When Do You Want to Retire?
It’s not a trick question, or at least it’s not supposed to be. The difference between answering “when I want to retire” vs “when I can afford to retire” depends on understanding what retirement will look like and what assets you’ll need to enable that vision.
Historically, it was assumed that a combination of social security benefits and some other source of fixed income (the traditional pension, or in more recent times, annuities) would be sufficient. Sadly, government ineptitude has almost bankrupted social security, and inflation has eliminated the guarantee that was the pension or annuity. The old rules and guidelines just don’t apply, but too many Americans act as if they still are valid.
According to one study, less than 35% of middle class Americans have a written retirement plan – even on the back of a napkin. They just don’t know what it’s going to take to retire at any age. Almost another third of Americans don’t know where they are on the plan they’ve put together. In either instance – no plan, or plan written but not really used as a road map – people are saving blindly without a sense of how they’re doing or really where their path will lead. The most important factoid we uncovered, though, was that a significant number of people who are eligible to retire at the “normal” age of 65 now believe they will have to continue to work until age 80 because they feel they lacked the means to retire earlier.
When it comes to retirement, putting your head in the sand is not an effective strategy. Here, then, are some simply steps to take.
Write Out A Plan And Then Use It
Maybe it can’t really be on the back of a napkin, but there is no magic to the number of pages you have use. What’s more important is the process of planning. Just putting down on paper where you are now, where you want to be when you retire, and what you think will get you there is a very valuable exercise. Values are also extremely important in the retirement planning process. What good is a plan if it doesn’t coexist with your personal values? Money is important but some of the best financial plans are based on values.
Don’t Forget Taxes, Healthcare and Travel
If you’re writing out a plan, the logical place to start is to consider what you’re spending now to live the life you want. Some articles in popular personal finance magazines suggest that when you retire you will only need 80% of your current living standard. That may have worked in the past, but it’s highly doubtful this will work today, or tomorrow. These old guidelines assumed most retirees settled into a quiet lifestyle and only lived 5 to 8 years. That’s not the retirement scene today. Retirees today are living as active a lifestyle- if not more so – than they did when they were working. They have better health and more time to enjoy things. They travel more as well, especially if the kids (and therefore the grand kids) settle in another town or state.
Longer life expectancy provides many benefits, but it also means healthcare costs are likely to be higher in the later years. We live longer, but not without some expensive help from chemistry and those nice men and women in white coats. Be sure to consider health costs and an appropriate amount for a good supplemental health insurance policy.
Lastly, you have to remember that when you retire, taxes will be part of retirement expenses. During your working years, taxes are taken out before you get the paycheck. It’s very easy to assume you are living comfortably on just what you take home in pay. That’s not true. In retirement, you will have to pay your own taxes, or have them withdrawn from your retirement account. So, the full load that your retirement assets must support include your current living expenses, plus any additions for new activities or travel, plus healthcare costs, plus the taxes incurred on withdrawals.
Maintain A Balanced Portfolio
Social security, pensions and annuities are all fine tools to use when you retire, but none of them individually are an effective exclusive strategy. The same applies to your actual investments. Having an investment portfolio that is too heavily skewed toward bonds or stock scan be a disaster. There are real risks at both extremes of the spectrum. Stocks are “risky”; we all know that. It’s hard to have missed that fact given the experience of 2008-09. But we haven’t had a bout of normal inflation in quite some time, let alone some extreme inflation. The Jimmy Carter years saw 10% inflation. Extraordinary, yes, but even the long-term American average of 3% will decrease your purchasing power by 50% over time.
That’s a real risk which we should considered, and bonds do not accomplish that goal. Too many stocks, and you’ve got a headache. Too many bonds and you’re liable to have heartache. You need to balance the tools you use and balance your portfolio, whether that portfolio is in a 401K, an IRA, a Roth, or a regular taxable account. Diversification works.
Plan to Retire | Ask For Help But Get What You Pay For
It really is OK to ask for help. None of us should attach ego or pride to those areas where we’re not proficient, and yet it is so easy to do when it comes to money. I’m not good at carpentry, plumbing or car repairs. I tried them when I was younger, both to save money and because I thought I could do it. There was a false pride in something for which I wasn’t trained or particularly suited. There was also a false economy. It was a disaster, and I ended up paying more to fix the problem I created than the original problem. I’ve learned to reach out. If the faucet leaks, I call the plumber. If the car makes funny sounds, I visit the mechanic.
But, I’m mindful of what I’m buying. I don’t object to paying for true value-added. I do mind paying more than I should. Every product and every service has its value, and therefore its appropriate price. We don’t want to be penny wise and pound foolish. In the financial realm, if you need some advice, it’s healthy to reach out and ask for it. You just want to make sure it’s objective advice; ask for references, and ask for a full disclosure of ALL fees that would be charged; then balance fees against the benefit. Don’t be afraid to ask a potential advisor to demonstrate or better explain how he or she will actually help you. Don’t let them use fancy words or phrases. If you don’t understand, ask them to explain it again and to make it simple. It’s your future; it’s your money; you’re entitled to understand that you’re getting what you pay for.
These are just a few simple concepts, but they really can help. If you would like help, or even just a second opinion, we’re always here to help. We provide our clients with 100% objective financial advice for every stage of life.