Most, if not all of us, know that someday we will retire. We know we need to plan to save a substantial enough amount of money to allow us to live comfortably without the regular income that a career brings, but often our planning ends there. We do not take the time to think through the details of what retirement will actually look like for us, and thus there is ample opportunity to be surprised once the day comes that we wrap up our careers.
This does not have to be the case. Ask yourself five key questions now, and you will find yourself more prepared for what the future brings.
Question #1: How will you save in retirement?
More and more Baby Boomers are retiring with the hope that they can become centenarians. Thanks to healthcare advances and generally healthier lifestyle choices, this hope could very well be realized. While we save for retirement, however, we do not necessarily plan to save in retirement to ensure our assets can keep up with our presumed longevity. This requires more than budgeting; it means investing with growth and tax efficiency in mind year after year.
Question #2: Could your cash flow be more important than your savings?
While the #1 retirement fear is someday running out of money, your net income stream may prove to be more important than your retirement nest egg size. How great will the income stream need to be from your accumulated wealth? Here are a few things to consider.
Many ascribe to the “4% rule”—a principle espoused by Bill Bengen in the Journal of Financial Planning in the 1990s. This theory states that retirees should withdraw about 4% of their overall savings annually to make it last. Respected economist William Sharp (one of the minds behind Modern Portfolio theory) dismissed the 4% rule as overly simplistic and an open door to retirement shortfalls in a widely cited 2009 essay in the Journal of Investment Management.
Because volatility is pronounced in today’s financial market and the relative calm prior to the recent recession still has yet to return, it is hard to imagine sticking with a hard guideline like the 4% rule. More realistically, your annual withdrawal percentage may need to vary due to life and market factors. Your financial advisor can help you come up with a plan that is more appropriate for you.
Question #3: What will you begin doing in retirement?
In the classic retirement dream, every day feels like a Saturday, and your reward for decades of work is 24/7 freedom. If this comes to fruition, however, would you be bored? It happens. Many people retire with only a vague idea of “what’s next”, and after a few months or years, they find themselves in the doldrums when they feel they could be applying their free time more productively.
A goal-oriented retirement has its virtues, as having concrete plans yields a sense of purpose, and in turn, helps to overcome retirement listlessness. Start thinking now what you may want to do in retirement (other than relax), as an encore career or specific projects you want to undertake will keep you engaged… and will give you a better framework around which to plan your retirement savings and income needs.
Question #4: Will your spouse what to live the way that you live?
Many couples retire with shared goals, but they find that ambitions and day-to-day routines differ. Dissonance turns to aggravation over time unless you start having the conversation necessary to iron out potential conflicts in advance. You may recognize that your spouse’s ideal retirement will not precisely mirror yours, but you may also be surprised at just how different your visions are if you don’t talk about it now. This also helps you to better frame your savings plans to ensure your assets will support both people’s goals.
Question #5: When should you (and your spouse) claim Social Security benefits?
Social Security is a complicated topic and truly deserves its own articles/guides, but there are general principles to keep in mind. Most notably, “as soon as possible” is not always the right answer to “when should we withdraw?” A careful analysis is needed. Talk with the financial professional you trust, and run the numbers. IF you can wat to apply for Social Security at a strategic time, you might realize as much as hundreds of thousands of dollars more in benefits over the course of your lifetimes.
This Retirement Reality Check is just a starting point, but it should get you headed in the right direction. For more detailed planning and to help sort out answers to these questions, contact us today.