Deciding when to retire may be one of the most important financial decisions that you will make during your life. Walking away from a regular paycheck and beginning to sustain yourself financially from retirement savings can be difficult. With fewer and fewer employees having access to pensions and even some without a company-sponsored 401(k) plan, many pre-retirees lack the confidence to make the transition. In fact, according to the Employee Benefit Research Institute (EBRI), as little as 27 percent of U.S. workers say they are very confident of having enough money to live comfortably during their retirement years. The key strategies noted below may help you feel more confident about leaping into full retirement. Remember, having a good financial plan for the future can help you to live more in the present.
Develop a vision for your future: What is your vision for retirement? Where will you live? How will you spend your free time — traveling, hobbies, grandchildren, volunteering? What are the things you have always wanted to accomplish? Despite its importance, many retirees will invest more time researching the next car they will buy than setting personal goals for their future. Developing a vision for retirement may help ensure that you are spending the early years of retirement (when many retirees are in better physical and financial health), focused on what is most important to you. Remember, you want to make it through retirement without saying “I wish I had” too often.
Run the numbers: After developing your vision, the next step is determining if you have sufficient resources to make it a reality. Do you know what the maximum amount is that you can spend on an inflation-adjusted basis over your retirement? How long will your resources last? Are you directing too much of your cash flow toward paying debt? How will curve balls like higher inflation or another economic impact the likelihood of your success? If you do not know the answers to the questions noted above, it may be necessary to revisit your retirement budget and develop a comprehensive financial plan.
Also, be sure to review multiple scenarios. What will the financial impact be of purchasing a second home, gifting to grandchildren, or paying for long-term care insurance when factored into your plan? Since many sources of retirement income, including pensions or Social Security, may not keep up fully with increases in the cost of living, running scenarios that take into account higher rates of inflation may help provide clarity on its impact. Keep in mind that a retirement analysis is not a one-time event. In the same way, a physician may not prescribe medication based upon blood work that is five years old; it is important to make sure that you continue to “run the numbers” regularly as it may help you address changes in your life and the economy.
Recalibrate investments: The transition from the accumulation phase of saving/investing to the distribution phase can be difficult for investors to make. While it is critical to avoid being too conservative (so that you can outpace inflation over the long-term), you also need to be sure that you are not taking unnecessary risks, too. Consider rebalancing your portfolio to be consistent with the financial plan you developed and aligned with your life. Review worst-case scenarios and avoid letting emotions rule your investment decision-making over time.
Optimize Social Security and other benefits: Do not overlook the importance of having a plan for taking Social Security at the right time. Since many retirees will rely on Social Security for a portion of their income, it is critical to start benefits at the optimal time for your circumstances.
Additionally, factor in the vesting schedule of other benefits, including pensions, profit-sharing plans, 401(k) matches, and company-provided health benefits if applicable. While fewer companies offer these benefits, retire at a time that strategically maximizes any benefits you are entitled to.
Address healthcare expenses: We all know that costs have been skyrocketing, yet many pre-retirees fail to properly account for healthcare costs in their retirement budget. According to previous surveys from AARP, only 36 percent of people aged 50 to 64 have tried to estimate how much they’ll need to cover the cost of health care in retirement. Of the few pre-retirees who take the time to review healthcare costs closely, many overestimate how much of these expenses will be covered by Medicare. Consider taking a closer look at your anticipated out-of-pocket healthcare costs before retirement.
Many people feel uncertain and unprepared when transitioning into retirement. However, developing a vision for retirement and a financial plan to pursue your goals may help ease the transition so you can take advantage of an important resource - time. Since everyone’s situation is unique, consider speaking to your financial adviser to determine the most appropriate strategies for you.
Kurt J. Rossi, CFP, AIF, MBA, is a Certified Financial Planner Practitioner and Wealth Advisor.
He can be reached for questions at (732) 280-7550, kurt.rossi@Independentwm.com or
www.Independentwm.com. LPL Financial Member FINRA/SIPC
