Retirement. A serene, leisurely time when you have finally escaped the “rat race” and can focus on the activities and people you most enjoy? Or is it a stressful, angst filled period lacking the stability provided by a regular paycheck, and filled with uncertainty as to how long your money will last? While there are no guarantees, proper planning can go a long way in steering things more towards the former than the latter.
Here are five items to keep in mind as you transition into retirement.
What will retirement look like for you? Where will you be and what will you be doing? For some, it might involve downsizing the home, or perhaps relocating, as discussed in further detail here. For others, it might include part time employment, or volunteering in the local community.
What if you are so accustomed to the working lifestyle that it is difficult to envision what you want? A bit of branching out or experimenting might assist in bringing better clarity. As you get into the homestretch of your career, take longer vacations, spending extended periods in places you might like to live during retirement. Network with friends and colleagues who may have recently retired and get their insights on what is working for them. Take up a hobby, perhaps something new, or maybe the revival of an activity enjoyed in youth but shelved for years due to career. The more specific your vision is, the better you can plan.
Budget for Now…and for Later…
Are you still paying for multiple cable channels you have not watched in years? Eating out daily when a brown bag lunch would serve you just as well? Paying premiums on a life insurance policy that may no longer be needed? Pausing to evaluate your current spending can yield many good fruits. You may identify areas, such as the examples above, where spending can be reduced. This in turn increases opportunities to save or to pay down debt.
In addition, it will give you a foundation from which you can better anticipate what your spending needs in retirement will be. While some expenses will remain constant, others will change. A current mortgage may be paid off. That decrease may be offset by increased health care or travel expenses. Retirement projections must by necessity take these things into account.
Saving, reflecting the concept of “pay yourself first,” flows directly from the sound budgeting discussed above. In addition, good savings habits have a way of building upon themselves to create additional opportunities. For example, contributing just an additional 1% or 2% of your salary into your traditional 401k will not only increase your nest egg, but will reduce your taxable income and potentially make you eligible for Roth IRA contributions as well. (This depends, of course, upon an individual’s income level and filing status.) Additionally, increased savings opportunities become available through “catch up” provisions in the calendar year in which you turn 50 (i.e. a full year’s worth of extra savings even if your birthday is not until December 31st!)
Ideally, your savings will be diversified among taxable, tax deferred, and tax-free accounts (Examples of each would include a brokerage account, a 401k, and a Roth IRA, respectively). This will give you the flexibility needed to be tax efficient while managing your cash flow year to year in retirement.
Over the course of your working years, accounts of various types can accumulate. Do you have old 401k plans from former employers? A SEP-IRA from an earlier stint as a business owner? Such accounts might be rolled into a single IRA. Consolidation will not only simplify things but can also be a good step towards clarifying where your income streams will come from at different points in retirement.
Further, tracking and updating the underlying investments in your portfolio can be a challenge during the busy working years. Different funds and securities may have been purchased years ago under different circumstances, perhaps due to secondhand advice. Does the allocation in your portfolio reflect your risk tolerance and time horizon? Is there any system in place to adjust that allocation as market cycles evolve? A coordinated investment strategy across all accounts in your portfolio will help you attain your desired lifestyle and goals.
When planning for retirement, it is natural to think of it as a destination, for which we must save a particular amount by a specific date, with the notion that meeting that tangible target (or not) will determine our success. In reality, once underway, retirement itself is more of an ongoing process filled with many more decisions. Financially, this can include questions such as “When should I start Social Security? Can I benefit from Roth IRA conversions, and when should I employ them? Which account should I draw from, from a tax perspective, to fund my cash flow needs?
The answers to those questions will depend in part upon your goals and circumstances, which also evolve. Maybe a member of your extended family suddenly needs additional financial support. Perhaps your priorities have shifted towards grandchildren who could use assistance in saving for college. Or, with various travel plans foiled, you would like to earmark more of your monies to philanthropic causes in the face of a worldwide pandemic.
Through the basic building blocks of budgeting, saving, and risk management, and by viewing retirement with both clarity and flexibility, you can create a path to a very rewarding period in your life. For help in navigating this landscape at any of its various phases, please consult your Wealth Manager.