Being prepared for retirement essentially boils down to two questions: Are you financially and emotionally ready to be retired? In the wealth management industry, we frequently get asked the question, “when can I retire?” The fact is, it depends!
Of course, this question leads to more questions: Have you saved enough? What will you do with your time? After going to work and having your career be part of your identity for most of your adult life, fear of the unknown can cause some anxiety. For many, the answer may be a glide path to retirement where you scale back and don’t fully retire at one time. A transition from full-time to part-time worked out perfectly for one of my clients whose husband retired a couple years prior to his wife’s planned retirement. Missing the camaraderie of her work peers, the feeling of self-worth she got from her job, and the sudden change in the home-life dynamic from full retirement, she decided to simply cut back her hours instead of retire altogether.
The Importance of Planning
One thing is for certain, if you or someone you know is even close to thinking about retiring early, I would encourage them to not simply rely on a rule-of-thumb when it comes to figuring out the right timing. I highly recommend a well thought-out—and stress-tested—written financial plan. A plan with action items, a timeline of events, and a planning checklist will help ensure success in the journey to retirement. Those heading to retirement should also be prepared to make course adjustments. The number one fear for retirees is the fear of running out of money. Even the best laid plans may need alterations, but if you take the time to work through your spending needs, your fear and risk can be greatly reduced while providing comfort even in rocky investment times.
Unexpected (But Predictable) Expenses
Many people retire either too early or too late because they haven’t taken the time to do the proper analysis. We all choose the paths we take in life, and those who choose the route of early retirement are often committed to a regimen of sacrifices, extensive savings, and reduced expenses. Ever heard of the phrase ‘save until it hurts?’ That would certainly be an appropriate adage for the FIREers (Financial Independence and Retiring Early). Planning for retirement is all about the relationship between the income you will have coming in (pensions, Social Security, etc.), the amount of assets you have accumulated, and how much you will spend. When you retire, certain expenses go away (commuting expenses, business clothing, lunches), while other expenses increase (health care, travel, entertainment). We are often guilty of only seeing our net paychecks, and not realizing that tax withholding and other things like healthcare are also being paid each period. When you no longer have employment income and your retirement savings turns into your new paycheck, those taxes and health care premiums become another expense that you didn’t previously have to plan for. These are often some of the most underestimated expenses in retirement.
Guessing Your Retirement Date
Last year I had a client walk in, tell me they just retired and then asked me to make sure they would be okay. In my opinion, that’s just too late. On the other hand, I have also seen people come in who would like to retire now but are sure they don’t have enough money. Once the analysis was complete, it was clear they could retire immediately. Both guessing the right retirement age or just picking one with no plan behind it may cause serious problems in the future, when it is too late to really do anything about it.
Of course, sometimes you are forced to leave the workforce before you expect to. Obviously, you should always have a contingency plan in this event. Just because you don’t expect to leave your job doesn’t mean that your job won’t leave you. Planning for the unexpected, like a company downsizing later in your career or the inability to continue to work due to a disability, is a critical part of everyone’s plan.
By working with your Wealth Manager and the financial planning tools that are available to us, we at Pinnacle Advisory Group have the ability to help our clients see the consequences of their financial decisions before they make them. Indeed, we often describe our financial planning software as a decision-making tool. It gives everyone the opportunity to test-drive or model their plans with different inputs or scenarios to show the impact that changes have on the success of those plans. What if you were to work one more year? What if you were to retire one year earlier? What if you saved a little more (or less) leading up to retirement? What if you were to spend more (or less) in retirement… or maybe consider a second home? What if you were to receive an inheritance? The knowledge of how these and other scenarios will ultimately impact the outcome of your plan is invaluable.
At the end of the day, there is no right or wrong retirement age. The most important thing is to be prepared. So whether you are a FIREer, someone who never plans on fully retiring, or someone who falls in between, do yourself a favor and work with your Wealth Manager to develop a plan that is right for you.
Jeff Troll, CFP® helped in the preparation of this article.