How do you know you're ready to retire?
HOW DO YOU KNOW YOU’RE READY TO RETIRE?
As a CERTIFIED FINANCIAL PLANNER ™ I get this question a lot. Someone in their late 50’s or early 60’s, may ask themselves this question daily. Folks are always wondering what the magic number is to have socked away so they can transition to the golden years of retirement. The simple answer is: there is no magic number for everyone, it truly depends on your unique financial picture. But if you are trying to determine your readiness, here are some questions you can ask yourself.
WHAT WILL I SPEND IN RETIREMENT?
The only way to know if your nest egg is large enough, is to understand what you will be spending from it each year. Therefore, the first step is to create a “budget in retirement.” I recommend clients look at the last 12 months of their credit or debit card transactions to help with this exercise. This way you will see spending habits and capture more of the miscellaneous items that don’t always come to mind- think CVS or alcohol purchases. For Executives or business owners, be sure to list expenses that you currently pay through the business that will become personal expenses in retirement - think car payment, auto fuel, cell phone, just to name a few.
Separate the budget into fixed and discretionary expenses so you understand that which is necessity and that which can be eliminated or reduced if necessary. Consider future expenditures and big-ticket items too. Will you need to replace your roof, hot water heater, or a generator during retirement? Is your current car reliable or is it time to trade it in? Perhaps some of these expenses should be targeted for while you are still working so you have more peace of mind transitioning into retirement. Additionally, if some of these expenses require financing, it is easier to be approved for a loan if you can show income.
Another big consideration is where you will be living in retirement. Do you plan on staying put or do you have dreams of being a snowbird? If you are moving to another state, be sure to research that area’s median house prices, real estate taxes, and state income taxes (if applicable). If you plan to stay in your current house, is it set up for you to age comfortably or do you need to add a bedroom on the first floor? Furthermore, is your current home the right size for you now, or was it more appropriate for when you were raising a family? Creating a “budget in retirement” will force you to think through some of these questions so you have time to develop a plan.
WHAT INCOME WILL I HAVE IN RETIREMENT?
Now that you know how much you will be spending in retirement, it's time to look at your sources of income. Tally what you expect to receive from social security, pensions, deferred compensation plans, annuities, rental income, business distributions, and/or any additional income you may be eligible for. Once you arrive at an annual income amount, compare that to your annual expenses: if there is a deficit, this is the amount you will be spending from your investments each year. Working with a financial advisor can help evaluate if your portfolio can support that withdrawal rate throughout retirement. If the conclusion is “no” then not all is lost. An advisor can also help develop strategies to reach your retirement goals; perhaps delay collecting social security, save more now by cutting back expenses, working longer, or “right sizing” to a house that is more appropriate for the future. The key is giving yourself enough time to make the necessary adjustments, so they have a real impact on helping reach your retirement goals.
Transitioning to taking income from your portfolio, is a big step. You must give yourself permission to turn on the spigot and take income from the nest egg you’ve been accustomed to building. Working with a CERTIFIED FINANCIAL PLANNER™ you can devise a plan as to where it makes sense to take said income. We must consider tax implications and the timing of Required Minimum Distributions (RMDs) from certain retirement accounts. It is also important to fine tune your portfolio to proactively plan for income needs. We at Beacon use a rule of thumb to keep at least nine months’ worth of our client’s cash needs aside in cash. That way we have the necessary cash set aside and it gives us a buffer to not be forced to sell from the portfolio during market volatility. There are so many elements of investing that we do not have control over making it that much more important to be on top of those elements we can control.
THE BIG PICTURE
As you can see, creating a budget is the first step, but it forces you to imagine the future and paint the picture of what retirement truly looks like for you. For many “how do you know if you’re ready to retire?” is not an easy question to answer. There is a physiological aspect to this that goes beyond just the financial piece. Some retirees struggle to identify “who they are'' now that they aren’t working. It is important to consider how you’ll spend your time and with whom you’ll spend it. If feasible, perhaps a transition to retirement by reducing workdays over time is one way to prevent feeling like you turned off a light switch. If that is not possible, think through hobbies and activities you will want to participate in to stay active. As with any dream, you must put action behind it to increase the probability of success. Retirement is no different; let yourself imagine what it will be like to own your time and put pen to paper so you can transition smoothly.
Written by Kelli Grew, CERTIFIED FINANCIAL PLANNER™