you enter this last phase of your full-time career, it's the perfect moment to pause and make sure your roadmap supports the dreams you have for this next chapter.
What does retirement actually mean to you?
Most articles jump straight into the math of how much income you need. We think that skips the most important question of all: What does retirement actually mean for you?
Your vision drives the numbers. Traveling the world requires a much higher income than going fishing every morning. Location matters just as much. Are you going to stay in your existing home, or are you looking to downsize? Perhaps you want to move to an area with a significantly different cost of living.
You should also ask yourself if you plan to work part-time. Maybe you want to turn a long-time hobby into a source of income. Answering these questions first ensures you're building a roadmap for the life you actually want, not just a generic idea of retirement. A CFP® professional can help you translate those dreams into concrete numbers.
How to manage your three biggest expenses
There are usually three major expenses you'll face in retirement. The good news is that you can take steps right now to control them.
1. Housing
Even if your mortgage is fully paid off and you plan to stay put, housing costs don't disappear. You will still be paying for things like property taxes. If you plan to sell your home and move to a cheaper place, remember that your monthly expenses might change, but they won't vanish completely. Now is the time to decide where and how you want to live so you can understand exactly what that means for your bottom line.
2. Healthcare
This is a big one. You need to know if you can continue using your current healthcare coverage in retirement and what that might cost. If you plan to retire at 65 or older, you'll be eligible for Medicare. However, if you plan to retire earlier, you need to figure out how you will insure yourself during the gap years until age 65.
3. Debt
Ideally, you would pay off your mortgage and any other liabilities before you retire. Entering retirement debt-free lowers your financial anxiety level significantly. If that isn't possible for you, make sure you have a strategy to pay off that debt as early in your retirement as you can.
Understanding your income sources
Once you know your expenses, you need to look at the other side of the equation. Where will your money come from? For many people, the list includes:
- Social Security
- Pension
- Retirement accounts, such as a 401(k), 403(b), IRA, or Roth IRA
- Part-time income from a job, hobby, or small business
The Social Security timing trade-off
You can file for Social Security benefits between ages 62 and 70. The rule here is simple: the earlier you file, the less you'll get each month.
Filing at 62 rather than at 67 (which Social Security considers full retirement age for those born in 1960 or later) can reduce your benefits by as much as 30%. On the flip side, waiting until age 70 to collect can boost your monthly check even more, as much as 30% over what you would have received at your full retirement age.
The Social Security Administration offers a free calculator to help you run the numbers. Just remember that filing for Social Security is a one-time decision and usually can't be undone. A financial planner can help you decide the optimal time to file based on your unique situation.
Withdrawal rules of thumb
When it comes to taking money out of your personal investments, there are no guarantees. However, a common rule of thumb is to withdraw no more than 4% annually.
Don't take that number as gospel. Your actual spending needs, Social Security benefits, other income sources, inflation, and market conditions all have a major effect on how much you can safely withdraw from your retirement accounts.
Why retirement isn't a finish line
We often think of retirement as the end goal, but it isn't really a finish line. It's the beginning of a new chapter in what we hope will be a long, well-lived life. Your investment strategy needs to reflect the fact that you may be retired for decades.
This means you need to understand which investments to hold onto. Stocks can earn you additional income when the market is growing, but they are volatile. Bonds are generally less risky and can help you weather future down markets, but be aware that they may not generate all the income you need on their own.
The key is creating a portfolio that will likely grow over time. Your financial planner can help you build the portfolio you'll need to sustain yourself for the long haul.
Don't forget about taxes
It's not just about how much you withdraw, but which accounts you withdraw from. Knowing which retirement accounts to tap into, how much to take, and when to take it is vital.
Each account type has its own tax rules. You want to be as tax-efficient as possible so you don't end up owing the IRS more than you planned to.
Facet is not an attorney and does not provide tax or legal advice. Consult a qualified tax or legal professional regarding your specific situation.
Nearing retirement is an exciting time. We want you to enjoy it. By putting a roadmap in place now, you can secure the retirement you've been dreaming about.
The Facet difference
Planning for retirement involves complex decisions about tax efficiency, healthcare gaps, and investment longevity. At Facet, we believe you shouldn't have to navigate this alone.
Our team of CFP® professionals provides fiduciary advice for a flat membership fee. We don't sell products or earn commissions, which means our only incentive is to help you build a life you love. We look at your entire financial picture, from your 401(k) to your personal values, to create a roadmap that works for you.
