How to Retire, Part 2
“The only thing we know for sure about any good financial plan, the moment we finish designing it, is that it’s wrong. We just don’t know exactly how, yet…Real Financial Planning is a process, not an event.”
(This is Part 2 in a two-part newsletter series on “How to Retire.” Last week, I introduced Part 1, which included two exercises that are CRITICAL to building a strong foundation for how you can achieve the retirement of your dreams. If you missed it, you can find it here!)
3. Get Organized (cont’d)
When it comes to Getting Organized, stay focused! You don’t need to organize every detail of your financial life in order to figure out how you can retire; however, you do need to organize the details that specifically relate to: how much your retirement will cost and how you will pay for it.
How Much Will Your Retirement Cost?
Take a look at your current spending habits. What costs will stick around after retirement? What costs will go away? And most importantly - what new costs will you need to consider, based on the goals and dreams you came up with in the prior exercise?
When you’re getting closer to retirement, consider taking this new spending plan for a test drive. Things that will be important to discover ahead of time, so they can be factored into the spending plan:
→ Can you live comfortably on that level of income?
→ What “emergencies” didn’t you plan for?
→ What other items should be considered?
Following through on this spending exercise will not only build your confidence in the numbers you’re using for the retirement equation, but could also potentially increase your savings during those last few months leading up to retirement, as you reduce costs while still receiving your pre-retirement income.
How Will You Pay For It?
If your retirement savings are spread out across multiple accounts, especially if they are multiple accounts of the same type (IRAs, 401ks, etc), consider consolidating them (or at least linking them all to one platform) so that you can get an aggregated balance of the accounts from which you will be able to draw income and take distributions for other life events.
Determine if/what other sources of income you have available to you in retirement and the specifics around how to maximize those sources of income. For example, while you can take Social Security starting at the age of 62, it may not be in your best interest to do so, as SS benefits are increased by a certain percentage for each month you delay starting your benefits. If you have a pension plan that allows you the option to annuitize it or roll it over as a lump sum into an IRA, you’ll want to do a cost/benefit analysis of each option, including the Survivor Benefits that are likely available if you choose to annuitize the plan.
Additionally, there are things like the Rule of 5, various Retirement Payout Methods, and other factors that could help you plan for your specific situation if, for example, you have higher income needs, own a business, are retiring early or later than a typical retirement age, or have certain estate planning wishes and/or circumstances.
4. Assess Your Situation: Will You Have Enough to Retire?
This is one exercise where you might want to seriously consider soliciting the advice of a financial planner.
Though having “enough” is a reasonable first question to answer as you consider how to retire, stopping there is similar to going into a boxing match with only a mouth guard. Yes, you’ll protect your teeth…but you might find yourself indefensible against a jab to the chest.
Not only can a financial planner help you consider various types of withdrawal strategies to identify one that works best for your situation, but they can also help with other pieces of your financial picture that will likely be important to consider as you move into and through retirement: things like your Social Security strategy, Medicare options, Tax planning / RMD’s, and Legacy / Estate planning strategies.
Furthermore, one of the most important things to keep in mind when determining the answer to the question of “Will I Have Enough” is that as life continues forward, circumstances will inevitably change. If your financial security was based on past assumptions, you’ll need to update the details of that plan and re-run the numbers following a life event that changes your cash flow and/or savings balances, to ensure you are still on track.
Carl Richards articulates this idea beautifully:
The only thing we know for sure about any good financial plan, the moment we finish designing it, is that it's wrong. We just don't know exactly how, yet…Real Financial Planning is a process, not an event.
5. Close the Gap
Regardless of whether you hire a financial planner or not, sometimes the answer to the question of “Will I have enough to Retire at age *x*” is unfortunately, not the answer you were hoping for.
In the event that you find yourself dealing with the news that you do not yet have enough to retire on a chosen date, there are – ultimately – two ways to close the gap: increase retirement income or decrease retirement expenses.
Let’s first look at a few ways to Increase your Retirement Income.
Work a Little Longer
Working an extra year can be a homerun, when it comes to boosting your retirement income.
First, that extra year of work means one less year of pulling from your retirement savings.
Second, that extra year of work means one more year of adding to your retirement savings.
Third, your higher wages during that final extra year of work could serve to increase your Social Security and/or Pension benefit by replacing a lower-wage year of work that would have otherwise been factored into your benefit total.
Finally, consider the impact of receiving workplace benefits (healthcare, pensions or other retirement savings benefits) for an additional year. These covered incentives can help multiply your efforts to save as you work for one or a few more years, and potentially mitigate years of expensive gap insurance needed, if you retire before the age of 65.
Partial or “Phased” Retirement
Sometimes the right decision isn’t to stop working entirely, but to instead stop working as much.
This is especially true for those who find a tremendous amount of joy and fulfillment with the work they do. A retirement income gap could be mitigated by part-time or part-year work with the same or a similar employer (contract or “fill-in” work such as substitute teaching) that is more flexible and/or discretionary. Or by exploring a hobby or an interest that you otherwise didn’t have time for while building your career.
Consider other assets that can be used to cover a shortfall
While running after a life full of meaning, we can sometimes accumulate things that once sparked joy, but are now better off converted into retirement income. Downsizing (homes, vehicles, recreational items) could free up equity that can be used toward filling the retirement gap.
While I would never advocate for a client trading meaningful life experiences as a quick money fix, I do recommend taking an honest inventory on what items are being put to good use and making wise decisions on what items and activities deserve to stay in the household inventory and budget.
Now let’s take a look at the flip side of the retirement coin: How to Reduce Expenses.
Lower Cost of Living
While inflation in the US seems to have stabilized for now, there’s no denying that some areas experienced a significant cost leap in the last four years.
If your area was impacted, then one lever you could consider pulling in retirement would be to relocate somewhere that is a little friendlier with regards to monthly and annual expenses like taxes, utilities, food, entertainment, and transportation.
Downsizing
The great thing about downsizing is that it can double up on your efforts to close the retirement gap. Not only could you potentially harvest the additional equity as retirement savings, but also you will likely give yourself a bit more room on the monthly and annual budget, as smaller homes and less “things” tend to mean lower costs.
Mindfulness
As you begin to plan your retirement, consider all the possible options for checking off your “bucket list” items.
For example, a trip to Mexico could be achieved through an “all-expense-paid” getaway (less expensive) or via a private excursion on a yacht (more expensive). Stateside destinations could be reached through renting an RV for travel (less expensive) instead of booking flights and a resort stay (more expensive).
Being mindful of and willing to explore various options could allow you the opportunity to retire at a time that is more in line with your goals while still also being able to afford meaningful experiences.
In closing, I want to mention one thing that I’ve found - not just with clients planning for retirement - but across the board in all planning situations, especially as it pertains to money:
Better communication creates opportunities for better outcomes.
I’ll share more of my thoughts on this next week in my newsletter, “Are You Bad with Money?”
But for now, take this as your nudge to start talking about how you want to retire, with someone whose opinions you trust and value.
And be sure you’re on the list so that you can receive the next newsletter first thing next Friday morning!
~ Jess
P.S. Did any of the five exercises from the past two weeks stand out to you as something you’ve never considered or something you’d like to try? If so, I’d love to hear from you!
Whenever you’re ready, there are 3 ways I can help you!
Organize Your Money Course: Are you ready to take control of your financial future, instead of letting it control you? This course will help relieve your financial anxiety and get you back on track.
Book a 1-on-1 Meeting: Whether you’re looking for assistance with your financial planning needs or are in the financial industry and you want to learn how to grow your practice, I can help.
Lake Avenue Financial: If you’re looking to build a relationship with a team who can help simplify, educate, relieve the stress caused by money decisions and make sure you are on your way to financial independence, we are here to help!
Let’s Step Forward Together.
Each week, the Step Forward newsletter provides readers with tips, uplifting stories and actionable steps to guide them through their financial journey.
Join today and receive my free Money Goals Worksheet!